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Session 16 – Cost Methodology Framework Presenter – Mick Doherty

Session 16 – Cost Methodology Framework Presenter – Mick Doherty. COST ESTIMATION CONFERENCE. Outline. Cost Methodology Framework Generic Cost Estimating Process; Cost Estimating Techniques; Which Technique to Use & When Costing Exemplars ; and Measures of Cost Estimate Quality.

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Session 16 – Cost Methodology Framework Presenter – Mick Doherty

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  1. Session 16 – Cost Methodology Framework Presenter – Mick Doherty COST ESTIMATION CONFERENCE

  2. Outline Cost Methodology Framework Generic Cost Estimating Process; Cost Estimating Techniques; Which Technique to Use & When Costing Exemplars ; and Measures of Cost Estimate Quality.

  3. Generic Cost Estimation Process

  4. Generic Cost Estimation Process Step 1 – Define the Project Scope Step 2 – Define Key Assumptions Document key assumptions in the scoping directive & Basis of Estimate The quality of an estimate is only as a good as the maturity of the project definition and the appropriateness of the assumptions made

  5. Generic Cost Estimation Process Step 3 – Develop WBS & Cost Elements Developed off a skeleton WBS A dynamic process WBS & Cost Elements will develop and expand over time. Step 4 – Investigate and Obtain Cost Data Where to find cost data? From Contractors From other projects Defence Library, Janes, Forecast International etc US President’s Budgets Step 5 – Develop the Workforce Plan Understand the Govt workforce to: Undertake Capability Development Acquire the Capability & setup the Support Systems Crew and Maintain the Capability Needs to be balanced against the White Paper Provisions

  6. Estimating Principles - cont Step 6 - For each cost element: Use best available cost data. Seek input from Subject Matter Experts, to assist you in obtaining the cost data. Use as many costing sources and techniques as possible to validate and test the range of estimates. Record your assumptions and document the basis of the estimate. Regularly review the estimate Step 7 Review Cost Model Compare against the DCP Provision Hint: If possible, obtain an Independent Cost Estimate (ICE) and compare the ICE against the cost model for completeness and accuracy.

  7. Estimating Principles - cont Step 8 - Test the Model Reasonableness Sensitivity Analysis Cost Benefit Analysis Cost Risk Analysis Step 9 - Analyse, Adjust and Maintain the Estimate Step 10 - Publish, Present and Use the Estimate This is an Iterative Process and these steps will be repeated on a regular and frequent basis as the project is further defined and the cost model develops.

  8. Generic Cost Estimation Process

  9. Estimating Techniques Extrapolationfrom Actuals Price Data Parametric EngineeringBottom up Analogy Cost Estimation Methods ExpertOption

  10. Why include ‘Price Data’? In the Australian context, we place a high reliance on ‘tender quality’ costs for projects seeking 2nd Pass Approval. Rather than obtaining ‘costs’ from tenderers, we are in fact being quoted the ‘price’ we are expected to pay for the goods or service. Price Data varies in quality, from ROM quotes to tender quality.

  11. Cost Estimating Techniques Analogy direct comparison with historical data for similar item, eg Weight Based Analogy Parametric Relates cost to some physical attributes or performance characteristics in a cost-estimating relationship (CER) Engineering (Bottom up) Examination of separate work segments in detail and a synthesis of many detailed estimates into a total.

  12. Which Technique to use, when Cost Estimation Technique and Project Maturity

  13. Which Technique to use, when Applicability of Cost Estimating Technique

  14. Which Technique to use, whenPrinciples • Each cost element should be costed using the most appropriate method • Use as many techniques as possible to validate the estimate before settling on the most appropriate method and the level of risk • Document results from other methods in the basis of estimate • Early on, when information is scarce, the primary techniques are: • Analogy • Parametric Estimation

  15. Estimating at DCP EntryCosting Exemplars • Make assumptions about systems that might fill the capability gap and choose an “exemplar” system to cost • Something, that if brought today, would meet the capability • Must be technically feasible • Doesn’t mean this is what will be delivered • Develop cost estimates based on the Exemplar

  16. Costing ExemplarsCost to Circumnavigate the Moon • In his 1865 novel "From the Earth to the Moon" Jules Verne described as his exemplar a "moon gun" located in Florida. • 2.74m bore Gun poured into a 274 m deep well. • First 61m of barrel filled with 122 tons of guncotton. • When fired, a 2.74 m diameter shell was propelled to a velocity of 16.5 km/second. • After deceleration through the earth's atmosphere, the shell would have a residual velocity of 11 km/second, sufficient to reach the moon. • Estimated the cost to be US$5,446,675 in 1865 prices.

