Army Cost Review Board Office Mort Anvari Mort.Anvari@us.army.mil (703) 601-4150 Cost Analysis for Non-Costers
HQDA SA CSA UNDER VCSA ASA (I&E) ASA (ALT) ASA (CW) ASA (MR&A) ASA(FM&C) DASA-CE RB FO Budget
Situation • You have just been tasked to develop a cost estimate, that is, a professional opinion about the cost of an item, a service or a thing. • Let’s discuss a process for organizing and developing this cost estimate.
Cost Estimating Process • Definition & Planning • Purpose of the Estimate • Defining the System and Schedule • Ground rules & Assumptions • Estimating Approach • Estimating Team • Data Collection and Analysis • Estimate Formulation • Review and Presentation • Final Documentation
Definition and Planning • Influences the success of the estimate • Understanding the requirements and how you approach the process will establish the guidelines and procedures for the estimate. • Ask lots of questions…They help you understand the requirement.
Questions • Why is this cost estimate needed? • What decisions are pending on the results of this estimate? • Will the estimate be briefed and to whom? • Will the results be incorporated into some document? • What does the recipient expect to have included or excluded? • What excursions or variations from the baseline are anticipated?
Questions Continued • What are the program and funding constraints especially if the program is a Joint Program? • What are the time constraints for this estimate? • What is the acquisition phase of the program? • Is the program definition mature? • Does technology exist today to design, develop, test and manufacture the system? • What is the interrelationship with other systems? • Are there previous contracts? How many? What type? • How have the contractors performed to date?
Definition and PlanningKnow Purpose of the Estimate • Main purposes of estimates: • Budget Formulation • Comparative Studies • Source Selection
Purpose of EstimateBudget Formulation Estimates • Program Office Estimate (POE) • Component Cost Analysis (CCA) • Independent Cost Estimate (ICE) • What-if exercises • Rough Order of Magnitude (ROM) • Should Cost Estimates • CAIV
Purpose of EstimateComparative Studies Estimates • Making cost & benefit comparisons between alternatives • Economic Analysis (EA) • Analysis of Alternatives (AoA) • Force Structure • Trade-off Studies • Source Selection • Prioritization
Definition and PlanningDefining the System • Adequate description of the technical and program characteristics of the system • What are the physical and performance characteristics? • What are the development, production, and deployment schedules? • How many systems are to be produced? • How will the systems be supported: contract, in-house, two or three levels of maintenance?
Defining the System Integrated System Schedule
Defining the System Work Breakdown Structure (WBS) • WBS defined in MIL-HDBK-881 as: • product-oriented breakdown of hardware, software, services, data and facilities that define the system. • WBS breaks a total job down into manageable pieces & portrays the way work is to be done. • WBS displays a company’s reporting structure. • Program managers may cite MIL-HDBK-881 “for guidance only” in contract solicitations.
Defining the System Work Breakdown Structure (WBS) 1.0 Research Development Test & Evaluation (RDT&E) 2.0 Production 3.0 Military Construction (MILCON) 4.0 Military Pay and Allowances (MPA) 5.0 Operating and Maintenance Army (OMA)
Defining the System COST ELEMENT STRUCTURE – 1.0 RDT&E CES#ELEMENT:FY00C$MTY$M 1.01 DEV. ENG. 1.02 PEP 1.03 DEV. TOOL. 1.04 PROTO MFG. 1.05 SEPM 1.06 SYS T&E 1.07 TRAINING 1.08 DATA 1.09 SUPP EQUIP. 1.10 DEV. FACILITIES 1.11 OTHER $ 39.039M $38.260M 0.408 0.386 0.457 0.450 110.421 107.724 78.266 76.363 11.112 10.927 1.989 1.954 3.439 3.413 4.897 4.758 0.0 0.0 0.968 0.928
Defining the System COST ELEMENT STRUCTURE – 2.0 PROCUREMENT CES#ELEMENT:FY00C$MTY$M 2.01 NON REC PROD. 2.02 REC. PROD 2.03 ENG. CHG 2.04 SEPM 2.05 SYS T&E 2.06 TRAINING 2.07 DATA 2.08 SUPP. EQUIP. 2.09 OPER./SITE/ACT. 2.10 FIELDING 2.11 TRAIN. AMMO/MSLS 2.12 WAR RESV. 2.13 MODS 2.14 OTHER $ 16.110M $ 16.583M 1,169.348 1,312.377 0.0 0.0 116.637 132.258 12.564 14.437 28.880 31.499 2.073 2.300 146.460 158.304 0.0 0.0 89.525 101.635 59.001 79.482 0.0 0.0 236.619 280.729 51.739 64.129
