If I had a hammer...

Saturday January 31, 2015

From a mailing list:

this project reminds me of the Defense department from decades ago when it paid 30,000 dollars for a common hammer…

That never happened. The popular story is that the Pentagon spent $600 on a hammer and even that was incorrect. The invoiced amount was $435 and the government really only paid $15 for that hammer. Understanding why is complicated, and not the answer given in this amusing, but incorrect, West Wing scene:

The real reason has to do with how capitalized costs are allocated. That hammer came as part of a much, much, larger procurement package. In this case, it was the United States Navy’s purchase of T-34C Trainers. See, when Beechcraft designed the aircraft, they needed a ton of nonconsumable supplies, but these supplies were only going to be used on this project. And when doing research and development, Beechcraft is simply acting in place of the government. In other words, these are not commodity services you can buy at Amazon.

So all this equipment purchased for research and development rightfully belongs to the United States Government. When Beechcraft was done, they put all that stuff in boxes and shipped to DoD along with an invoice. This is where things get complicated. When Beechcraft did their internal accounting, all of the research and development costs were capitalized, equally, across all the physical hardware. As a result, a $15 hammer was invoiced at $435 because, from Beechcraft’s perspective, $420 of engineering costs went into procuring it.

From the government’s perspective, the hammer is basically free since they ordered an airplane and the hammer came in the box.

This was all investigated by the Packard Commission, though the only conclusion you can draw from their report is most people do not know how to read financial reports.