Bill Haseltine President, Society of Cost Estimating & Analysis (SCEA)

1. Using Most Probable Cost As A Part Of The Source Selection Evaluation Process Bill HaseltinePresident,Society of Cost Estimating & Analysis (SCEA) November 6, 2009

2. Luke 14:28-30 For which one of you, when he wants to build a tower, does not first sit down and calculate the cost to see if he has enough to complete it? Otherwise, when he has laid a foundation, and is not able to finish, all who observe it ridicule him, saying “this man began to build and was not able to finish.”

3. OUTLINE • What is Cost Estimating & Analysis • Life Cycle Composition • Estimate Definitions • Cost Estimating Basics • Challenges • Cost Reasonableness & Realism • Sample Section M • Integration of Cost Risk & Oversight

4. What is Cost Analysis & Estimating? Cost Analysis & Estimating is an Analytical Process employed to predict the resource requirements for Weapon System Programs considering both: Qualitative and Quantitative Factors Guidelines = PPBS and DOD 5000.4 Frameworks

5. Life Cycle Cost Composition Life Cycle Cost Estimate Program Acquisition Cost RDT&E, PROC, MILCON, O&M, & MILPERS Procurement Cost RDT&E, PROC & MILCON, PROC only Weapon System Cost PROC only • Initial Spares Flyaway Cost • Facilities • Operations Support (includes Post Production Support) • Disposal RDT&E & PROC • Tech Data • Publications • Contractor Services • Support Equipment • Training Equipment • Factory Training • Management • Hardware • Software • NRE “Startup” • ECOs • IACO

6. Estimate Definitions • Life Cycle Cost Estimate (LCCE) includes ALL Phases and ALL years: • Development (usually RDT&E) • Procurement (usually Investment) • Operations & Support and Disposal (O&M) • Types of LCCEs • PMO Estimate • Independent Cost Estimate (ICE) (i.e side by side) • Independent Cost Analysis (ICA)

7. Estimate Definitions (cont.) • FYDP Estimate • Development • Production • O&S • All or some of the above • Planning Estimate (or “What-If” Exercise) • Drill • Portion of one of the phases • Cost Benefit Analyses • Acquisition should cost • Estimate Assessments • Qualitative • Sufficiency Review

8. Estimate Definitions (cont.) • Independent Government Cost Estimate (IGCE) • Completed prior to receipt of proposals • Detailed Technical Baseline including: • Assumptions, • Schedule • Detailed Work Breakdown Structure (WBS) • Detailed WBS Dictionary • Cost mapped to Contract Line Items (CLINs) • Addresses Government Furnished Equipment (GFE) • Most Probable Cost Estimate (MPC) • Ties back to IGCE • Part of Source Selection Evaluation effort • Broken out by Contract Line Items (CLINs) • Government Furnished Equipment (GFE) • Adjustments for cost realism, risk & missing items

9. Price Reasonableness& Cost Realism

10. Cost Estimating Process

11. Cost Estimating Methodologies • Parametrics: • Statistically based equations relating technical & performance parameters to $$$. Price model Example • Analogy to a similar system(s): • Use data from comparable systems and adjust it for unique aspects or differences. • Engineering Build-Up: • Estimates based on scope of work and technical understanding of each task to be accomplished WBS by WBS.

12. Data Requirements • Parametrics: • Built on multiple program data sets • Analogy to a similar system(s): • Crucial to have the actual cost data from comparable systems. • Engineering Build-Up: • Must have reliable cost data for each WBS that builds to the estimate. Critical to have Actual contract data for each estimating approach!!!!!

13. Cost Estimating Challenges

14. Steps Involved In Cost Realism Analysis Step1: Determine if cost realism analysis is required. Step 2: Gather information Step 3: Conduct analysis Step 4: Perform risk assessment Step 5: Advise offeror of findings during discussions Step 6: Allow revised proposal (repeat analysis) Step 7: Adjust proposed cost to MPC Step 8: Use results as stated in the RFP

15. Sample Section M

16. Example of Sections L & M

17. Integration of Cost, Risk & Oversight

18. Back Up Slides

19. Typical Allocation of FundingBy Phase

20. Technical & Programmatic Baseline Technical: • Work Breakdown Structure (WBS) ….DETAILED • Hardware & Software Elements • Physical and Performance Characteristics • Description of State-of-the-art Technology • New design vs Modified vs off-the-shelf • Commonality to Existing Systems • Programmatic: • Acquisition Strategy • Schedule • Quantities • Contractors & Subcontractors • Make vs Buy • GFE vs CFE • Milestones • Appropriation Phasing Cost Analysis and Estimating Process PMO LCCE ICE LCCE FYDP Estimate Planning Estimate Assessment

21. Cone of Uncertainty

22. Point Estimates VersusProbability Distributions • Risks are assessed at the lowest possible WBS level, and • Aggregated by program phase to determine the probability distribution • Uncertainty is GUARANTEED, and • Point Estimates will ALWAYS be WRONG !!!

23. Sample Risk Assessment Matrix Technical Schedule Cost Overall PMP – Design PMP – Prototypes PMP – S/W Development SEPM Data Tooling & Factory Test Equip. ST&E Government Operational T&E Gov’t Program Office Expense KEY: High Moderate Low