Mari-Tech 2012 Exhibition and Conference – Re-birth of the Marine Technical Community

T-802-G – Early State Design Cost Estimating Methodology

Mark Oaks Russell Peters Alion Science and Technology Alion Canada

Biography

Mark Oakes is the Chief Technical Officer for the Engineering and Integration Solutions Sector (EISS) of Alion Science and Technology. EISS was formed from Alion’s acquisition of John J. McMullen Associates (JJMA) in 2005 and acquisition of Anteon’s Engineering Technology Center in 2006.

Mark joined JJMA in 1977. Prior to joining JJMA, Mark worked for Newport News Shipbuilding in the Main Propulsion and Deck Machinery Section of the Engineering Technical Department. Prior to becoming the Chief Technical Officer for Alion EISS he was responsible for all ship design engineering at JJMA. He was responsible for creating Alion’s Alion Canada operation in the National Capital Region.

He has over 35 years experience in all areas of ship design including surface combatants, auxiliary and UNREP ships, oceanographic and survey ships, surface effect ships and high speed catamarans. He has managed several major design programs including the Saar 5 corvette, T-AGS 45 oceanographic survey ship, Littoral Combat Ship preliminary design, and Joint Support Ship project definition design. Mark has been involved in many international ship projects including Canada (JSS and CPF), Israel (Saar 5, Multipurpose Corvette and Alligator), and Korea (ULSAN Class, KDX II, KDX III, LPX and KFX). He spent several months on-site at Hyundai Heavy Industries providing early stage design assistance for surface combatants.

And Russell Peters is the Manager of Canadian Maritime Programs at Alion Canada and is responsible for all operations for Alion Canada and was recently the Project Manager for CCG’s OFSV design. He retired from the Royal Canadian Navy in 2009 after serving for 20 years as a Naval Architect. Significant posts held were the Naval Architecture Officer in FMF Cape Breton, the Project Naval Architect in JSS, and the DPM for CSC. He also did an exchange tour with the USN at the Naval Surface Warfare Centre Carderock Division. Description

One of the biggest challenges facing government procurement is that the budget is often fixed prior to the cost of the requirements being estimated. Ship owner’s need cost estimates early in the design process to understand if they can afford their requirements. This paper discusses a ship cost estimating method compatible with early stage ship design when limited information is available. The methodology uses a weight based methodology combined with other key attributes of the design. The paper recommends that the Crown collect return cost and labour hour data from the NSPS projects so that it can develop a robust early stage cost estimating capability.

Early State Design Cost Estimating Methodology

T-802

Early Stage Design Cost Estimating Methodology

Russell Peters – Alion Canada Mark Oakes - Alion

OUTLINE

• Challenge of estimating cost with limited information

• Available Cost estimating methods • “Weight Based” models • Example use of a “Weight Based” model • Need for returned cost data from ship

construction programs • Recommendations

Challenge of Estimating Cost With Limited Information

• How do you respond when an owner calls and asks for the price of a new ship?

• For example, government SOWs have been known to have words similar to the following regarding cost estimates: The cost estimate is fundamental to the evolution of the design and could result in reconsideration of the vessel’s capabilities. As a result, there may be a requirement for more than one costing iteration or a partial costing iteration (to assess a specific change to the design) during the Concept Design Phase.

Challenge of Estimating Cost With Limited Information

• Very early in the design phase you would likely have the following based on the owner’s defined requirements: – Notional size: length, displacement – Mission: what does it do/carry? – Operational Profile: How fast/far does it go?

• What do you do when the answers don’t provide much to go on and they want it tomorrow for decision making purposes?

Challenges in Early Stage Design • Early Stage Design provides additional

estimating challenges even if you can answer the Owner’s initial question

• Requirements change/or “what if” questions (particularly in a “design to cost” exercise)

• Increase/decrease speed • Increase/decrease mission payload or carrying capacity

Challenges in Early Stage Design • This is prior to having completed the first

design cycle • Requires variations in weight, machinery

ratings, equipment costs, etc. • For example, a maximum speed change will

impact main machinery and possibly hull form, and thus the weight, maybe the length and beam of the vessel as well – how much does that cost??

Available Cost Estimating Methods • Analogous Estimating Approach

– Look up award prices from public data • Doesn’t necessarily provide the whole cost

– Example: • June 2011, France sells Russia two Mistral, built in

France, outfitted in Russia, for €1.12B ($750M CAD each)

• What we don’t know though: – GFE (particularly relevant for combat systems) – PMO costs – Other agreements (an option for 2 more may be

a factor), offsets, NRE – Production schedule and learning curves

Available Cost Estimating Methods

– With a number of assumptions, you can then estimate the cost of a very similar ship

– What do you do though, when the owner wants this vessel, only 10% smaller, or 5% faster, etc?

Available Cost Estimating Methods • Ask the owner for data on previous ship buys

– In a similar manner, the owner may be able to provide data for previous buys, that give some frame of reference

– But as soon as the requirements change, it is difficult to draw conclusions

Available Cost Estimating Methods • Create your own cost estimating tool

– Typically this is based on your previous knowledge and experience, and works well for a well established type of vessel

• Use a commercial cost estimating tool – There are several on the market – Typically spreadsheet/data base type tools – Require ship data (weights, equipment data, etc.)

