Maryland Center of Excellence for Sustainment Sciences

Outcome-Based and Performance-Based Contracts (Contract Engineering)

Outcome-based contracts are growing in popularity for both governmental and non-governmental acquisitions of critical systems. These contracts allow the customer to buy an outcome rather than purchase the system, and/or to buy the availability of the system rather than pay for maintenance. Performance-based contracting is a proven strategy that reduces costs and improves the quality of the product or service. Unfortunately, the contract design (if done at all) is nearly always performed separate from the engineering design process and provided (best case) as a requirement to the engineering design process. This process (or lack of process) creates significant risks for all parties.

Outcome-based contracts are used for defense systems (system-level performance-based logistics), energy generation (power purchase agreements), and civil infrastructure (public private partnerships).  Performance-based logistics, in particular, has been used to significantly reduce system sustainment costs and increase system reliability. This research area focuses on optimizing outcome-based contracting arrangements and addressing barriers to their expanded use.

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The Federal government buys $400 billion worth of products and services every year.  Today, as the nation faces unprecedented budgetary pressures, the need to acquire and sustain these products and services efficiently and effectively has never been greater. This research area seeks to identify and promote government best practices and strategies.

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Policy and Regulation

In the acquisition and sustainment arena, well-intentioned polices often carry unintended consequences. This research area is focused on identifying barriers to efficient acquisition and sustainment, making revisions to existing policy, and crafting new policy strategies.

Life-Cycle Cost Modeling and Return on Investment (ROI)

Life-Cycle Cost Modeling and Return On Investment Chart

Life-cycle cost (sometimes referred to as LCC) is the sum of all recurring and non-recurring costs over the complete life of a product or service. Life-cycle cost includes the design cost, manufacturing cost, installation cost, operating costs, maintenance and upgrade costs, the remaining (residual or salvage) value at the end of ownership or useful life, and disposal costs.

The factors that influence the total cost of ownership of a product or system are shown below.  Generally the total cost of ownership captures all costs that are passed along to the owner or user through the product, system or service price; plus the infrastructure and business process costs borne by the owner or user.  For low-cost, high-volume products, the manufacturer of the product seeks to maximize their profit by minimizing its cost.  For higher-cost products, a more important customer requirement for the product may be the minimization of the total cost of ownership of the product.

For safety-, mission- and infrastructure-critical systems, it is not uncommon that only about a third of a system’s life-cycle costs are incurred during development and production; the remainder is incurred during operations and sustainment. However, a significant proportion of these costs are “built in” during the concept design stage, therefore it is important for the customers to understand all the life-cycle costs when making procurement decisions. This research area focuses on how to reduce systems’ lifecycle costs—both prior to their production and once they are fielded.

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Long-term Sourcing

Due to the nature of the manufacturing and support activities associated with long life-cycle products, the supply of parts that products require must be dependable. However, the parts that comprise long lifetime products are susceptible to a variety of supply-chain disruptions. In order to minimize the impact of these disruptions on product production and long-term support, manufacturers can implement proactive mitigation strategies. Two mitigation strategies that have been shown to decrease the penalty costs associated with disruptions are: dual sourcing and buffering.  Dual sourcing involves selecting two distinct suppliers from which to purchase parts over the life of the part’s use within a product or organization. Dual sourcing reduces the probability of part unavailability (and its associated penalties) at the expense of qualification and support costs for multiple suppliers. An alternative disruption mitigation strategy is buffering (also referred to as hoarding or safety stock). Buffering involves stocking enough parts in inventory to satisfy the forecasted part demand (for both manufacturing and maintenance requirements) for a fixed future time period so as to offset the impact of disruptions. Careful selection of the mitigation strategy (dual sourcing, buffering, or a combination of the two) is key, as it can dramatically impact a part’s total cost of ownership.

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Maintenance Optimization

Maintenance refers to the measures taken to keep a product in operable condition or to repair it to an operable condition. The term maintainability is used to denote the study and improvement of the ability to maintain products, primarily focused on reducing the amount of time required to diagnose and repair failures.

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Critical Skills Workforce Management

The loss of critical human skills that are either non-replenishable or take very long periods of time to reconstitute, impacts the support of legacy systems ranging from infrastructure, military and aerospace to IT. Many legacy systems must be supported for long periods of time because they are prohibitively expensive to replace.  Loss of critical human skills is a problem for legacy system support organizations as they try to understand and mitigate the effects of an aging workforce with highly specialized, low-demand skill sets.  The existing research focuses on workers that have skills that are obsolete and therefore need to be retrained to remain employable; alternatively our work addresses the system support impacts due to the lack of workers with the required skill set.  We developed a model for forecasting the loss of critical human skills and the impact of that loss on the future cost of system support.  The model can be used to support business cases for system replacement.  

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System Health Management

Prognostics is the process of predicting the future reliability of a product by assessing the extent of deviation or degradation of a product from its expected normal operating conditions. Health monitoring is a process of measuring and recording the extent of deviation and degradation from a normal operating condition.

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Obsolescence Management (Diminishing Manufacturing Sources and Materials Shortages – DMSMS)

The rapid growth of the electronic systems industry has spurred dramatic changes in the components that comprise electronic products and systems.  Increases in speed, reductions in feature size and supply voltage, and changes in interconnection and packaging technologies are becoming events that occur continuously.  As a result, many of the electronic parts that compose a product have a life cycle that is significantly shorter than the life cycle of the product they go into.  A part becomes obsolete when it is no longer manufactured, either because demand has dropped to low enough levels that it is not practical for manufacturers to continue to make it, or because the materials or technologies necessary to produce it are no longer available.

Product sectors that involve safety-, mission- and infrastructure- critical systems are subject to lengthy and expensive certification/qualification cycles may be required even for minor design changes and systems are fielded (and must be maintained) for long periods of time.  Such systems can derive significant cost avoidance from understanding the risk of obsolescence of their constitute parts, optimization of approaches when obsolescence does occur and planning/budgeting for design refreshes.

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Counterfeit Part Management

Purchase of electronic parts from part manufacturers and its authorized suppliers is the lowest risk step in parts procurement. However, for various reasons, including part obsolescence, lead time requirements, or unavailability of parts from authorized sources, parts may be purchased from unauthorized sources such as independent distributors and brokers. There is a need for authentication and screening of parts purchased from such sources to verify their authenticity.

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