Collaborative Research: Theoretical Impact of Acquisition Mechanisms on System Design Outcomes Under Uncertainty

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This project will explore the causes and cures for massive cost overruns in large complex system developments, such as new airplanes, spacecraft, weapon systems or novel energy power plants. The U.S. Department of Defense reports overruns, delays and cancellations equivalent to $200 million per day in lost value, and similar overruns are experienced by space programs, commercial aircraft, nuclear power plants, and prototype fusion power plants. Much of these losses are due to engineering processes, but engineering processes are usually a response to customer or government contracts. Different forms of contracts can bring about different processes, allowing technically ambitious systems to be designed and developed without large losses. Not only can this save time and money, it will also allow more projects to be attempted, accelerating the speed of technology development and accelerating our nation's economic growth. This project has the potential to be the basis of change in the Federal acquisition process that could ultimately result in savings exceeding $100 million per day.The objective of this research project is to test the hypothesis that the mechanism that leads from technical risk and complexity to cost and schedule overruns in large complex engineered systems is the systems engineering process of requirements flow-down, stimulated by requirements-based contracts. The project will use simulations of engineering organizations to explore the hypothesis. While many others have applied principle agent theory to contracting, and some have explored principle agent theory within engineering organizations, this is the first project to investigate how to optimize incentive contracts to affect the systems engineering structure of design work within a large engineering organization. It is the interaction of the contract and the way systems engineering is conducted that marks truly new ground in this research. The project explores four research questions: 1) What is the causal relationship among cost reimbursement, award fees, incentives, and project outcomes? 2) How is this relationship affected by the structural complexity and size of the industry engineering organization, including the supply chain? 3) How is this relationship affected by program uncertainty, particularly technical risk? 4) How is this relationship affected by uncertainty in the user environment, that is, by out year changes in the relationship of artifact attributes to government benefit? Answering these questions will expose theoretical issues pertaining to acquisitions in systems engineering that are poorly understood today.