• These tools are often going to be “weight based” for early stage design, but can also be hardware based (bottoms up based on known components of the ship)

“Weight Based” Cost Models • “Weight Based” models have evolved because

that is almost all that you know early: – Develop Cost Estimating Relationships (CERs) – Cost/Lightship weight = $$/tonne – In it’s simplest form, you could look again at the Mistral sale:

• $750M CAD for ship construction costs for a 21,000 tonne vessel, or the CER is $35,000 per tonne

• If you thought your new design would be 15,000 tonnes, you could make an assumption that the vessel would be $525M for ship construction costs – all other things being equal – which they aren’t

• If you wanted to build that ship in Canada, then it gets more complicated

“Weight Based” Cost Models • Develop Cost Estimating Relationships (CERs)

– Typically, you try to get more fidelity and use specific weight groups, and use 4 different variables:

• Wgt = the weight of any weight group of the ship • $$/tonne = based on material/equipment prices • Hrs/tonne = hours to install it or build it (the CER) • $$/hr = an average shipyard labor rate

– Then – You can often estimate major equipment (prime

movers) using market data at this stage too given an estimate of power required

“Weight Based” Cost Models • Example:

– If you thought that : • Group 100 (hull) would weigh 5,000 tonnes on your design • Steel is $1000/tonne • It takes 100 hrs/tonne to fabricate and install it • Shipyard labour rate was $50/hr

– Then

• Note that typically you would include a wastage factor – the shipyard buys more material than goes into the ship

“Weight Based” Cost Models • Obviously the more information you have, the better

your estimate will be – The CER’s (hrs/tonne) usually come from experience, and

will vary depending on construction location (shipyard labour force skills, efficiency, overhead, etc. are part of this)

– The labour rates ($$/hr) come from what you know about where it will be built and should be agreed to up front with the owner

– The weights come from wherever you are in the design cycle, in the first iteration likely from a parent design

Improving the Cost Estimate • As you start to receive vendor data, this

process changes and becomes more accurate, as you replace material cost weight based estimates with actual estimates

• However, you are still applying a weight based estimate to the labour cost associate with it

• In addition, as the early stage design progresses and more data becomes known, $$/kW data can replace $$/tonne for machinery

Improving the Cost Estimate

• An example of how early stage cost estimates can improve over the early stage design process:

Improving the Cost Estimate

Indication of where the cost estimating information originated

• Typically, a customer does not have more money than they need, and they usually ask many questions such as “what if I go 2 knots slower, how much will I save”

• This is hard to do without a complete design cycle, but estimates can be made to changes in propulsion power, and resulting weight groups

• This type of what if scenario is best done as a relative measure, and describing it as a percentage change up or down from the baseline

What If Scenarios

Use of a “Weight Based” Model • Alion uses a weight based cost model for early

stage design – For smaller vessels, design projects, we would

typically use a spreadsheet – For larger projects we would use a commercial

tool called ACEIT

• Developed by DOD and used for 21 years • Mandated by DOD other US Government

organizations • Very powerful for “what-ifs” including

escalation changes

Spreadsheet Model

COST MODEL INPUTS - OPERATOR

Rounding Value Ship ParticularsDesign & Build Margin Length OA [m]Learning Curve, Labour LWL [m]Learning Curve, Material LBP [m]Overhead Rate B [m]Supplementary Labour Income T [m]Contractor's Profit D [m]Contractor's Contingency CbOwner's Contingency for Change Materials DataEscalation Rate (%) 100 Hull StructureLabour Escalation Rate (%) Steel [$/t]Financial Security Escalation (%) Wheel Abrading and Priming [$/t]Shipyard Material Negotiation Discount Steel Grinding & AbradingBase Labour Rates Scrap RateBasic Work Year [manhours]Default Values Unburdened Burdened

Waterfront Blended

Spreadsheet Model 4.0% Design & Build Margin Current Steel Cost ($/t) 751.00 Carryette Algorithm(Not Used)

15.0% Scrap Rate Wheel Abrading and Priming ($/t) 220.00 -$ 1 Hull Structures 12.0% AH36 Premium 143.00 Wt of AH36 G&A (%) 0.15

13.5% % AH36 Effective Steel Cost/t 1116.65 Material CERGroup Totals = 0.00 0.00 0.00 0.00 0.00 #DIV/0! -$ 0.00 0 -$

Unit Net Weight Net Weight Quoted Unit Net Cost Labour Labour LabourGroup Weight w/o Margins w/Margins LCG VCG TCG Country Cost Cost Incl: Scrap CER Estimate CostCode Description Qty [tonnes] [tonnes] [tonnes] [m] [m] [m] of Origin [Original Currency] [CDN$] [CDN$] [Hours] [Manhours] [$]