Defining the System COST ELEMENT STRUCTURE – 3.0 MILCON CES#ELEMENT:FY00C$MTY$M 3.01 DEVELOP. CONSTRUCTION 3.02 PRODUCT. CONSTRUCTION 3.03 OPERATION/SITE ACTIVATION 3.04 OTHER MILCON
Defining the System COST ELEMENT STRUCTURE – 4.0 Military Pay&Allowances (MPA) CES#ELEMENT:FY00C$MTY$M 4.01 CREW 4.02 MAINTENANCE 4.03 SYSTEM SPECIFIC SUPPORT 4.04 SEPM 4.05 REPLACEMENT PERSONNEL 4.06 OTHER MPA
Defining the System COST ELEMENT STRUCTURE – 5.0 Operating & Maintenance Army (OMA) CES#ELEMENT:FY00C$MTY$M 5.01 FIELD MAINT., CIV LABOR 5.02 SYS. SPECIFIC BASE OPS 5.03 REPLENISHMENT DLRs 5.04 REPLEN. CONSUMMABLES 5.05 POL 5.06 END ITEM MAINTENANCE 5.07 TRANSPORTATION 5.08 SOFTWARE 5.09 SEPM 5.10 TRAINING 5.11 OTHER OMA
Defining the System Cost Analysis Requirements Description (CARD) • Source of a system’s description • Describes important features • Is provided to other groups preparing cost estimates • Helps ensure all groups are costing out the same “program.” • Prepared by program office; approved by DoD Component Program Executive Officer
Defining the System Cost Analysis Requirements Description (CARD) • Divided into a number of sections, each focusing on a particular aspect of the program being assessed. • 1.1.1 System Description • 1.1.4 Government-Furnished Equipment and Property • 1.2.1 Technical and Physical Description • 1.2.1. x (..x..) Subsystem Description • 1.2.1.x.3 Material, Processes, and Parts • 1.2.2 Software Description.
Defining the System Cost Analysis Requirements Description (CARD) Continued
Defining the System CARD Continued
Defining the System Sample CARD
Definition and PlanningGround Rules & Assumptions • State the conditions which must take place in order for the estimate to be valid • Ground rules and assumptions must be documented since changes in these areas provide an audit trail for changes in the cost estimate.
Definition and PlanningSelect the Estimating Approach • Techniques available • Analogy • Parametric • Engineering • Extrapolation • Expert Opinion Select the technique that is most applicable to a specific WBS element
Definition and PlanningEstimating Methods • Analogy • Basic Comparison • Factors • Parametric • Regression Analysis • Engineering • Detailed • Expert Opinion • Committee • Delphi
Cost Estimating MethodsAnalogy Method • Based on direct comparison with historical information of similar existing activities, systems, or components. • Compares new system with one or more existing similar systems where there is accurate cost and technical data. • Analyst must show validity of comparison.
Cost Estimating MethodsAnalogy Method • Based on known costs of a similar program • Adjustments for complexity, technical, physical • Strengths • Based on representative experience • Less time consuming than others • Can be used as a check on other techniques • Weaknesses • Small sample size • Heavy reliance on judgment • Sometimes difficult to identify analogy and associated costs
Analogy Estimating with Factors Cost(New) = Cost(Old) x Adjustment Factor
Cost Estimating MethodsParametric Method • Known as Statistical Method or Top Down Method • Relates cost to physical attributes or performance characteristics • Uses database of elements from similar systems • Uses multiple systems • Most beneficial in earlier stages of the system or project life cycle
Cost Estimating MethodsParametric Method • Statistical relationships between cost and physical or performance parameters of past systems. • Strengths • Captures major portion of cost • Quick what if type estimates • Weaknesses • Less detailed • Getting accurate data
Cost Estimating MethodsParametric Method(Extrapolation) • Use historical values to establish a trend for the future. • Example problem: Given the actual productivity and labor rates in the given table. How much will it take to complete a 3-year software development project of 10K lines of code, if 50% is completed in the second year and 25% is completed in first and third years?
