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### Risk and Uncertainty Definitions

### Cost Risk & Uncertainty Definition

### Risk and Uncertainty Analysis

### Reasons for Doing Risk Analysis

### Point Estimate

### Risk Reduction

### Risk Concepts

### When to do Risk Analysis

### Risk Analysis Methods

### Quantitative Methods

### Other Methods

### Risk Analysis Approaches

### Ways to Perform Risk Analysis

PDF

### Probability Distributions

PDF

### Combining Risk Distributions

### Statistical Results

### Percentiles

### Cost Risk Analysis Challenges

- Definition of Risk and Uncertainty Analysis
- Methods of Risk Analysis
- Risk Facets
- Schedule Risk

Purpose

The purpose of a Risk Assessment is to provide Management and decision makers with a realistic range of possible outcomes, given a fixed set of baseline assumptions!

Process

- Quantify the impact of the different Risk factors on cost
- Identify inter-relationships between these Risk factors
- Combine individual Risk factors into an overall estimate range
- Interpret and report results

Risk is the Occurrence of an Outcome Subject to a Known Pattern of Random Variation, i.e. Known-Unknown. ( Changes in those Technical Parameters that are Captured in the Estimating Methodology )

Uncertainty is the Occurrence of an Outcome Subject to Unknown Random Fluctuations, i.e. Unknown-Unknown. ( Changes in those Parameters that are not Part of the Estimating Methodology )

Cost Risk and Uncertainty Analysis is Placing Probability Distribution Around a Point Estimate

Cost Risk Analysis Assumes that the Analyst has Correctly Identified the Factors (Parameters) that Influence Cost and Taken them into Account when Producing the Point Estimate

If the Point Estimate is not a function of Influencing Factors, Performing a Risk Analysis will be of Little Value

Risk Analysis is a Requirement

All Cost Estimates for Major Defense Acquisitions Must be Accompanied by a Formal Risk Analysis

“Defense Acquisition Management Policies and Procedure” DoD 5000.2

Point Estimates are Almost Always Wrong, because

Changes in the Specifications

Changes in the Requirements

Optimistic Estimates of Advances in Technology

Funding Instability

Schedule Slippage

Method for Producing the Point Estimate Must be the Same as that for Estimating the Risk

In fact, the Point Estimate for Total Cost Should be a By-Product of the Cost Risk Analysis

Analyst Should not Obtain a Point Estimate and then Later Apply a Totally Different Method to Assess the Risk

Cost Risk Analysis will not Reduce the Risk Inherent in a Program

Risk Analysis Help Program Managers Understand the Nature of the Risk Involved, and the Uncertainty Associated with Cost Estimates

Risk Analysis result in a more Realistic Assessment of the Funding Required and Likelihood of Exceeding the Point Estimate

Low Risk

Moderate Risk

Probability of Occurrence

Increasing

Low Risk

Severity of Consequence

Risk analysis reduces the uncertainty between requirements and funding

Qualitative Methods (e.g., Subjective Assessments of Low, Medium, or High Risk) are of Most Use when There is Little or no Historical Data Available or Firm Requirements Have not Yet been Established

Quantitative Methods are Considered where Probability Distribution on Cost Elements or Drivers can be Estimated from Historical Data or Deduced from Expert Opinion

Analytical Method involves the Mathematical Determination of a Total Cost Distribution from its Components Cost Distributions

Simulation Method Involves the Computer Generation of Random Costs from Component Distributions and Aggregation into a Total Cost Distribution

Prediction Intervals, like stating “There is X% Chance that total cost will fall between Y and Z”

Predication Intervals are too gross a summary measure of the distribution of total cost

They are not needed if the entire distribution can be estimated

- Detailed Network & Stochastic

- Discrete Technical, Schedule, and Estimating Risks

- Detailed Monte Carlo Simulation (each WBS)

Effort

- Bottom Line Monte Carlo Simulation

- Add a Risk Factor/Percentage

Detail

Use Regression Analysis to Relate Cost Drivers to Historical Costs

- WBS:

Apply Probability Distribution to Cost Elements and Aggregate them into a total cost

- Stochastic:

Break Down the Acquisition and Management Processes into their Components Activities and Events in Proper Time Sequence Networks

WBS Cost Distribution

Frequency

P.E.

Sum PE

MLC (Mode)

+

- =

CDF

Confidence

50%

P.E.

+

20%

Sum PE

MLC

P.E.

+Many More

+

+

=

Cost

Tech

Schedule

P.E.

P.E.

+

+

P.E.

P.E.

