-
CENTRES
Progammes & Centres
Location
In defence procurement, costs defy clarity—complex systems, secrecy, and politics blur price precision.
.jpg)
Image Source: DRDO
The accurate cost calculations of deals involving the purchase of weapon systems have always been a subject of debate and concern. Whether it is fighter jets, warships, missiles, ammunition or armoured vehicles, the complexity of these systems and their associated procurement processes makes it challenging to arrive at accurate cost projections. This difficulty is compounded by the fact that weapons deals are not simply a matter of hardware purchases but also involve long-term acquisition timelines and operational, maintenance, and logistical considerations that can alter the initial cost projections as well as price negotiations. While these concerns are valid for all types of defence deals, the dynamics are different when the equipment is being imported from foreign sources. Understanding why defence deal costs are so opaque requires examining how methodological, political, and economic factors interact in a space where both national security and financial prudence are at stake.
One of the most persistent problems in defence procurement is the absence of a standardised methodology for cost estimation. In many countries, including India, defence procurement lacks a consistent and detailed costing methodology. For instance, India's first Defence Procurement Procedure (DPP), released in 1992, did not provide clear guidelines for initial cost estimates, resulting in variations in costing approaches across different procurement agencies. This inconsistency results in initial cost estimates that are often outdated or unrealistic by the time the acquisition process begins. The Defence Acquisition Procedure (DAP) released in 2020 also does not clarify this aspect; an amendment in this case is expected to be incorporated in the new DAP 2025.
Weapons deals are not simply a matter of hardware purchases but also involve long-term acquisition timelines and operational, maintenance, and logistical considerations that can alter the initial cost projections as well as price negotiations.
Initial cost estimates often overlook long-term expenses such as maintenance, training, and operational support that can exceed the original purchase price. Governments tend to offer the contracts to the L1 – the lowest bidding vendor. In the L1 system, the lowest bid is usually awarded the contract since it offers the lowest purchase price. The L1 system, though, has been criticised for not accounting for money spent on activities after the equipment has been purchased. As opposed to the L1 method of costing, the Life Cycle Costs (LCC) method is often presented as a more practical alternative. LCC refers to the entire expenses accrued as a result of research, development, production, operations, maintenance and disposal of the concerned equipment. Differing rates of inflation also impact the LCC calculations, especially when these are not included in the initial cost estimates. Since fleet sustainment costs account for almost two-thirds of the entire LCC, a LCC plus Performance-Based-Logistics contracting may ensure that all concerned stakeholders take the big picture view beyond acquisitions. Critics, however, point out that even the LCC method is not foolproof, as it does not account for time delays in the acquisition process.
Defence programmes often begin with overly optimistic cost and schedule estimates. As projects progress, unforeseen challenges can lead to increased costs and extended timelines. For example, the United States (US) Navy's Littoral Combat Ship programme started with a goal of US$220 million per ship, but the costs eventually doubled due to unforeseen complexities. In India’s case, the Rafale fighter jet procurement process faced significant delays due to price revisions and the incongruity between the total cost of the deal initially estimated versus the overall LCC accrued to the Indian Air Force (IAF). The L1 versus LCC debate brings out the dilemma faced by procurement authorities of whether to prioritise the lowest quoted price or to evaluate the cost of ownership that extends across decades of maintenance and upgrades.