Equations10 Hull Structure, General1000 Hull Structure - General11 Shell and Supporting Structure1110 Shell Plating, Surface Ship And Submarine Pressure Hull1130 Inner Bottom1140 Shell Appendages1150 Stanchions1160 Longit. Framing, Surface Ship And Submarine Pressure Hull1170 Transv. Framing, Surface Ship And Submarine Pressure Hull12 Hull Structural Bulkheads1210 Longitudinal Structural Bulkheads1220 Transverse Structural Bulkheads1230 Trunks and Enclosures13 Hull Decks 1310 Main Deck1320 2nd Deck1360 01 Hull Deck (Forecastle And Poop Decks)14 Hull Platforms and Flats1490 Flats15 Deck House Structure1510 Deckhouse Structure To First Level1520 1st Deckhouse Level1530 2nd Deckhouse Level1540 3rd Deckhouse Level1550 4th Deckhouse Level1560 5th Deckhouse Level (Gallows 12m ABL)16 Special Structures1610 Structural Castings, Forgings, And Equiv. Weldments1620 Stacks and Macks1630 Sea Chests1650 Sonar Domes1670 Hull Structural Closures1680 Deckhouse Structural Closures1690 Special Purpose Closures And Structures17 Masts, Kingposts, and Service Platforms1710 Masts, Towers, Tetrapods18 Foundations1820 Propulsion Plant Foundations1830 Electric Plant Foundations1840 Command And Surveillance Foundations1850 Auxiliary Systems Foundations1860 Outfit And Furnishings Foundations1870 Armament Foundations19 Special Purpose Systems1980 Free Flooding Liquids

General Weight and Cost Information Labour Estimate

Weight CER

Commercial Model

Commercial Model

Use of a “Weight Based” Model • Initial weight estimates

– The level of detail in the early stages depends on the weight information/equipment information of the parent compared to the new notional design

– We will take whatever level of information from the parent, and use an Alion tool called RATS (uses algorithms to ratio weights (or powers) in specific weight groups) to create new weight estimates for each weight group/sub-group

Use of a “Weight Based” Model • Initial cost estimates

– These weights are then input into the cost formula using established CER’s

– Steel CER’s are quite low (hrs/tonne) – Comms and electronics CER’s are very high (e.g.,

the equipment is light but takes a significant amount of labour to install and set to work)

Use of a “Weight Based” Model • Initial cost estimates

– Of course, to that you need to apply all the other costs:

• Shipyard profit • Shipyard risk • Insurance • Contingencies • Escalation • Engineering • Etc.

Use of a “Weight Based” Model • Ideally, you can validate your model against a

known price – For a recent design, we were fortunate that we

could create our model and validate it against a known contract price released for a similar size and type of vessel

– This allows you to validate your CER’s and weight estimates

Other Factors to Consider • Escalation

– This can be a big ship cost driver, particularly if the build is a number of years away (note a slow production rate increases the cost of escalation)

– Some vendors include escalation, but most won’t – Escalation rate needs to be agreed to – owner’s

tend to minimize the rate, which can hurt in the long run

– Cost estimates can be very sensitive to escalation, and timing assumptions often are inaccurate

Other Factors to Consider • BRI, Bonding, Borrowing, Profit

– This is easier when working with a shipyard – If not working with a shipyard, ensure that the

owner agrees to these estimates up front – These need to be to added to ship construction

cost

• Currency fluctuation – As this is an always changing cost item, it is best to

agree to a process with the customer up front

Other Factors to Consider • Integrated Logistics Support

– The owner needs to understand what they expect • Initial spares, training, manuals, drawings, etc.

– Again it is best to agree with the owner up front

• Learning Curve on Labour – This can have a big positive impact on price, but

has to be based on realistic assumptions • Quick delivery schedule and same workers

– Agree with the owner/yard up front

Other Factors to Consider • Shipyard Savings

– It is likely that the shipyard can negotiate savings that are difficult to estimate in the early stage

– This would come via negotiations and multiple ship buys

• Classification Costs and Detail Design – These are one time expenses and need to be

included as well

Need for “Returned” Data from Construction Programs

• In house or commercial cost models become more valuable if they are based on “returned” data from construction programs to permit more accurate estimates for each ship in a class: – Construction hours by functional group (hrs/tonne) – Material costs by functional group ($$/tonne) – Final weight estimates by functional group – Other shipyard factors applied to construction hours and

material costs to get to total cost before profit

• Permits derivation of CERs and learning curves

Recommendations • Under NSPS establish a permanent ship cost

estimating capability – Develop one group that does this all the time, for

all ships, in all departments – Always use the same factors and parameters – Develop a cost estimating model for use by

program offices designing and procuring ships • Would recommend use of a commercial tool such as

ACEIT that prevents development of individual spreadsheets, and allows for numerous what-ifs

Recommendations • Under NSPS establish a permanent ship cost

estimating capability – Collect “returned” cost data and metrics from

each new construction program for each ship • Typically shipyards do not like to give up this data • Need to establish a relationship that allows the

shipyards to protect themselves while also contributing to the development of more effective cost models

– Derive CERs for each functional area for each ship type

Recommendations • Under NSPS establish a permanent ship cost

estimating capability – Develop a standardized input data set for new

programs as the starting point for estimating costs • Everybody uses the same rates for the non-ship

construction cost estimates • Everybody uses the same labour rates

QUESTIONS?