  17. Cost to Circumnavigate the Moon • In 1969, Apollo 8 circumnavigated the moon. • Up to the Apollo 8 mission, the cost of the Apollo program was US$14.4 billion in then year dollars. • Recall Jules Verne’s estimate of US $5,446,675 in 1865 prices which equates to US$12.1 billion in 1969 prices. • Within 15% Not bad for an estimate made 104 years earlier!!!

  18. Estimation at DCP EntryOutline Approach • Define mission system & obtain indicative costs • Make adjustments to mission system for: • Cost growth & cost escalation • Procurement & integration of additional equipment • Communications equipment • Electronic Warfare & mission support systems • Carried Equipment, (helos, weapons, UAVs etc) • Adjust for Quantity (learning curve, LRIP v Full Rate) • Apply metrics to • Capability Development • Mission System Development • Support System • Contractor Support System • Productions Support • DMO Project Support

  19. Estimation at DCP EntryMetrics - Rules of Thumb As a percentage of Mission System Cost

  20. Estimation at DCP EntryMetrics - Rules of Thumb

  21. Estimation at DCP EntryPrice Data Example • Replenishment Ship based on Berlin Class • Cost US$141.3m 1998 (0.74 exchange rate) • 1.42 Inflator to 2010/11 prices • Current Price = A$271m 2011 prices

  22. Estimation at DCP EntryOutline Approach Progressively replace “metric estimate” with detailed estimate that takes account of: Engineering Development & Non Recurring Engineering Support System incl training and simulation Global Supply Chain? Facilities & Infrastructure Ordnance – initial load out & warstock Production Systems if equipment to be manufactured or assembled in Australia

  23. Estimation at DCP EntryWeight Based Analogy Process Obtain cost & technical data for reference system Eg: Displacement, Gross Weight Estimate scaling factor for new system, Displacement Prorata CostNew = CostOld * DispNew / DispOld Advantages Easy to use Scaleable Disadvantages First order approximation only Scaling factor may not be constant Error Band unknown Needs to be confirmed by other costing methods

  24. Weight Based Analogy Joint Light Tactical Vehicle How to Estimate the Cost of the New Vehicle? Estimate off HMMWV & M-ATV using a Weight Based Analogy HMMWV Joint Light Tactical Vehicle M-ATV

  25. Weight Based Analogy Joint Light Tactical Vehicle Note: US Army Estimate $306,000 to $332,000

  26. Weight Based Analogy Joint Light Tactical Vehicle • Do you think the estimate is reasonable?

  27. Weight Based Analogy Joint Light Tactical Vehicle

  28. Weight Based Analogy Joint Light Tactical Vehicle • Now, do you think the estimate is reasonable? • Potential problems with scaling include: • Increased reliability (doubling of mean miles between failure) • Increased Operational Availability (from 90% to 95%) • Increased power generation • Faster 65mph to 70mph • No allowance for cost growth • Where might cost growth occur?

  29. Estimation at DCP EntryOutline Approach - NPOC Understand the operating profile: Level of preparedness Rate of Effort Basis of Provisioning Ratio of crew to equipment Scale off existing equipment using a “weight based analogy”

  30. Weight Based Analogy SEA 1180 – Multirole VesselOperating Costs • Exemplar HMNZS Otago • Length overall – 85m • Beam – 14.0m • Draught – 3.6m • Disp – 1626 tonnes • How can we determine operating for the new ship? What about extrapolating using a weight based analogy from RAN Streaming Day Rates for similar ships?

  31. Weight Based Analogy SEA 1180 – Multirole VesselOperating Costs • Step 1 – Obtain daily steaming day rates for exemplar vessels What next?

  32. Weight Based Analogy SEA 1180 – Multirole VesselOperating Costs • Step 2 – Annualise steaming day rates • Annual Cost = Seadays x $daily_rate • Step 3 – Obtain full load displacement for each ship

  33. Weight Based Analogy SEA 1180 – Multirole VesselOperating Costs • Step 4 – Determine scaling factor • Disp_Ratio = Dispnew / Dispold • Step 5 – Multiply annual cost by Displacement Ratio Scaling up or down on the basis of the Displacement Ratio suggests an annual cost of around $15m pa

  34. What are the Expected Cost Quality Standards? Cost estimates are expected at each and every stage of the process and for key approvals from DCP Entry to 2nd Pass Approval. 1st Pass Cost Estimates Can be budgetary quotes, market surveys, info from Allies etc for implementation costs (for FMS cases P&A data) However, funds to be expended during CapDev (or 1st to 2nd Pass activities) are to be of tender quality 2nd Pass Cost Estimates Tender Quality Costs is the aim (for FMS cases draft LOA)

  35. DCP Entry – more then one data point for big ticket items. First Pass – Survey the market and ask the right questions (non competitive). Second Pass – Tender data (lowest possible price). Vigilantly document the assumptions and calibrations at every level. Cost Quality Standards

  36. Questions ?

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