Beyond the issues of which costing methodology is more accurate, certain other factors influence defence procurements. For valid security reasons, the defence sector operates with limited transparency. However, this also makes it difficult for analysts and scholars to assess the costs of weapons. The US Department of Defence has acknowledged that its cost estimates are frequently incomplete or inaccurate, leading to challenges in making informed decisions about military spending. In India, the government has refused to divulge the actual deal costs to Parliament as well, despite the same not being covered under confidentiality clauses. The contested concepts of secrecy and security can be twisted and applied in a sweeping manner, making the overall process opaque. While official rules prohibit government employees from sharing procurement information with outsiders, occasional leaks and media bytes by a few people-in-the-know have been a regular feature globally. Especially in defence deals where the seller utilises the services of an agent/consultant, their remuneration is a part of the quoted price, which may further increase the overall purchasing cost of the consumer. The Government of India has taken a clear position on this issue by making it mandatory for defence companies involved in government contracts to disclose if they have employed the services of any consultant/agent. The media, political parties, and other stakeholders often keep a close eye on defence deals. In cases of inaccurate or incomplete estimates, the deal cost becomes a sensitive issue and is milked for political gains. This eventually leads to comparisons of similar deals conducted overseas, including comments about the influence of such deals on the political establishment. In such cases, finalising the agreement requires convincing domestic audiences and balancing different pressures as well. Arms sellers tend to take advantage of legal loopholes and a lack of bureaucratic specialisation to push through high-cost deals. In such cases, bureaucrats, politicians, and contractors may have their own interests and incentives to understate costs or overstate the capabilities of the equipment. This ‘intellectual dishonesty’ can lead to unrealistic expectations and cost overruns, as stakeholders prioritise short-term goals over accurate forecasting. Even after the deal is concluded, post-facto audit scrutiny and objections can raise troubling questions about pricing, capabilities generated, and adherence to procurement and financial guidelines.
The contested concepts of secrecy and security can be twisted and applied in a sweeping manner, making the overall process opaque.
Defence deals often span many years, during which inflation and currency exchange rates fluctuate significantly. The inclusion of inflation rates in the final pricing can significantly raise costs, resulting in unintended political and financial implications for the buyer. Indian experience shows that moves by the seller country to revise (and increase) the deal costs during various stages of the project have not been viewed favourably in India. The situation is further complicated if the buyer insists on payment in dollars or their own currency, which can stress the forex reserves of the buyer's country. These factors are difficult to predict at the outset of a project, and need nuanced scrutiny before finalising a contract.
A persistent issue in public (and media-driven) discourse is the tendency to perform direct mathematical calculations based on the total deal valuation announced in weapons deals. This often leads to misleading conclusions. For example, if an agreement is announced with a price tag of, say, US$1 billion to purchase 10 aircraft, it is not correct to calculate that each aircraft would cost exactly US$100 million per piece. This method of analysis, though seemingly straightforward, is flawed.
Using the total deal amount to derive a unit cost oversimplifies the complexity of defence procurement.
The total cost of a deal encompasses much more than the platform itself. It typically includes a comprehensive weapons package (such as missiles, bombs, and rockets), spares, ground support equipment, simulators, training for operating staff and maintenance crews, infrastructure upgrades, and long-term maintenance or performance-based logistics support. In some cases, the deal may also cover technology transfers or offset obligations. Therefore, using the total deal amount to derive a unit cost oversimplifies the complexity of defence procurement. It not only distorts public understanding but also opens the door to politically charged and inaccurate narratives, more so when the cost has not been referenced from a credible source. Hence, a nuanced approach is required when interpreting deal figures.
Estimating the accurate costs of defence deals is far more complex than commonly perceived. From the lack of standardised methodologies to evolving technical requirements, political pressures, and unpredictable economic variables, multiple interlocking factors contribute to the difficulty of arriving at accurate figures. The challenge becomes even more pronounced when public discourse influences the decision-making process. Modern defence procurement goes beyond acquiring a piece of equipment—it involves a web of associated costs, long-term commitments, strategic trade-offs, and future-readiness planning. In such a scenario, transparency, institutional rigour, and professional integrity are essential to ensure that cost estimations reflect ground realities and serve long-term national interests. At the same time, it must be recognised that, due to the inherent complexities of defence procurements, any costing methodology can provide only approximations rather than precise figures. The defence bureaucracy, armed forces, and political leadership cannot eliminate cost overruns entirely. However, if a cost revision occurs, their responsibility is to ensure that the escalation remains marginal and within manageable limits.
Modern defence procurement goes beyond acquiring a piece of equipment—it involves a web of associated costs, long-term commitments, strategic trade-offs, and future-readiness planning.
As countries continue to modernise their armed forces and engage in major defence acquisitions, there is a compelling need to evolve more robust and transparent costing practices. Better public understanding, clear communication from the government, and institutional accountability can go a long way in bridging the perception gap and ensuring a more informed debate on defence economics.
Rahul Wankhede is a Research Analyst at the Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA), New Delhi.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Rahul Wankhede is a Research Analyst at the Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA), New Delhi. His research areas are defence cooperation, ...
Read More +
PREV
