The Rising Unit Cost of Defence Equipment

The rise in the unit cost of many types of defence equipment is spectacular, for example fighter aircraft now cost about 30 times more than during World War II, after allowing for the effects of monetary inflation. Such increases have stimulated accusations that defence chiefs write over-ambitious and extravagant (‘gold-plated’) specifications and that their contractors are at best inefficient and at worst guilty of ‘fraud, mismanagement and waste’. This paper provides a framework within which the causes and consequences of the rapid and persistent increases in unit cost can be discussed. The framework uses the variation of the total cost and effectiveness of a military force with the individual cost and effectiveness of the units in that force to demonstrate a rational method of selecting defence equipment for procurement. It also demonstrates that this rational policy, during a period of international rivalry and technological progress, leads naturally to increases in the unit cost of successive generations of the defence equipment chosen for procurement. Such increases cannot therefore be regarded as evidence of mismanagement, either in defence organisations or in industry. It is reasonable to expect that unit costs will continue to rise, and that this rise will affect the future structure of defence forces and future procurement policies. The last section of this paper discusses how rising unit costs will make it less possible for a small or medium power to sustain the full range of military capability, and will make more attractive the procurement of equipment from a superpower rather than development and production on a national basis. The author is grateful for constructive comments from his colleagues, but the views expressed in the paper are his own and do not necessarily represent those of the UK Ministry of Defence.