Prof.

Morteza Anvari

Cost Analysis Requirement

MS 0
O L D

MS I
Program Definition & Risk Reduction

MS II
Engineering & Manufacturing Development (EMD)

MS III
Production, Fielding/ Deployment

Concept Exploration

Cost Estimates Needed

A
N E W
Concept Exploration

B
Component Advanced Development System Integration System Demo

C
Production Readiness & LRIP Rate Production & Deployment

Review

Review

Review

Support

Concept & Technology Development

System Development& Demonstration

Production & Deployment

Pre-Systems Acquisition

Systems Acquisition
(Engineering and Manufacturing Development, Demonstration, LRIP & Production)

Sustainment

Cost Estimating Process

Definition Data Collect Planning Normalize

Estimate Formulation

Review/ Presentation

Final Document

DOCUMENTATION

Cost Analysis Model

Develop Cost Estimate Structure and WBS Establish Ground Rules and Assumptions Prepare Cost Estimates for Each Element Data/CERs LCC Estimates Cost Drivers

Start

Test Total System Estimate

Prepare Documentation

Compile Data Base/ CERs/Models

Engineering Analogy Parametrics Expert Opinion

Reasonableness Sensitivity Analysis Cost-Risk Assessment

4

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. Lets discuss a process for organizing and developing this estimate.

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 questionsThey 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?
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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?
8

Definition and Planning Know Purpose of the Estimate

Main purposes of estimates: Budget Formulation Comparative Studies Source Selection

Purpose of Estimate Budget 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
10

Purpose of Estimate Comparative Studies Estimates

Making cost & benefit comparisons between alternatives Economic Analysis (EA) Analysis of Alternatives (AoA) Force Structure Trade-off Studies Source Selection Prioritization
11

Definition and Planning Defining 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, inhouse, two or three levels of maintenance?
12

Defining the System Integrated System Schedule

ACTIVITY
PROGRAM REVIEWS ENGINEERING & MANUFACTURING DEVELOPMENT LETHALITY ENHANCEMENT
LITE I / WARHEAD / LOW COST BST
QL UE
FT T QUAL

1993
LLTI PEO IPR

1994
LRIP DECISION

1995

1996
MRRB

J A S O ND 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

TODAY

1997

1998

1999

2000

MILESTONE III

TECH SUPPORT

DEVELOPM ENT

TEST & EVALUATION

LIVE FIRE TEST LOG DEMO II PROD VER TEST

IOTE

LUT
(3)(6)

LFT (A)
(26)

LFT
(B,C) (8,4)

I LD II

II, III, FLIGHT

PVT
(25 MS L + 10 CLU)

ENHANCED PRODUCIBILITY PROGRAM LOW RATE INITIAL PRODUCTION

FY94 FY95 FY96
MSLS - 698 CLUs 55 MSLS - 872 CLUs 97 MSLS - 1015 CLUs - 108

LEGEND
MSL CLU
(28) (9)

CA

LLTI CA CA

LEAD TIME

PRODUCTION LEAD TIME PRODUCTION LEAD TIME CA PRODUCTION

QL FTT UE LUT CA MRRB

QUICK LOOK FIELD TACTICAL TRAINER USER EVALUATION LIMITED USER TEST CONTRACT AWARD MATERIEL RELEASE REVIEW BOARD

CA

MULTIYEAR I & II (3 YR CONTRACT)

FY97 FY98 FY99
ARMY M SLS - 1020 CLUs - 206 M SLS - 1080 CLUs - 270 M SLS - 3316 CLUs - 423 USM C 141 48 194 140 741 133

LEAD TIME CA RANGER 82nd COMPL FIELDING BEGINS 82nd COMPLETE

PRODUCTION CA M YII

FIELDING AWE

FUE USA

FUE USMC

HANDOFF FT. HOOD NTC

13

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 companys reporting structure. Program managers may cite MIL-HDBK-881 for guidance only in contract solicitations.
14

WBS

15

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#
1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11

ELEMENT:
DEV. ENG. PEP DEV. TOOL. PROTO MFG. SEPM SYS T&E TRAINING DATA SUPP EQUIP. DEV. FACILITIES OTHER

FY00C$M
$ 39.039M 0.408 0.457 110.421 78.266 11.112 1.989 3.439 4.897 0.0 0.968

TY$M
$38.260M 0.386 0.450 107.724 76.363 10.927 1.954 3.413 4.758 0.0 0.928

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Defining the System

COST ELEMENT STRUCTURE 2.0 PROCUREMENT
CES#
2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11 2.12 2.13 2.14

ELEMENT:
NON REC PROD. REC. PROD ENG. CHG SEPM SYS T&E TRAINING DATA SUPP. EQUIP. OPER./SITE/ACT. FIELDING TRAIN. AMMO/MSLS WAR RESV. MODS OTHER