Learning Curve Theory As the quantity of a product produced doubles, the man-hours- per-unit expended to produce the product decreases at a fixed rate or constant percentage (usually 10% to 20%).
Learning Curve Theory Factors Contributing to Efficiency • Job familiarization by both production workers and supervisory personnel. • Changes in product design which do not materially affect the product, but result in increased ease and speed of production. • Changes in tooling, machinery, and equipment which simplify or speed up the production process. • Improved production planning and scheduling, and improvements in production techniques and operational methods. • Improvements in shop organization, engineering coordination and liaison. • Improvements in the handling and flow of materials, and in the materials and parts supply systems
TABLE FOR FIGURESF-1-1 and F-1-2 Unit No. Unit Person-hours 1 100.00 2 80.00 4 64.00 8 51.20 16 40.96 32 32.77 64 26.21 Learning Curve Theory • The table is based on the assumption that the first unit required 100 person-hours to produce. The table indicates a constant rate of reduction of 20% for each doubling of the unit number; the value of the second and each succeeding item in the table is 80% of the value of the preceding item.
Learning Curve Theory 80% Unit Curve on Arithmetic Paper
Learning Curve TheoryUses • Evaluating contract production costs. • Assessing impact of production interruptions, product changes and production rate change. • Rate of improvement experienced by a particular contractor on a prior product may be indicative of rate of improvement expected on new product of similar size, complexity, and construction. • Improvement curve pattern experienced in the production of past item can be extended to calculate costs of future items.
Cost Estimating MethodsEngineering Method • Known as bottom up method • Requires extensive knowledge of system characteristics • Divide into segments; estimate costs for each segment • Combine segments plus integration cost • Uses a combination of cost estimating methods • Detailed knowledge of new technologies may not be available.
Cost Estimating MethodsEngineering Method • Strengths • Detailed • Best when long stable production process • Weaknesses • Requires a lot of time • Cost • Cannot be used until system well defined
Cost Estimating MethodsExpert Opinion Method • Subjective judgment of an experienced individual or group • Use if time does not permit a more thorough analysis • Document source(s) of opinion of experts • List attributes of the source(s) Example: Delphi Technique
Cost Estimating MethodsExpert Opinion Method • Consulting with one or more experts who use their knowledge and experience to arrive at an estimate • Group techniques include • Consensus (Committee) • Delphi • Strengths and weaknesses
Expert Opinion MethodDelphi Technique • Query expert opinion from group • Seek information from each expert • Summarize the results • Send report to each expert • Gather second opinion after each individual reviews report • Summarize results • Iterative process continues until the experts reach a consensus, or near‑consensus.
Cost Estimating MethodsLaying Out the Estimating Approach Aircraft System – sum of level II elements (cross-check with analogy) Air Vehicle – sum of level III elements Airframe – CERs Air Vehicle Software – Expert Opinion Propulsion – CERs Avionics – Analogy Armament – Catalog Price System Eng/Program Mgt – Factor of Air Vehicle System Test & Evaluation – Factor of Air Vehicle Training – Factor of Air Vehicle Data – Factor of Air Vehicle Peculiar Support Equipment – Factor of Air Vehicle Initial Spares – Factor of Air Vehicle
Cost Analysis (CA) Working-level Integrated Process Team (WIPT) C&E PM Co-Chairs DCSOPS ASA(I&E) CRB-WG TRADOC DCSLOG PA&E Army Materiel Command (AMC) ArmyBudget Office DISC4 ASA(ALT) AMCOM AMC’s MSCs CECOM TACOM STRICOM
Data Collection and Analysis • The direction we take in collecting historical data will be determined by our choice of estimating methodologies. • This step may also dictate a change in estimating approach due to the availability or non-availability of certain data. • Data collection is not limited to cost data. We must also collect technical and program data if we want the total picture of the historical systems. This will help us ensure the comparability of the systems that we are collecting data on with the system we are estimating.
Data Collection and AnalysisMost Difficult Task in Cost Estimating • Data Sources • Data Types: Cost/Resource, Technical, Program • Categories: Primary, Secondary • Data Problems • Wrong Format – Matching up – Definition • Temporal Factors - comparability • Normalization • Data Location