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> If the government wanted to buy another one, the contractor would have charged them an extra $435. This claim appears to contradict what the story says, as f

by ekidd 3y ago

> If the government wanted to buy another one, the contractor would have charged them an extra $435. This claim appears to contradict what the story says, as far as I can tell? He's the original: > The military bought the hammer, Kelman explained, bundled into one bulk purchase of many different spare parts. But when the contractors allocated their engineering expenses among the individual spare parts on the list-a bookkeeping exercise that had no effect on the price the Pentagon paid overall-they simply treated every item the same. So the hammer, originally $15, picked up the same amount of research and development overhead-$420-as each of the highly technical components, recalled retired procurement official LeRoy Haugh. (Later news stories inflated the $435 figure to $600.) > "The hammer got as much overhead as an engine," Kelman continued, despite the fact that the hammer cost much less than $420 to develop, and the engine cost much more-"but nobody ever said, 'What a great deal the government got on the engine!'" So the bought an order containing a hammer, an engine, and some other stuff. There weren't itemized prices. So they divided the price evenly between everything in the box. Which is a silly way to do accounting. It's as if I bought a "woodworking kit" containing a hammer, a screwdriver and table saw for $900, and then I decided decided that meant the hammer cost $300.

unreal37 3y ago
I acknowledged in my comment that even if the most charitable explanation was assumed, the method of accounting is misleading and makes determining the cost of anything impossible.
- flavius29663 3y ago
  How is that? If you buy an engine, do you itemize by: engine block, alternator, water pump and starter? You might include in the requirements that the engine must come with all 4 extra elements, but you will pay for the whole engine. Now, if someone wants to be misleading, they could say the water pump was 1/4 of the price...
  - karaterobot 3y ago
    If the total R&D cost for all items is split across every single product equally, there's no way to tell how much of the $435 hammer is R&D for the hammer. It's a really weird way to do accounting, almost like they just didn't keep track of how much R&D they did for each item. And that makes you wonder if the amount they are charging is even real in the first place. In general it lowers confidence and makes you think you're probably being ripped off (which, hey, is true).
    - hgsgm 3y ago
      You know what you are paying for the bundle you get. You can also get multiple bids for different bundles. The problem here, if any, is not getting competitive bids for the bundles.
    - juhanima 3y ago
      The article is not quite clear why the contractor had to split the intangible goods cost to the tangible ones, but it does give a hint. Federal accounting is meant to prevent possibly corrupted overspending and that's why charging for intangible services is not allowed or made more difficult than charging for something tangible that can be measured and counted afterwards and compared to market prices. So to me it sounds like this: you hired me to make a wall of bricks around your garden. I did it and presented you a bill: bricks 100$, mortar 20$, work 300$. Then you say I cannot charge for work as that's intangible and I have to restructure the bill by allocating the cost of work to the tangible objects. So instead of charging for work I split the cost of it by two and charge a bricklaying fee of 150$ divided by the number of bricks for each brick and another 150$ for mixing the mortar. Because I'm pissed off by your awkward and unpractical accounting requirements and not going to start figuring out more complex ways of dividing the cost between the materials, when everybody knows that it's the bricklaying that counts and not the bricks or mortar. And that's how you get very expensive mortar or 600$ hammers.
      - lmm 3y ago
        > Federal accounting is meant to prevent possibly corrupted overspending and that's why charging for intangible services is not allowed or made more difficult than charging for something tangible that can be measured and counted afterwards and compared to market prices. Right - so if contractors are doing an end run around those requirements by padding the prices of hammers or whatever, that's a problem.
- cbsmith 3y ago
  > The hammer did indeed cost $435. If the government wanted to buy another one, the contractor would have charged them an extra $435. But the above statement wasn't true.
  - mattkrause 3y ago
    The article has a nice example of this in the B2 bomber. The first 21 planes cost $2B each. The next one costs $700M. If, for some reason, we were to make a hundred or a thousand of them, the cost per plane would be even lower.