+

CDF

+

P.E.

P.E.

+ Many More

+ Many More

Range Minimum $1,318

Range Maximum $3,466

Range Width $2,148

Mean Std. Error $5.45

Forecast: Statistic Value

Trials 5,000

Mean $2,195

Median (approx.) $2,147

Mode (approx.) $2,100

Standard Deviation $385

Variance $148,391

Skewness 0.47

Kurtosis 2.79

Mean = first moment

Variance = second moment

Std. Deviation = (Variance)1/2

Skewness = third moment

Kurtosis = fourth moment

Total Forecast Results in FY05 $M

0% $1,242

10% $1,719

20% $1,842

30% $1,947

40% $2,043

50% $2,135

60% $2,231

70% $2,359

80% $2,507

90% $2,709

100% $3,389

Cumulative Probability

Not to Exceed

Schedule Risk

Fixed Cost

Technology Outdate

Parallel Effort

More ECP

Less Mature Design

Life Cycle Cost

Typical

Min

Optimal

Development Schedule

- Commercial Drivers
- Technology Drives Schedule
- Constraint Schedule
- Goal is ROI Maximization

Defense

Cost

- DoD Drivers
- Funding Drives Schedule
- Unconstrained Schedule
- Goal is Cost Reduction

Commercial

Development Schedule

Funding Allocation

Cost

Acquisition Process

Program Execution

Cycle Time Reduction Goal

Development Schedule

Mean Cycle Time to IOC

DoD

Pre-1992 Starts 132 months (11 years)

Post-1992 Starts 89 months (7.4 years) on-going

F-22 216 months (18 years) IOC 2004

Comanche 264 months (22 years) IOC 2006

Commercial

Boeing 777 54 months (4.5 Years)

ENGINE

IN-HOUSE

Example of R&D Funding Profile

F

Y

0

8

F

Y

0

7

F

Y

9

5

F

Y

9

6

F

Y

9

7

F

Y

9

8

F

Y

9

9

F

Y

0

0

F

Y

0

1

F

Y

0

2

F

Y

0

3

F

Y

0

4

F

Y

0

5

F

Y

0

6

F

Y

0

9

78% of Programs had less than

10% Schedule Slippage

92% of Programs BAFO had

Raised no Issue with the

Government Proposed

Schedule

- Program Managers’ Priority
- Superior Performance
- Low Acquisition Cost
- Low Operation Cost
- Shortened Schedule

Shortening the Cycle Time

Provides Opportunity for Cost

Reduction

Reduced Cycle Time Opportunity

Business Case

AS-IS

TO-BE

Program 1

Program 1

Program 4

Program 2

Program 3

Cost

Program 2

Program 5

Program 4

Program 5

Program 6

Program 3

Program 6

x

x/2

x/2

Cycle Time Result From:

- Starting Programs too Soon

- Starting Too many Programs

- Inefficient Acquisition Process

Reduced Cycle Time will Result In:

- Fielding of Newer Technology

- Lower Cost per Project

- Reduced Exposure to Annual Funding Reduction

Information Organization, Structure, and Mapping

- Expert Identification and Communication
- Interdependency of Risk Issues
- Impact of Global Factors (e.g., Industrial Base)
- Modeling
- Probability Distribution Assumptions
- Packaging Range Estimate
- Interpretation of the Results
- Risk Mitigation Plan
- PPBES and Point Estimates

- Funding Allocation Puts more Constraint on the Program Schedules than Acquisition Process and Program Execution
- Shortening the Cycle Time Provides Cost Reduction Opportunity with Greater Operational Capability
- Cost Schedule Risk Analysis Tools and Techniques Should be Utilized to Demonstrate the Effect of Schedule Trade-off

At the end of the day, the cost analyst ends up being the system architect-integrator-engineer as the details are worked through.

Supports

Inputs

(Descriptions)

Process

(Models)

Outputs

(Costs)

Requirements

Acquisition Assumptions

Design Parameters

Risk Assessment

ASARC

IT OIPT

CAIG, DAB

APB

PPBES

AOA / EA

Cost Analysis Process

Databases, Tools, & Models

$

Types of Cost Analysis

Estimate

Known

Solving For:

How Much Does the System Cost?

System Descriptions, Cost Models

System Costs

OLD

Approach

Historical System

Description and Costs

How to Cost a System?

Cost Models / CER

System Descriptions, Design &

What System Can I Get For My Dollars?

NEW

Cost Targets

Models

Approach

Performance Parameters

Initiated Development of Performance Based and Design Based Cost Models

37

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