Prof. Morteza Anvari
1
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
2
Cost Estimating Process
Definition Data Collect Planning Normalize
Estimate Formulation
Review/ Presentation
Final Document
DOCUMENTATION
3
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. • Let’s discuss a process for organizing and developing this estimate.
5
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.
6
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 Planning Know Purpose of the Estimate
• Main purposes of estimates: – Budget Formulation – Comparative Studies – Source Selection
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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
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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
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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?
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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
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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:
1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 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$M
16.583M 1,312.377 0.0 132.258 14.437 31.499 2.300 158.304 0.0 101.635 79.482 0.0 280.729 64.129
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Defining the System
COST ELEMENT STRUCTURE – 3.0 CON
CES# 3.01 3.02 3.03 3.04 ELEMENT: DEVELOP. CONSTRUCTION PRODUCT. CONSTRUCTION OPERATION/SITE ACTIVATION OTHER N FY00C$M TY$M
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Defining the System
COST ELEMENT STRUCTURE – 4.0 Pay & Allowances
CES# 4.01 4.02 4.03 4.04 4.05 4.06 ELEMENT: FY00C$M CREW MAINTENANCE SYSTEM SPECIFIC SUPPORT SEPM REPLACEMENT PERSONNEL OTHER TY$M
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Defining the System
COST ELEMENT STRUCTURE – 5.0 Operating & Maintenance (O&M)
CES# 5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 5.09 5.10 5.11 ELEMENT: FY00C$M FIELD MAINT., CIV LABOR SYS. SPECIFIC BASE OPS REPLENISHMENT DLRs REPLEN. CONSUMMABLES POL END ITEM MAINTENANCE TRANSPORTATION SOFTWARE SEPM TRAINING OTHER TY$M
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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) 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
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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
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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.
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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 RDT&E ACEIT PRICE SEER ACDB AMCOS OSMIS SBC/ISR CO$TAT 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 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
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Definition and Planning Estimating Methods
• Analogy – Basic Comparison – Factors • Parametric – Regression Analysis • Engineering – Detailed • Expert Opinion – Committee – Delphi
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Life Cycle Cost Estimates
Concept Refinement Technology Development System Development & Demonstration Production & Deployment Operations & Support
A
B
C
D
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
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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
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Analogy Estimating with Factors
Cost(New) = Cost(Old) x Adjustment Factor
Element
Old Sys1 Old Sys2 Old Sys3
New Sys
Airframe Engine
Avionics Payload
$500/lb
$250/lb
$750/lb
1.25*S1 .8*S3
1.0*S2 .65*S1
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2M/Unit 3M/Unit 5M/Unit
$3K/lb $2K/lb $4K/lb
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
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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
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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?
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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.
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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
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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
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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
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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
Tool & Die Machinist
Hours Needed 1000
% of Total Hourly Rate Hrs $13 10.5
%*rate
$1.37
3000
500
$11
$11
31.6
5.3
$3.48
$.58
5000 9500
$9
52.6
$4.73 $10.16
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Totals
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%).
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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
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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
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Learning Curve Theory
80% Unit Curve on Arithmetic Paper
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Learning Curve Theory
1000
Unit Cost (LOG)
100
90% 85% 80%
10
70%
1 1 10
Production Unit Number (LOG)
100
1000
10000
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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.
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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 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
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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.
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.
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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
Frequency
PDF
WBS Cost Distribution
Total Cost
P.E.
+
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
.0 2 4
Frequency Chart
4,978 Trials Shown
117
.0 1 8
8 7 .7
.0 1 2
5 8 .5
.0 0 6 M e a n = $ 2 ,1 9 8 .0 0 0 $ 1 ,2 5 0 $ 1 ,7 5 0 $ 2 ,2 5 0 $ 2 ,7 5 0 $ 3 ,2 5 0
2 9 .2
0
Risk and Uncertainty Analysis
Cumulative Distribution Functions
Fo re ca s t: R e s u lts = Cell B 28
.9 9 5
C um ul a ti v e C ha rt
4 , 9 7 7 Tri a l s S h ow n
4977
.7 4 7
.4 9 8
.2 4 9
.0 0 0 $ 1 ,2 5 0 $ 1 ,7 5 0 $ 2 ,2 5 0 $ 2 ,7 5 0
0 $ 3 ,2 5 0
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
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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)
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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 else’s 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
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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?
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