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Combining Labour Market Economic Modelling with Traditional Cost Estimation

Combining Labour Market Economic Modelling with Traditional Cost Estimation. Mr Iain Bain Andrew Nicholls KPMG. Traditional Approach. Labour/Effort Cost Schedule Generic Indexation Risks. Labour/Effort - Replacement Submarine Design Effort.

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Combining Labour Market Economic Modelling with Traditional Cost Estimation

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  1. Combining Labour Market Economic Modelling with Traditional Cost Estimation Mr Iain Bain Andrew Nicholls KPMG

  2. Traditional Approach • Labour/Effort • Cost • Schedule • Generic Indexation • Risks

  3. Labour/Effort - Replacement Submarine Design Effort Source: Australia’s Submarine Design Capabilities and Capacities, RAND, 2011

  4. Experienced and highly trained workforce required Using $100,000 p.a. as not unreasonable, but also for simplicity Price: Some Simplifying Assumptions Source: Australia’s Submarine Design Capabilities and Capacities, RAND, 2011

  5. Over $1bn using standard approach Design Activity: Nominal or Out-turned Price

  6. We all understand potential cost risk for highly skilled workforce, but can these be quantified Question:

  7. Bringing in Economic Modelling approach • Intergrates labour market economic modelling into traditional cost estimation • Provides more robust estimation of budget related to personnel by • projecting the economy-wide skills gaps for required skills • accounting for such skills gaps in individual occupations that are required by a specific project • . Has application for projects that may have significant demand for highly sort after skills within the economy. • .

  8. Methodology: A Step-by-Step

  9. A practical application of our approach : Step 1 - apply labour market model to produce skills gaps for each ANZSCO occupation Labour Demand 1. Employment by industry (Macro CGE model) 2. Employment by occupation (Occupational Demand Model) Model system control of inputs and outputs Balancing Occupational Demand & Supply 4. Labour force by education (Education Model) 3. Population by age groups (Demographic Model) 5. Labour force by occupation (Occupational Supply Model) Labour Supply

  10. Model Output for each year

  11. Step 2 - Map each employment of interest based on major ANZSCO codes • Occupational projection of number of employment for a specific project

  12. Mapping Skill Sets to ANZSC codes Note that ANZSCO codes also go to lower levels, but these have not been used in this example

  13. Step 3 - Identify potential pressure wages growth for each employment category • The index designed to capture wage pressure at the occupational, INDEX_OCCUPATIONAL, produces a rather different picture as opposed to the national index, INDEX_NATIONAL

  14. Step 4 - Calculate final impact on cost estimate based on the occupational index • Accordingly, using our approach gives a different budgetary outcome over the lifespan of the project

  15. Difference made by considering occupation specific wage pressure

  16. Issues dealing with sub-skills set • analysing the concentration of technical skills in the occupations needed for the project • a higher wage pressure results from higher concentrated sub-skills set in a occupation • (results a 10% increase in the occupational index)

  17. Issues dealing with sub-skills set • budget gap over time and accumulative budget gap

  18. Concluding Remarks • - Large complex projects significantly benefit from integration of economic and costing analysis. • Labour Market risks can be quantified. • - Approach has broad application for Defence and Natural Resources industries

  19. Questions

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