cost estimation .ppt

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Prof. Morteza Anvari

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Cost Analysis Requirement

BA ConceptExploration

Concept & Technology Development

System Development& Demonstration

Production & Deployment

Pre-SystemsAcquisition

Systems Acquisition(Engineering and Manufacturing

Development, Demonstration, LRIP &Production)

Support

C

Sustainment

ReviewReviewReview

ComponentAdvanced

Development

SystemIntegration

SystemDemo

ProductionReadiness & LRIP

Rate Production &DeploymentN

EW

OLD

ConceptExploration

Program Definition &

Risk Reduction

Engineering & Manufacturing Development

(EMD)

Production, Fielding/

Deployment

MS 0 MS I MS II MS III

Cost Estimates Needed

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Cost Estimating Process

Final Document

Data CollectNormalize

EstimateFormulation

Review/ Presentation

DefinitionPlanning

DOCUMENTATION

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Develop Cost EstimateStructure and WBS

Data/CERsLCC EstimatesCost Drivers

EstablishGround

Rules andAssumptions

Prepare CostEstimatesfor EachElement

Test TotalSystem

Estimate

Prepare Documentation

EngineeringAnalogy

ParametricsExpert Opinion

ReasonablenessSensitivityAnalysisCost-Risk

Assessment

CompileData Base/

CERs/Models

Cost Analysis Model

Start

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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 estimate.

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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.

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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?

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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?

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Definition and PlanningKnow Purpose of the Estimate

• Main purposes of estimates:

– Budget Formulation

– Comparative Studies

– Source Selection

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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

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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

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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?

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ACTIVITY J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

1993 1994 1995 1996 1997 1998 1999 2000J A S O N D

PROGRAM REVIEWS

ENGINEERING & MANUFACTURING DEVELOPMENT

TEST & EVALUATION

LIVE FIRE TEST

LOG DEMO II

PROD VER TEST

ENHANCED PRODUCIBILITY PROGRAMLOW RATE INITIAL PRODUCTION

FY94

FY95

FY96

MULTIYEAR I & II (3 YR CONTRACT)

FY97

FY98

FY99

FIELDING

LLTI PEO IPR LRIP DECISION MILESTONE III

IOTE

TECH SUPPORT

QLFTT

QUAL

UE

FUE FUEUSMC

MSLS - 3316 741 CLUs - 423 133

MSLS - 1080 194 CLUs - 270 140

MSLS - 1020 141 CLUs - 206 48

MSLS - 1015 CLUs - 108

MSLS - 872 CLUs - 97

MSLS - 698 CLUs - 55

CA CA

CA

CA

CA

LEAD TIME PRODUCTION

PRODUCTION

LEAD TIMELLTI

LD II

LFT (A)(26)

(3)LUT

CA

LEGEND

QL - QUICK LOOK FTT - FIELD TACTICAL TRAINER UE - USER EVALUATION LUT - LIMITED USER TEST CA - CONTRACT AWARD MRRB - MATERIEL RELEASE

REVIEW BOARD

(6)

TODAY

MRRB

PRODUCTION

LFT (B,C) (8,4)

USA

LEAD TIME

LEAD TIME

AWEHANDOFF NTC

PRODUCTION

PVT(25 MSL + 10 CLU)

FT. HOOD

RANGER COMPL

82nd FIELDING BEGINS

82nd COMPLETE

ARMY USMC

LETHALITY ENHANCEMENT

LITE I / WARHEAD / LOW COST BST

DEVELOPMENT

CA MYII

(9)CLU

(28)MSL

II, III, FLIGHTI

Defining the SystemIntegrated System Schedule

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Defining the System Work Breakdown Structure (WBS)

• WBS definition – 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.