    - lmm 3y ago
      Unfortunately the military has now cottoned onto that trick with the F-35. Every time there's a budget overrun they just order another 100 planes so that "the price hasn't changed".
    - cbsmith 3y ago
      The B2 bomber case isn't a precise analogy. The hammer really was purely an accounting phenomenon. It's not that the first hammer cost $600. The first hammer was part of a collection of goods, of a wide variety of different values, that were billed as a single line item... and this was resolved, from an accounting perspective, as each item cost $600. In reality, most of the items only cost a few dollars, but a few big ticket items skewed the average. Think of it like you're buying a car, and you have the dealer add in a half-dozen options & extras, and then they bill you for all of them, as a package, as a single line item. If you then said the cost of each item in the package, including the car, was worth 1/7th the price you paid for the package, that would be the equivalent of what is going on here.
- nerdponx 3y ago
  Isn't this somewhat inevitable in any complicated engineering project?
- D13Fd 3y ago
  Your main comment is literally untrue and contrary to the article, and pointing out a separate problem with telling what things cost doesn’t change that.
- kibwen 3y ago
  From the article: > The new moral is that numbers, taken as self-explanatory truths by the public and the press, can in fact be the woefully distorted products of a broken accounting system. So it appears you're just in agreement with the OP that the accounting system is broken, while also being the exact same sort of victim of misunderstanding that the broken accounting fosters.
  - aflag 3y ago
    We don't even know if the system is broken. It's not clear whether this was common case or a one off instance that they didn't really have an appropriate form for.
- lamontcg 3y ago
  If you own a car how much did the engine in the car cost you to buy? Unless you've done an engine swap recently you probably can't answer that, because you bought the whole car, and the engine came with it.
enkid 3y ago
Sometimes what's written on paperwork can be silly because it doesn't really matter and the cost to verify or correct stuff that is estimated costs more than an estimate. Other times it has to be more precise than is possible, so you have to figure out a good way to "estimate" it. Being inaccurate isn't always problem if the costs outweigh the benefits of being accurate.
- bumby 3y ago
  I think there’s an important distinction. It may not add value to whomever is writing the itemized expense, but more accurate data could add value to someone else who needs it for accountability or uses it to benchmark future work. You have to assess the entire value stream.
- denton-scratch 3y ago
  > Being inaccurate isn't always problem if the costs outweigh the benefits of being accurate. You're speaking of public money; the cost of inaccuracy is much greater than the amount of the inaccuracy itself, it erodes public trust. Also, the difference between $15 and $600 can't be described as an "inaccuracy".
  - ryathal 3y ago
    having worked in government the amount of time wasted to ensure that money wasn't wasted is itself quite wasteful.
gretch 3y ago
I think a more accurate analogy is that if you bought those 3 items and they did have proper itemized cost, but the whole package also had a $500 shipping charge. And then it’s not obvious how to distribute the shipping cost across each item. And in both situations it’s probably better to itemize by itself, though maybe some system didn’t allow for non tangible costs like “R&D”
- reaperman 3y ago
  Much better analogy.
- LadyCailin 3y ago
  If you itemize separately, then you can start to ask the important questions, like, “why is shipping $500”.
  - dmix 3y ago
    The excuse repeatedly here is that "it was easier/convenient (to merge it into a single line item)" or "its just an accounting artifact", as if that isn't a giant red flag all in itself. It's easy to ignore the $600... but if a hammer line-item could be 10x'd on vague R&D costs only the original accountant really understands... how is that better? That's a recipe for masking waste and never knowing why anything costs as much as it does, without expensive in-person interviews with the people involved. Can't imagine what it's like trying to compete with companies engaging in this sort of practice. How could you possibly project costs? Why even bother? Just tell them it's a $1 hammer and make it up in R&D hidden away in "accounting artifacts".
  - dghlsakjg 3y ago
    Because table saws can frequently have the same dimensions as a refrigerator.
tempodox 3y ago
That still obfuscates the actual cost of things, which is the exact opposite of accounting, if you think about it.