FY00C$M
$ 16.110M 1,169.348 0.0 116.637 12.564 28.880 2.073 146.460 0.0 89.525 59.001 0.0 236.619 51.739 $

TY$M
16.583M 1,312.377 0.0 132.258 14.437 31.499 2.300 158.304 0.0 101.635 79.482 0.0 280.729 64.129
18

Defining the System

COST ELEMENT STRUCTURE 3.0 CON
CES# 3.01 3.02 3.03 3.04 ELEMENT: DEVELOP. CONSTRUCTION PRODUCT. CONSTRUCTION OPERATION/SITE ACTIVATION OTHER N FY00C$M TY$M

19

Defining the System

COST ELEMENT STRUCTURE 4.0 Pay & Allowances
CES# 4.01 4.02 4.03 4.04 4.05 4.06 ELEMENT: FY00C$M CREW MAINTENANCE SYSTEM SPECIFIC SUPPORT SEPM REPLACEMENT PERSONNEL OTHER TY$M

20

Defining the System

COST ELEMENT STRUCTURE 5.0 Operating & Maintenance (O&M)
CES# 5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 5.09 5.10 5.11 ELEMENT: FY00C$M FIELD MAINT., CIV LABOR SYS. SPECIFIC BASE OPS REPLENISHMENT DLRs REPLEN. CONSUMMABLES POL END ITEM MAINTENANCE TRANSPORTATION SOFTWARE SEPM TRAINING OTHER TY$M

21

Defining the System

Cost Analysis Requirements Description (CARD)
Source of a systems 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) Continued
1.0 System Overview 1.1 System Characterization 1.1.1 System Description 1.1.2 System Funcitonal Relationships 1.1.3 System Configuration 1.1.4 Government Furnished Equipment/Information 1.2 System Characteristics 1.2.1 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 Factors 1.3.1 Reliability 1.3.2 Maintainability 1.3.3 Availability 1.3.4 Portability and Transportability 1.3.5 Additional Quality Factors 1.4 Embedded Security 1.5 Predecessor/Reference System 2.0 Risk

23

Defining the System CARD Continued

3.0 System Operational Concept 3.1 Organizational Structure 3.2 Basing and Deployment Description 3.3 Security 3.4 Logistics 4.0 Quantity Requirements 5.0 System Manpower Requirements 6.0 System Activity Rates 7.0 System Milestone Schedule 8.0 Acquisition Plan or Strategy 9.0 System Development Plan 10.0 Element Facilities Requirements 11.0 Track to Prior Card 12.0 Contractor Cost Data Reporting Plan
24

Definition and Planning Ground 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.

25

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
26

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.
27

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

28

Tools for Total Ownership Cost Estimating

Life Cycle Cost Management Tools
APPN RDT&E ACEIT PRICE SEER ACDB AMCOS OSMIS SBC/ISR CO$TAT X X X X X X

PROC

MILCON

MILPERS

O&M

29

Definition and Planning Select the Estimating Approach

Techniques available Analogy Parametric Engineering Extrapolation Expert Opinion Select the technique that is most applicable to a specific WBS element
30

Definition and Planning Estimating Methods

Analogy Basic Comparison Factors Parametric Regression Analysis Engineering Detailed Expert Opinion Committee Delphi

31

Life Cycle Cost Estimates

Concept Refinement Technology Development System Development & Demonstration Production & Deployment Operations & Support

Disposal

Cost Estimating Model

x y 0
Parametric Engineering Actuals

x y 0

Parametric Engineering Actuals

x y z

Parametric Engineering Actuals

x y z

Parametric Engineering Actuals

0 y z

Parametric Engineering Actuals

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
32

Cost Estimating Methods Analogy 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.
33

Cost Estimating Methods Analogy 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
34

Analogy Estimating with Factors

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

Element Airframe Engine

Old Sys1 Old Sys2 Old Sys3 $500/lb $250/lb $750/lb

New Sys 1.25*S1 .8*S3

2M/Unit 3M/Unit 5M/Unit

Avionics
Payload

$3K/lb

$2K/lb

$4K/lb

1.0*S2
.65*S1
35

6M/Unit 8M/Unit 7M/Unit

Cost Estimating Methods Parametric 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
36

Cost Estimating Methods Parametric 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
37

Cost Estimating Methods Parametric 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?

38

Cost Estimating Methods Engineering 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.
39

Cost Estimating Methods Engineering Method

Strengths
Detailed
Best when long stable production process

Weaknesses
Requires a lot of time Cost Cannot be used until system well defined
40

Cost Estimating Methods Expert 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
41

Cost Estimating Methods Expert 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

42

Expert Opinion Method Delphi 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.
43

Expert Opinion Method Example

Labor type Senior Engineer Design Engineer

Hours Needed 1000 3000

% of Total Hourly Rate Hrs $13 $11 10.5 31.6

%*rate

$1.37 $3.48

Tool & Die

Machinist Totals

500 5000
9500

$11 $9

5.3 52.6

$.58 $4.73
$10.16
44

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 15%).