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WBS

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Defining the System Cost Element Structure (CES)

1.0 Research Development Test & Evaluation (RDT&E)

2.0 Production

3.0 Construction (CON)

4.0 Pay and Allowances

5.0 Operating and Maintenance Army (O&M)

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Defining the System COST ELEMENT STRUCTURE – 1.0 RDT&E

CES# ELEMENT: FY00C$M TY$M1.01 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

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CES# ELEMENT: FY00C$M TY$M2.01 NON REC PROD. 2.02 REC. PROD 2.03 ENG. CHG2.04 SEPM2.05 SYS T&E2.06 TRAINING2.07 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 – 2.0 PROCUREMENT

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CES# ELEMENT: FY00C$M TY$M3.01 DEVELOP. CONSTRUCTION 3.02 PRODUCT. CONSTRUCTION 3.03 OPERATION/SITE ACTIVATION3.04 OTHER N

Defining the System COST ELEMENT STRUCTURE – 3.0 CON

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CES# ELEMENT: FY00C$M TY$M4.01 CREW 4.02 MAINTENANCE 4.03 SYSTEM SPECIFIC SUPPORT4.04 SEPM4.05 REPLACEMENT PERSONNEL4.06 OTHER

Defining the System COST ELEMENT STRUCTURE – 4.0

Pay & Allowances

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CES# ELEMENT: FY00C$M TY$M5.01 FIELD MAINT., CIV LABOR5.02 SYS. SPECIFIC BASE OPS 5.03 REPLENISHMENT DLRs5.04 REPLEN. CONSUMMABLES5.05 POL5.06 END ITEM MAINTENANCE5.07 TRANSPORTATION 5.08 SOFTWARE5.09 SEPM 5.10 TRAINING 5.11 OTHER

Defining the System COST ELEMENT STRUCTURE – 5.0

Operating & Maintenance (O&M)

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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

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Defining the System Cost Analysis Requirements Description

(CARD) Continued1.0 System Overview1.1 System Characterization

1.1.1 System Description1.1.2 System Funcitonal Relationships1.1.3 System Configuration1.1.4 Government Furnished Equipment/Information

1.2 System Characteristics1.2.1 Technical/Physical Description 1.2.1.1 Subsystem Description 1.2.1.2 Functional and Performance Description 1.2.2 Software Description

1.3 System Quality Factors1.3.1 Reliability1.3.2 Maintainability1.3.3 Availability1.3.4 Portability and Transportability1.3.5 Additional Quality Factors

1.4 Embedded Security1.5 Predecessor/Reference System2.0 Risk

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Defining the SystemCARD Continued

3.0 System Operational Concept3.1 Organizational Structure3.2 Basing and Deployment Description3.3 Security3.4 Logistics

4.0 Quantity Requirements5.0 System Manpower Requirements6.0 System Activity Rates7.0 System Milestone Schedule8.0 Acquisition Plan or Strategy9.0 System Development Plan

10.0 Element Facilities Requirements11.0 Track to Prior Card12.0 Contractor Cost Data Reporting Plan

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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.

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Data Collection and Analysis

• Collection and analysis represent a significant amount of the overall estimating task in terms of time. The analysis will include decisions on what programs to include in the data set to whether to truncate lot data on a program for which you are calculating a learning curve.

• Document data in your analysis, and any assumptions you make

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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.

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Data Collection and Analysis Most 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

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Tools for Total Ownership Cost Estimating

Life Cycle Cost Management Tools

APPN ACEIT PRICE SEER ACDB AMCOS OSMIS SBC/ISR CO$TAT

RDT&E X X X X X X

PROC X X X X X X

MILCON X X X X X

MILPERS X X X X X

O&M X X X X X X X

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Definition and PlanningSelect the Estimating Approach

• Techniques available– Analogy– Parametric– Engineering– Extrapolation– Expert OpinionSelect the technique that is most applicable

to a specific WBS element

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Definition and PlanningEstimating Methods

