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Topic: Cost Estimating, Contract Pricing, & Sources of Risk

Topic: Cost Estimating, Contract Pricing, & Sources of Risk. By: Gregory A. Garrett, CPCM, C.P.M, PMP Managing Director April 28, 2009. Question 1: Describe the basic characteristics of credible cost estimates. Answer (Per the Government Accountability Office Cost Assessment Guide 2007 ):

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Topic: Cost Estimating, Contract Pricing, & Sources of Risk

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  1. Topic: Cost Estimating, Contract Pricing, & Sources of Risk By: Gregory A. Garrett, CPCM, C.P.M, PMP Managing Director April 28, 2009

  2. Question 1: Describe the basic characteristics of credible cost estimates. Answer (Per the Government Accountability Office Cost Assessment Guide 2007): • Clear identification of task(s) • Broad participation in preparing estimates • Availability of valid data • Standardized structure for the estimate • Provision for program uncertainties • Recognition of inflation • Recognition of excluded costs • Independent review of estimates • Revision of estimates for significant program changes

  3. Question 2: What are the primary cost estimating methods? Answer (Per the Society of Cost Estimating and Analysis, 2003): • Analogy method (historical data) • Parametric analysis method • Weighted average method • Technical consensus method • Engineering build-up method Reference Text pg. 4: "Cost Estimating and Contract Pricing: Tools, Techniques, and Best Practices," by Gregory A. Garrett, CCH, Chicago, IL 2008.

  4. Question 3: How do the three most commonly used cost estimating methods compare to each other? Answer: Reference Text pg. 41

  5. Question 3: How do the three most commonly used cost estimating methods compare to each other? (continued) Answer: Reference Text pg. 41

  6. Question 4: What are the 12 Steps to GAO’s High-Quality Cost Estimating Process? Answer: Reference Text pg. 11

  7. The 12 Steps to GAO’s High-Quality Cost Estimate Reference Text pg. 11

  8. The 12 Steps to GAO’s High-Quality Cost Estimate Reference Text pg. 12

  9. The 12 Steps to GAO’s High-Quality Cost Estimate Reference Text pg. 12

  10. The 12 Steps to GAO’s High-Quality Cost Estimate Reference Text pg. 13

  11. The 12 Steps to GAO’s High-Quality Cost Estimate Reference Text pg. 14

  12. Question 5: What are some common sources of cost data? Answer: Reference Text pg. 40

  13. Question 6: What does a Sample Cost Analysis Form look like? Reference Text pg. 41

  14. Question 7: What questions should you ask for checking the accuracy of cost estimating methods? Answer: Reference Text pg. 40

  15. Question 7: What questions should you ask for checking the accuracy of cost estimating methods? (continued) Answer: Reference Text pg. 40

  16. Question 8: What are the possible pricing arrangements or types of contracts?

  17. Question 9: What is the risk associated with each type of contract? (Types of Contracts) FFP FP/EPA FPI T&M CS CR CPIF CPAF CPFF CPPC** Buyer’s Risk (Low) (High) Seller’s Risk (High) (Low) *T&M contracts typically involve higher levels of risk for buyers **Illegal in government contracting

  18. Question 10: What are the sources of major risk in developing cost estimates and contract pricing? Answer: Sources of Major Risk Uncertainty and risk in cost estimating and contract pricing arise from six main sources: • Lack of buyer understanding of its requirements • Shortcomings of human language and differing interpretations • Behavior of the parties • Haste • Deception • Poor cost estimating and pricing practices Reference Text pg. 14

  19. Questions to Consider • How well trained and/or educated are you in cost estimating and contract pricing? • How well does your organization develop its employees’ cost estimating skills and competencies? • On a scale of 1 to 10 (1 = low/poor performance; 10 = high/outstanding performance), how would you rate your organization’s capability of developing timely and accurate cost estimates?

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