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Cost Estimating Basics

Cost Estimating Basics. Why cost estimating (and an overview of how ). Unit Index. Unit I – Cost Estimating Cost Estimating Basics Costing Techniques Parametric Estimating Unit II – Cost Analysis Techniques Unit III – Analytical Methods Unit IV – Specialized Costing

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Cost Estimating Basics

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  1. Cost Estimating Basics Why cost estimating (and an overview of how) Unit I - Module 1

  2. Unit Index Unit I – Cost Estimating • Cost Estimating Basics • Costing Techniques • Parametric Estimating Unit II – Cost Analysis Techniques Unit III – Analytical Methods Unit IV – Specialized Costing Unit V – Management Applications Unit I - Module 1

  3. Outline • Introduction to Cost Estimating and Analysis • Overview of Cost Estimating and Analysis • Cost Estimating Products • Cost Estimating Process & Methods • Cost Estimating Certification • Summary • Resources Unit I - Module 1

  4. Introduction to Cost Estimating and Analysis • Definition and Purpose • Applications • Organizations • Skills Unit I - Module 1

  5. Cost Estimating • Cost Estimating: • The process of collecting and analyzing historical data and applying quantitative models, techniques, tools, and databases to predict the future cost of an item, product, program or task • Purpose of cost estimating • Translate system/functional requirements associated with programs, projects, proposals, or processes into budget requirements • Determine and communicate a realistic view of the likely cost outcome, which can form the basis of the plan for executing the work Unit I - Module 1

  6. Applications of Cost Estimating • As part of a total systems analysis, cost estimating helps decision makers to: • Make decisions on program viability, structure, and resource requirements • Establish and defend budgets • Assess technology changes • Conduct analysis of alternatives (AoA) • Create new business proposals and perform source selection • Perform design trade-offs • Comply with public law • Satisfy oversight requirements 13 14 16 Unit I - Module 1

  7. Cost Estimating Organizations • Cost oversight organizations • Program Offices and project teams • Budgeting, contracting, and purchasing organizations • Manufacturers • Consultants 1 20 Unit I - Module 1

  8. Cost Estimating Skills • Cost estimating and analysis at its best is an interdisciplinary mix of: • Mathematics, Probability, Statistics • Economics, Econometrics, Business, Accounting, Budgeting • Operations Research, Management Science, Industrial Engineering • Mechanical Engineering, Systems Engineering, Physics, etc. • Sales and Marketing 5 10 11 Cost Estimating 101, Naval Center for Cost Analysis (NCCA), http://www.ncca.navy.mil/about/101.cfm. Unit I - Module 1

  9. Overview of CostEstimating and Analysis • Requirements • Benefits and Qualities • Limitations and Concerns • Types of Cost Estimates • Government Entities Unit I - Module 1

  10. Requirements for Cost Estimating • Must estimate and plan consumption of resources • Capture impacts of changing resources • Validated cost estimate necessary to continue through milestone reviews • Estimates should be updated periodically as program matures technically and schedules change • Efficient management of changing requirements under tight constraints • Supports management decisions by quantifying the resource impact of alternatives 11 Cost analysis is required whenever resources are allocated Unit I - Module 1

  11. Benefits of Cost Estimating • Supports budgeting process by enabling you to: • Integrate the requirements and budgeting processes • Assess reasonableness of program budgets • Effectively defend budgets to oversight organizations • Quickly/accurately determine impacts of budget cuts on program baselines and associated functionality • Enhances profitability and organization’s future business potential • Uses established, repeatable methods • Enables identification of potential pitfalls such as cost growth, schedule slips early in a program’s life • Enables identification of future cost improvement initiatives 15 Unit I - Module 1

  12. Benefits of Cost Estimating • Provides for the identification and objective quantification of the impact of program risks (technical and schedule risks) • Provides basis for evaluating competing systems/initiatives (cost/benefit analyses and AoAs) • Enables proposal pricing and evaluation of proposals for cost reasonableness • Captures cost impacts of design decisions to facilitate tradeoffs in CAIV/DTC/Target Costing • Facilitates evaluation of the impact of new ways of doing business (e.g., in-sourcing vs. outsourcing, COTS vs. custom software) 9 13 19 14 16 Unit I - Module 1

  13. Cost Estimate Qualities • The characteristics of high quality cost estimates are: • Accuracy • Comprehensiveness • Replicability and Auditability • Traceability • Credibility • Timeliness 10 Unit I - Module 1

  14. Limitations of Cost Estimating • Cost estimating cannot • Be applied with cookbook precision • Produce results that are better than input data • Predict political impacts • Substitute for sound judgment, management, or control • Make final decisions Unit I - Module 1