• Analogy– Basic Comparison– Factors

• Parametric– Regression Analysis

• Engineering– Detailed

• Expert Opinion– Committee– Delphi

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ConceptRefinement

TechnologyDevelopment

System Development& Demonstration

Production &Deployment

Operations& Support

Life Cycle Cost Estimates

• Cost estimates based on confidence intervals• Parametric analysis based on similar systems and similar attributes (regression)• Engineering data based on reliability projections used for bottoms-up estimate• Actual system costs used to extrapolate future system costs• Cost estimate revised every two years after production• Weights associated with non-actuals decrease as system matures• MS B is a true hard stop for systems

A B C D

Cost Estimating Model

Disposal

ParametricEngineeringActuals

xy0

ParametricEngineering

xy0


xy0


xy0


xy0


xy0


xyz


xyz


xyz


xyz


xyzActuals


0yz


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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.

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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

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Analogy Estimating with Factors

Element Old Sys1 Old Sys2 Old Sys3 New Sys

Airframe $500/lb $250/lb $750/lb 1.25*S1

Engine 2M/Unit 3M/Unit 5M/Unit .8*S3

Avionics $3K/lb $2K/lb $4K/lb 1.0*S2

Payload 6M/Unit 8M/Unit 7M/Unit .65*S1

Cost(New) = Cost(Old) x Adjustment Factor

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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

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• 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

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(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?

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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.

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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

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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

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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

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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.

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Expert Opinion Method Example

Labor typeHours Needed

Hourly Rate% of Total Hrs

%*rate

Senior Engineer 1000 $13 10.5 $1.37

Design Engineer 3000 $11 31.6 $3.48

Tool & Die 500 $11 5.3 $.58

Machinist5000 $9 52.6 $4.73

Totals 9500 $10.16

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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 15%).

Learning Curve Theory

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• 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

Learning Curve TheoryFactors Contributing to Efficiency

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TABLE FOR FIGURESF-1-1 and F-1-2

Unit No. Unit Person-hours

1 100.002 80.004 64.008 51.2016 40.9632 32.7764 26.21

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.


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80% Unit Curve on Arithmetic Paper


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1

10

100

1000

1 10 100 1000 10000

90%

85%

80%

70%

Production Unit Number (LOG)

UnitCost

(LOG)

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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.

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Estimate Formulation

• We have defined our tasks, planned the estimate, assigned cost responsibilities, and performed data collection and analysis.

• Here we apply our estimating methodologies and tools: develop the factors, analogies, CERs, and learning curves.

• We will aggregate the various cost elements into development, production, and O&S estimates, fiscally spread the costs, and apply inflation.

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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 – CERsAir Vehicle Software – Expert OpinionPropulsion – CERsAvionics – AnalogyArmament – Catalog Price

System Eng/Program Mgt – Factor of Air VehicleSystem Test & Evaluation – Factor of Air VehicleTraining – Factor of Air VehicleData – Factor of Air VehiclePeculiar Support Equipment – Factor of Air VehicleInitial Spares – Factor of Air Vehicle

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Review and Presentation

• We want to ensure that the estimate is reasonable, realistic, and complete.

• Reasonableness addresses areas such as: using appropriate and acceptable methodologies; presenting methodologies systematically; the use of relevant data; and ensuring that assumptions are valid and clearly stated.

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Review and Presentation (Continued)

• The realism test checks to see if the assumptions and ground rules are consistent with the statement of work and if the costs are in line with historical data.

• We evaluate completeness by determining whether the estimate includes all the work stated in the request for proposal and whether the costs are traceable and reconcilable.

Risk and Uncertainty AnalysisRisk and Uncertainty Analysis

Risk Analysis Approaches

Detail

Eff

ort

• Detailed Network & Stochastic

• Detailed Monte Carlo Simulation (each WBS)

• Bottom Line Monte Carlo Simulation

• Add a Risk Factor/Percentage

• Discrete Technical, Schedule, and Estimating Risks


Probability DistributionsWBS Cost Distribution Total Cost

P.E.