by ekidd 3y ago

unreal37 3y ago

I acknowledged in my comment that even if the most charitable explanation was assumed, the method of accounting is misleading and makes determining the cost of anything impossible.

flavius29663 3y ago
How is that? If you buy an engine, do you itemize by: engine block, alternator, water pump and starter? You might include in the requirements that the engine must come with all 4 extra elements, but you will pay for the whole engine. Now, if someone wants to be misleading, they could say the water pump was 1/4 of the price...
- karaterobot 3y ago
  If the total R&D cost for all items is split across every single product equally, there's no way to tell how much of the $435 hammer is R&D for the hammer. It's a really weird way to do accounting, almost like they just didn't keep track of how much R&D they did for each item. And that makes you wonder if the amount they are charging is even real in the first place. In general it lowers confidence and makes you think you're probably being ripped off (which, hey, is true).
  - hgsgm 3y ago
    You know what you are paying for the bundle you get. You can also get multiple bids for different bundles. The problem here, if any, is not getting competitive bids for the bundles.
  - juhanima 3y ago
    The article is not quite clear why the contractor had to split the intangible goods cost to the tangible ones, but it does give a hint. Federal accounting is meant to prevent possibly corrupted overspending and that's why charging for intangible services is not allowed or made more difficult than charging for something tangible that can be measured and counted afterwards and compared to market prices. So to me it sounds like this: you hired me to make a wall of bricks around your garden. I did it and presented you a bill: bricks 100$, mortar 20$, work 300$. Then you say I cannot charge for work as that's intangible and I have to restructure the bill by allocating the cost of work to the tangible objects. So instead of charging for work I split the cost of it by two and charge a bricklaying fee of 150$ divided by the number of bricks for each brick and another 150$ for mixing the mortar. Because I'm pissed off by your awkward and unpractical accounting requirements and not going to start figuring out more complex ways of dividing the cost between the materials, when everybody knows that it's the bricklaying that counts and not the bricks or mortar. And that's how you get very expensive mortar or 600$ hammers.
    - lmm 3y ago
      > Federal accounting is meant to prevent possibly corrupted overspending and that's why charging for intangible services is not allowed or made more difficult than charging for something tangible that can be measured and counted afterwards and compared to market prices. Right - so if contractors are doing an end run around those requirements by padding the prices of hammers or whatever, that's a problem.
cbsmith 3y ago
> The hammer did indeed cost $435. If the government wanted to buy another one, the contractor would have charged them an extra $435. But the above statement wasn't true.
- mattkrause 3y ago
  The article has a nice example of this in the B2 bomber. The first 21 planes cost $2B each. The next one costs $700M. If, for some reason, we were to make a hundred or a thousand of them, the cost per plane would be even lower.
  - lmm 3y ago
    Unfortunately the military has now cottoned onto that trick with the F-35. Every time there's a budget overrun they just order another 100 planes so that "the price hasn't changed".
  - cbsmith 3y ago
    The B2 bomber case isn't a precise analogy. The hammer really was purely an accounting phenomenon. It's not that the first hammer cost $600. The first hammer was part of a collection of goods, of a wide variety of different values, that were billed as a single line item... and this was resolved, from an accounting perspective, as each item cost $600. In reality, most of the items only cost a few dollars, but a few big ticket items skewed the average. Think of it like you're buying a car, and you have the dealer add in a half-dozen options & extras, and then they bill you for all of them, as a package, as a single line item. If you then said the cost of each item in the package, including the car, was worth 1/7th the price you paid for the package, that would be the equivalent of what is going on here.
nerdponx 3y ago
Isn't this somewhat inevitable in any complicated engineering project?
D13Fd 3y ago
Your main comment is literally untrue and contrary to the article, and pointing out a separate problem with telling what things cost doesn’t change that.
kibwen 3y ago
From the article: > The new moral is that numbers, taken as self-explanatory truths by the public and the press, can in fact be the woefully distorted products of a broken accounting system. So it appears you're just in agreement with the OP that the accounting system is broken, while also being the exact same sort of victim of misunderstanding that the broken accounting fosters.
- aflag 3y ago
  We don't even know if the system is broken. It's not clear whether this was common case or a one off instance that they didn't really have an appropriate form for.
lamontcg 3y ago
If you own a car how much did the engine in the car cost you to buy? Unless you've done an engine swap recently you probably can't answer that, because you bought the whole car, and the engine came with it.

enkid 3y ago

Sometimes what's written on paperwork can be silly because it doesn't really matter and the cost to verify or correct stuff that is estimated costs more than an estimate. Other times it has to be more precise than is possible, so you have to figure out a good way to "estimate" it. Being inaccurate isn't always problem if the costs outweigh the benefits of being accurate.

bumby 3y ago
I think there’s an important distinction. It may not add value to whomever is writing the itemized expense, but more accurate data could add value to someone else who needs it for accountability or uses it to benchmark future work. You have to assess the entire value stream.
denton-scratch 3y ago
> Being inaccurate isn't always problem if the costs outweigh the benefits of being accurate. You're speaking of public money; the cost of inaccuracy is much greater than the amount of the inaccuracy itself, it erodes public trust. Also, the difference between $15 and $600 can't be described as an "inaccuracy".
- ryathal 3y ago
  having worked in government the amount of time wasted to ensure that money wasn't wasted is itself quite wasteful.

gretch 3y ago

I think a more accurate analogy is that if you bought those 3 items and they did have proper itemized cost, but the whole package also had a $500 shipping charge. And then it’s not obvious how to distribute the shipping cost across each item. And in both situations it’s probably better to itemize by itself, though maybe some system didn’t allow for non tangible costs like “R&D”

reaperman 3y ago
Much better analogy.
LadyCailin 3y ago
If you itemize separately, then you can start to ask the important questions, like, “why is shipping $500”.
- dmix 3y ago
  The excuse repeatedly here is that "it was easier/convenient (to merge it into a single line item)" or "its just an accounting artifact", as if that isn't a giant red flag all in itself. It's easy to ignore the $600... but if a hammer line-item could be 10x'd on vague R&D costs only the original accountant really understands... how is that better? That's a recipe for masking waste and never knowing why anything costs as much as it does, without expensive in-person interviews with the people involved. Can't imagine what it's like trying to compete with companies engaging in this sort of practice. How could you possibly project costs? Why even bother? Just tell them it's a $1 hammer and make it up in R&D hidden away in "accounting artifacts".
- dghlsakjg 3y ago
  Because table saws can frequently have the same dimensions as a refrigerator.

tempodox 3y ago

That still obfuscates the actual cost of things, which is the exact opposite of accounting, if you think about it.