  15. Cost Estimating Concerns • Support Critical Decisions • May be difficult to quantify cost impacts of alternatives • Cannot trade off non-cost variables • Timeliness • Schedule constraints on estimate delivery • Estimate quality suffers with fast turnaround requirements • Quick and easy access to historical data may not be possible • Lower quality estimate limits utility to key decision makers • Quality • Definition of “good data” • Adjustments to raw data may be made several times • Inadequate documentation • Undocumented or tacit knowledge • Coordination • Large number of organizations may be involved 16 18 4 Unit I - Module 1

  16. Cost Estimating Concerns • Consistency • Estimates must track over time • Estimates developed by other organizations must be based on same content and assumptions • Historical data is not consistent between differing cost element or work breakdown structures • Security/access • Company-proprietary data • Data classification/security • Possible misuse of data Unit I - Module 1

  17. Types of Cost Estimates – Budget • Budget Estimate • Estimate prepared for inclusion in budget to support acquisition programs • Ensures project feasibility and attainable performance levels • A reliable project cost estimate consistent with realistic schedules • Used to establish baseline project definitions, schedules, and costs • May or may not include risk 1 6 Unit I - Module 1

  18. Types of Cost Estimates – LCCE • Life Cycle Cost Estimate (LCCE) • “Cradle to grave" estimate • Includes research and development (R&D), production, operations and support (O&S), and disposal • Commercial definitions are similar • Life cycle is often confused with O&S but actually includes all of the above • Should be performed as early in the life cycle as possible • Estimate costs regardless of funding source • AKA Total Ownership Cost (TOC) estimate 12 Unit I - Module 1

  19. Types of Cost Estimates – ICE • Independent Cost Estimate (ICE) • LCCE developed by an independent organization • “True facts" assessment of what the program's most likely cost will be • Provides an unbiased test of the reasonableness of the Program LCCE (PLCCE) • Identifies potential budgetary excesses and shortfalls • Reduces the cost risks associated with the project Unit I - Module 1

  20. Types of Cost Estimates – ROM & EA • Rough-Order-of-Magnitude (ROM) • Very little specific information is known about the project • The design effort has not begun • Estimate uses ratios or factored historical information • Used for feasibility studies and selection from among alternatives • AKA “Quick Look” • Economic Analysis (EA) • Describes specific mission requirement(s) and lists specific alternative courses of action • Framework for systematically investigating problems of choice • Compares the costs and benefits associated with each alternative course of action 13 Unit I - Module 1

  21. Types of Cost Estimates – AoA & ABC • Analysis of Alternatives (AoA) • Evaluates the costs and benefits of different alternatives • Shows advantages and disadvantages of the alternatives being considered • Activity Based Costing (ABC) • Accounting methodology that assigns all costs to activities • Enables resources and overhead costs to be accurately assigned to products and services • Assists in making decisions about pricing, outsourcing, capital expenditures and operational efficiency. 13 16 Unit I - Module 1

  22. Government EntitiesResponsible for Cost Estimating • OSD Cost Analysis Improvement Group (CAIG) • Milestone review authority, has oversight of DoD service cost centers • Intelligence Community CAIG (IC CAIG) • Provides independent cost assessments to the Director of Central Intelligence (DCI) for selected IC programs • Naval Center for Cost Analysis (NCCA) • Prepares and briefs the Component Cost Analysis (CCA) to the CAIG • Holds a reconciliation meeting prior to the formal CAIG meeting • US Army Cost and Economic Analysis Center (CEAC) • CEAC prepares CCA and briefs results to the CAIG • Army Cost Review Board works with the Assistant Secretary of the Army (Financial Management) to develop the Army cost position briefed to the CAIG • Air Force Cost Analysis Agency (AFCAA) • Air Force Cost Directorate, SAF/FMCC, prepares the AF cost position, after reconciliation between the System Program Office estimate and the AFCAA’s CCA Unit I - Module 1

  23. Cost Products • Cost Analysis Requirements Description (CARD) • Cost Estimate • Estimate Documentation Unit I - Module 1

  24. Cost AnalysisRequirements Description (CARD) • Cost Analysis Requirements Description (CARD) • Detailed technical, programmatic, and schedule description • Purpose of CARD • Collect, integrate and coordinate technical, programmatic, and schedule information necessary to estimate the costs of a program • Ensures that cost projections developed by the analyst are based on a common definition of the system and the acquisition program 2 CARD is a DoD requirement for major programs but a CARD-like document should be developed for any estimate, government or private industry Unit I - Module 1