P.E.

P.E.

+

+

+ Many More

=

Sum PE MLC (Mode)

PDF

CDF

Con

fide

nce

50%

20%

Fre

quen

cy

Sum PE MLC


Probability Density Function

Cell B28 Frequency Chart

Mean = $2,198

4,978 Trials Shown

.000

.006

.012

.018

.024

0

29.2

58.5

87.7

117

$1,250 $1,750 $2,250 $2,750 $3,250

Forecast: Results=


Cumulative Distribution Functions

Cell B28 Cumulative Chart 4,977 Trials Shown

.000

.249

.498

.747

.995

0

4977

$1,250 $1,750 $2,250 $2,750 $3,250

Forecast: Results=

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Reasons for RiskReasons for Risk

Technical Programmatic Cost Schedule

PhysicalProperties

MaterialAvailability

Sensitivity toAssumptions

Degree ofConcurrency

Materialproperties

SkillRequirement

Sensitivity toTechnical Risk

Sensitivity toTechnical Risk

SoftwareComplexity

EnvironmentalImpact

Sensitivity toProgrammaticRisk

Sensitivity toProgrammaticRisk

IntegrationInterface

ContractorsStability

Sensitivity toSchedule Risk

Number ofCritical Path

RequirementChanges

Funding Profile EstimatingErrors

EstimatingErrors

OperationalEnvironment

PoliticalAdvocacy

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Development Schedule

Lif

e C

ycle

Cos

t

Min Optimal

Typ

ical

Cost Schedule Curve Cost Schedule Curve

Parallel EffortMore ECPLess Mature Design

Fixed CostTechnology Outdate

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Development ScheduleDevelopment Schedule

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)

Mean Cycle Time to IOC

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Defense

Schedule GoalsSchedule Goals


Cos

t

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

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

Commercial

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DoD Program Schedule DriversDoD Program Schedule Drivers


Cos

t

Cycle Time Reduction Goal

Funding Allocation

Acquisition Process

Program Execution

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Final Documentation

• Provide the means for other analysts to get the same results that we have in our cost estimate.

• Providing good directions and a clear trail to follow are essential in having an estimate that can be replicated.

• Provide step-by-step documentation of the methodologies, supporting data, ground rules, and assumptions, equations, examples, etc.,

• Ability to interpret or evaluate someone else’s cost documentation is as important as ability to prepare good cost documentation.

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CAIV Process

• Set realistic but aggressive cost objectivesearly in acquisition program

• Manage risks

• Track progress using appropriate metrics

• Motivate Government and industrymanagers to achieve program objectives

• Incorporate incentives to reduce O&S costsfor fielded systems

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Cost As An Independent Variable (CAIV)

• Best time to reduce cost is early in the process.

• Involves the stakeholders in the process.• Cost tradeoffs must be addressed early in

the acquisition process and embedded in program requirement documents, Request For Proposals (RFPs), contract provisions, and source selection process.

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Cost Analysis ProcessDatabases, Tools, & Models

Requirements Acquisition Assumptions

Design Parameters Risk Assessment

ASARCCAIG, DABAPBPPBESAOA

Inputs (Descriptions) Process (Models) Outputs (Costs)

Types of Cost StudiesStudies Should be Known Unknown Class

Cost Estimating Descriptions, Models Costs Analysis

CER DevelopmentDescription, Historical

CostsModels Synthesis

Needed Capability CAIV Cost Goals, Models

Descriptions ( Design and Performance Parameters)

Control

Current Capability

Performance Based and Design Based Cost Models Currently do not Exist

Cost Analysis Domain

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Analysis of Alternatives

• Set realistic, aggressive cost objectives earlyin development

• Manage risks

• Track progress with appropriate metrics

• Motivate government/industry managersto achieve program objectives

• Incorporate incentives to reduce O&S costsfor fielded systems.

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Cost Analysis

Art or Science?

cost estimation .ppt

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