45

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
46

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.
TABLE FOR FIGURES F-1-1 and F-1-2

Unit No. 1 2 4 8 16 32 64

Unit Person-hours 100.00 80.00 64.00 51.20 40.96 32.77 26.21

47

Learning Curve Theory

80% Unit Curve on Arithmetic Paper

48

Learning Curve Theory

1000

Unit Cost (LOG)

100

90% 85% 80%

10

70%

1 1 10

Production Unit Number (LOG)

100

1000

10000

49

Learning Curve Theory Uses

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.

50

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.
51

Cost Estimating Methods

Laying 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
52

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.
53

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.
54

Risk and Uncertainty Analysis

Risk Analysis Approaches

Detailed Network & Stochastic

Discrete Technical, Schedule, and Estimating Risks

Effort

Detailed Monte Carlo Simulation (each WBS)

Bottom Line Monte Carlo Simulation Add a Risk Factor/Percentage Detail

Risk and Uncertainty Analysis

Probability Distributions WBS Cost Distribution
Frequency PDF P.E.

Total Cost

+
Confidence

Sum PE

MLC (Mode)

P.E.

CDF 50%

20%
Sum PE MLC

P.E.

+ Many More

Risk and Uncertainty Analysis

Probability Density Function

Forecast: Results= Cell B28
.024 .018 .012 .006 Mean = $2,198 .000 $1,250 $1,750 $2,250 $2,750 $3,250 0

Frequency Chart

4,978 Trials Shown

117 87.7 58.5 29.2

Risk and Uncertainty Analysis

Cumulative Distribution Functions

Fo re ca s t: R e s u lts = Cell B 28
.995 .747 .498 .249 .000 $1,250 $1,750 $2,250 $2,750 0 $3,250

C um ul a ti v e C ha rt

4 , 9 7 7 Tri a l s S h ow n
4977

Reasons for Risk

Technical
Physical Properties Material properties Software Complexity Integration Interface Requirement Changes Operational Environment

Programmatic
Material Availability Skill Requirement Environmental Impact Contractors Stability

Cost
Sensitivity to Assumptions Sensitivity to Technical Risk Sensitivity to Programmatic Risk Sensitivity to Schedule Risk

Schedule
Degree of Concurrency Sensitivity to Technical Risk Sensitivity to Programmatic Risk Number of Critical Path Estimating Errors

Funding Profile Estimating Errors Political Advocacy

59

Cost Schedule Curve

Fixed Cost Technology Outdate

Life Cycle Cost

Parallel Effort More ECP Less Mature Design

Min

Optimal

Development Schedule
60

Typical

Development Schedule
Mean Cycle Time to IOC DoD
Pre-1992 Starts Post-1992 Starts F-22 Comanche 132 months (11 years) 89 months (7.4 years) on-going 216 months (18 years) IOC 2004 264 months (22 years) IOC 2006

Commercial
Boeing 777 54 months (4.5 Years)

61

Schedule Goals

Commercial Drivers Technology Drives Schedule Constraint Schedule Goal is ROI Maximization

Cost

Defense

Commercial

DoD Drivers Funding Drives Schedule Unconstrained Schedule Goal is Cost Reduction

Development Schedule
62

DoD Program Schedule Drivers

Funding Allocation

Cost

Acquisition Process

Program Execution

Cycle Time Reduction Goal

Development Schedule
63

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 elses cost documentation is as important as ability to prepare good cost documentation.
64

CAIV Process
Set realistic but aggressive cost objectives early in acquisition program Manage risks Track progress using appropriate metrics Motivate Government and industry managers to achieve program objectives Incorporate incentives to reduce O&S costs for fielded systems
65

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.
66

Cost Analysis Domain

Inputs (Descriptions)
Requirements Acquisition Assumptions Design Parameters Risk Assessment

Process (Models)
Cost Analysis Process
Databases, Tools, & Models

Outputs (Costs)
ASARC CAIG, DAB APB PPBES AOA

Types of Cost Studies

Studies
Current Capability

Should be Known
Descriptions, Models Description, Historical Costs Cost Goals, Models

Unknown
Costs Models Descriptions ( Design and Performance Parameters)

Class
Analysis Synthesis Control

Cost Estimating CER Development

Needed Capability

CAIV

Performance Based and Design Based Cost Models Currently do not Exist
67

Analysis of Alternatives
Set realistic, aggressive cost objectives early in development Manage risks Track progress with appropriate metrics Motivate government/industry managers to achieve program objectives Incorporate incentives to reduce O&S costs for fielded systems.
68

Cost Analysis Art or Science?

69