  25. CARD includes: System Technical Description Work Breakdown Structure (WBS) Predecessor System Description Manpower Requirements Risk Operational Concept Deployment Logistics Support Concept Training Acquisition Schedule Acquisition Strategy System Test and Evaluation (ST&E) Environmental Impact Analysis Track to Prior CARD CARD Contents Unit I - Module 1

  26. CARD includes: System Technical Description Work Breakdown Structure (WBS) Predecessor System Description Manpower Requirements Risk Operational Concept Deployment Logistics Support Concept Training Acquisition Schedule Acquisition Strategy System Test and Evaluation (ST&E) Environmental Impact Analysis Track to Prior CARD CARD Contents Unit I - Module 1

  27. Cost Estimate • Definition of a cost estimate • Cost estimate is an analysis of individual cost elements using established methodologies to project from data to estimated costs • Various types of estimates can be developed • Budget Estimate, LCCE, ICE, ROM Estimate, EA, AoA, ABC, etc. • Developed using one or more estimating techniques • Analyst should consider past and current actual data 2 Unit I - Module 1

  28. Cost Estimate Characteristics • Input rates • Labor, materials, tooling, scrap, etc. • Application of audited or negotiated direct and indirect rates • Model structure • Estimate developed to a varying level of detail depending on system and schedule • Estimate is inflated and time phased • Model execution • Applies COTS or custom model • May include sensitivity/risk analysis 9 Unit I - Module 1

  29. Estimate Documentation • Why document the estimate? • Provides reviewers with: • Purpose of cost estimate • Program background and system description • Program Schedule • Scope of cost estimate • Ground rules and assumptions • Robust and detailed documentation permits reviewers to follow estimate logic from assumptions to results Document not only for an external audience but for yourself! Unit I - Module 1

  30. Estimate Documentation • What should be documented? • The data, data sources, and normalization procedures • Labor rates and hours, content, and how they were developed • Material requirements and subcontracts • Methodology for any applicable cost improvement curves • Details regarding the factors and cost estimating relationships (CERs) applied 4 7 3 Unit I - Module 1

  31. Estimate Documentation • What should be documented? • Details regarding the applied cost models including • Relevance to the system/program • Inputs/outputs • Calibrations performed • Inflation indices used and time phasing details • Detailed description of judgments applied by estimator(s) • Any details of risk and confidence analysis • The conclusion(s) resulting from the estimate • Appendices and appropriate references 9 Unit I - Module 1

  32. Cost Estimating Process WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Work Breakdown Structure (WBS) Development • Program/System Baseline Development • Data Collection and Analysis • Cost Element Methodology • Estimate Development and Validation • Results and Report Generation 8 Unit I - Module 1

  33. Work Breakdown Structure (WBS) WBS Baseline Data Collection Data Analysis Methodology Validation Reports • What is a WBS? • Common frame of reference for relating job tasks to each other and relating project costs at the summary level of detail • Framework for specifying the objectives, labor, materials, and contracts of the system/program • Structure defining the total program/system • Detailed definitions of individual elements required • WBS varies by program and project phase • WBS  Cost Element Structure (CES) • MIL-STD-881B previously the DoD standard • Now MIL-HDBK-881B is guidance • Excellent resource for WBS components/content 3 Unit I - Module 1

  34. Purpose of a WBS WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Displays and defines the system/program to be developed as a product-oriented family tree • Includes hardware, software, support, and/or service elements • WBS should encompass complete life cycle of the system/program • CARD (or similar type of document) is the source for this program plan • Establishes the physical work packages or elements and the activities within those packages that completely define a project • Organizes the physical work packages into levels that can be developed into a summary Unit I - Module 1

  35. Purpose of a WBS WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Relates the work scope elements to each other and to the end product(s) • Makes the relationships of the components clear and the relationship of the tasks to be completed (to each other and to the end product) clear • Key to developing/tracking costs • Provides financial reporting framework • Assists in tracking the status of efforts, resource allocations, cost estimates, expenditures, and cost and technical performance 15 Unit I - Module 1

  36. Work BreakdownStructure (WBS) Early Development WBS Baseline Data Collection Data Analysis Methodology Validation Reports • WBS development should start early in the conceptual stages of the program • Provides structure to the design requirements and functional architecture • WBS evolves as system/program evolves • Evolves through iterative analysis of the development strategy, objectives and requirements • Define detailed technical objectives and specify work tasks for each WBS element Unit I - Module 1

  37. Work BreakdownStructure (WBS) Continued Development WBS Baseline Data Collection Data Analysis Methodology Validation Reports • As the program/system matures • Engineering efforts focus on system-level performance requirements and top-level specifications • Major subsystems and configuration items are identified • WBS continues to be defined at lower levels • Eventually the total system definition is complete • During production, maintain and update the WBS • WBS Dictionary • Develop WBS dictionary while developing WBS • Should be routinely revised to incorporate changes and current status of the program throughout the program's life Tip: Dictionaries are often overlooked and are critical to use of a WBS Unit I - Module 1

  38. Program/System Baseline Definition WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Program/system baseline definition encompasses all the information of a CARD • Process for defining program/system baseline • Determine the programmatic scope of estimate • Period to be estimated • Phases estimated • Determine the technical scope of estimate • Program requirements • Work not included • Deliverables Unit I - Module 1

  39. Program/System Baseline Definition WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Process for defining program/system baseline • Develop detailed system technical description • Include key performance characteristics, hardware/software components, architecture, configurations, reliability and security requirements, etc. • Include previously developed WBS • Develop detailed description of predecessor systems, if any • Include technical details, reason for replacing, legacy hardware/software, phase-out plan, etc. Unit I - Module 1

  40. Program/System Baseline Definition WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Process for defining program/system baseline • Determine manpower requirements • Include skills, salaries, location, etc. • Incorporate technical/performance, schedule, and cost risk • Determined by management and/or engineers • Define the operational concept • Include program management details, operation specifics, platforms • Determine deployment details • Include sites, schedules, special preparations, site configurations, transition plans, etc. Unit I - Module 1

  41. Program/System Baseline Definition WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Process for defining program/system baseline • Detail logistics support • Include maintenance, sparing, and upgrade plans • Define the training plan • Include types of training/certification, providers, locations, frequency, etc. • Establish the acquisition schedules • Include milestones, strategy, contracting details, etc. 7 Unit I - Module 1

  42. Program/System Baseline Definition WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Process for defining program/system baseline • Detail the system test and evaluation plan • Include schedule, number of tests, criteria, locations, etc. • Describe any environmental impacts • Include disposal concept, mitigation plans, conditions, materials, etc. • Maintain track to the original baseline • As programs mature, define changes Unit I - Module 1

  43. Data Collection and Analysis WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Data Collection • Obtaining data • Normalizing data • Data Analysis • Methods and process 5 4 4 6 8 Tip: These two steps of the process go hand in hand and are somewhat iterative. Unit I - Module 1

  44. Data Collection WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Understand total picture of estimating task • Intended use of the estimate • Scope of the estimate • Establish cost element structure • Based on WBS • Understand estimating techniques and data collection needs • Identify proposed estimating technique(s) • Identify potential data sources 4 Unit I - Module 1

  45. Data Collection WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Develop data collection plan • Ensure sources identified for all needed cost elements • Identify alternative/backup data sources • Identify sources for cross-checks • Establish a timeline/schedule • Collect the data • Normalize the data • Make data consistent and comparable • Types of normalization include Cost Units, Sizing Units, Key Groupings, State-Of-Development Variables, and End Terms for Homogeneity 4 Unit I - Module 1

  46. Data Analysis WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Scatter plot the data • Develop visual depiction of the relationships in the data • Calculate descriptive statistics • For example, the means and CVs • Look for outliers • Points far from the center of the data • Compare to history • Standard factors, rules of thumb, other historical data 6 14 Unit I - Module 1

  47. Cost Element Methodology WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Select estimating methodology that most reliably estimates program costs • Primary cost estimating techniques or methodologies • Analogy • Parametric • Engineering build-up • Other methods • Expert opinion • Extrapolation from actuals 2 16 3 8 Unit I - Module 1

  48. Estimate Development and Validation WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Develop estimate with appropriate costing techniques • Validate estimate • Crosscheck with historical data for similar programs, another estimating methodology, or another model • Compare estimate with industry “rules of thumb” • Crosscheck proprietary models with Excel backups • Document estimate while developing 17 Unit I - Module 1

  49. Results and Report Generation WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Document the estimate • Written justification of the estimate • Well-documented estimate withstands scrutiny and increases credibility • Provide sufficient information to replicate the estimate • Develop results and report at appropriate level of detail • Crisp and complete • Easy to comprehend • Address important details • Convey competence 13 Unit I - Module 1

  50. Results and Report Generation WBS Baseline Data Collection Data Analysis Methodology Validation Reports • Conduct other analysis • Cost As an Independent Variable (CAIV) • Making performance and schedule a function of available resources • Sensitivity analysis • Tool for determining effect of changes for decision-making • Risk analysis • Analyzing technical, schedule, performance and other risks • Used to adjust cost estimate • Final result is defendable cost estimate for decision making 16 9 Unit I - Module 1

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