“Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

1. “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23rd February 2005

2. Contents • Requirements for project success • Cost estimating basics • Purpose, Applications, Skills, Benefits, Qualities, Limitations, Concerns • Principles of Cost Analysis • Elements of Life Cycle Costing • Influences of Costs • Illustrations and issues • Some myths of project management and costs

3. Requirements for Project Success

4. To bring a project in to Time and Cost requires that: - • Targets are realistic • Targets can be challenging but they must be attainable or else the programme is doomed to failure from the start • The project is well managed • The possibility for expenditure and delay are unbounded • The requirement remains stable • To get anywhere one must know where one is going • Navigation is hindered if the customer tears up the map

5. Causes of Failure • Causes of delay to in-service date • Technical difficulties • Need to redefine a project • Deferring projects to match overall funding • Causes of cost variance • Programme changes • Inflation adjustments • Specification changes Source: NAO MoD Major Projects Report

6. Failure to allow for technical difficulties Infeasible targets Underestimates of cost and times Cost/time overruns Erroneous inflation/productivity expectations Estimating failures Programme changes Specification changes Project deferment Inadequate methodology Ø Diminished value for money Proximate and ultimate causes Ø For cost/time estimating, requirements capture etc.

7. Success requires:- • Full Allowance for technical difficulties present and potential • Realistic appraisal of prospects for relative price inflation including promised productivity gains • Use of a methodology that gives accurate unbiased estimates of cost and time

8. But, success is rare at present Major UK defence projects Source: NAO MoD Major Projects Reports

9. 0 5 Min. cost exceeds customers’ max. price by 12.5 % Airline demands 3.5 4.0 Boeing costings 4.5 5.5 Success is the right contract price - not the lowest Unit price $M Source: H. Mansfiled, “Vision, Popular, New York, 1966” First generation jet airliners 1955 Notes 1.) Boeing do not revise estimates downward to match rivals’ offers and airline expectations. 2.) Notwithstanding Boeing’s advantage of a demonstrable prototype. • . Boeing offer price set at $4.5M (1) • . Boeing share Pan American order with Douglas (2) • . Boeing lose United order to Douglas • . Boeing share burgeoning market with Douglas and Convair • . Rivals lose $950M in executing their contracts; Boeing shows profit on it • . Boeing has funds to launch B727 and dominates jet airliner market • Where are Douglas and Convair now?

10. Cost Estimating Basics

11. 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.

12. Fundamentals to Consider • There are three basic methods of estimating: • “Top Down” • Analogy: comparing the cost of an item to be estimated to a similar item. • Parametric: mathematical relationship between one or more parameters (cost, performance, programme, etc). • “Bottom-Up” • Detailed Estimating: at the lowest definable level using industrial engineering techniques & standards.

13. Cost Estimate Qualities • The characteristics of high quality cost estimates are: • Accuracy • Comprehensiveness • Replicability and Auditability • Traceability • Credibility • Timeliness

14. Limitations of Cost Estimating • Cost estimating cannot: - • Be applied with cookbook precision • Produce results that are better than the input data • Predict political impacts • No substitute for sound judgment, management, or control • Make final decisions

15. A Few - Cost Estimating Concerns • Consistency • Estimates must track over time • Estimates developed by other organisations 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

16. Basic principles of cost analysis

17. General introduction to some concept and current issues • Some definitions and distinctions • Elements of Life-Cycle cost • Influences on cost • Illustrations and issues • Economics of scale

18. Cost Unit non-recurring cost e.g. unit production cost Recurring cost e.g. production cost Non-recurring cost e.g. development cost Unit cost e.g. unit acquisition cost Quantity e.g. Units made 0 Q Recurring and non-recurring costs Non-recurring costs are once for all. Recurring costs multiply with quantity. Quantity can be units made, hours used, years elapsed etc… Note: Need a careful definition of a “Unit Cost”

19. Direct and indirect costs Direct costs are those costs which are associated directly and unambiguously with the product or activity in question. Indirect costs are costs associated with a range of products or activities and which have to be apportioned between these in a more-or-less arbitrary fashion. Indirect costs make the costs of one product a function of demand not only for it but for each of a range of associated products also. Head office Indirect (overhead) costs Production centres Products

20. Acquisition and running costs ActivitiesCostsPrimary influences Develop Acquisition costs Equipment type and performance Build Operate Support costs Equipment type and performance Maintain Patterns of use Support costs are as much a matter of user choice as they are of equipment type and supplier efficiency.

21. Elements of Life Cycle Cost

22. Life cycle cost Non-recurring Development RDT&E Production Recurring Investment Acquisition Production Support In-service Crew Direct Indirect Non-crew Ammunition Fuel Disposal Maintenance

23. Start Design Make Test OK? Finish Development Activities preparatory to and enabling production Research, Development, Test and Evaluation (RDT&E) Costs dominated by the design/make/test cycle No yes Production Investment (PI) Tools & Test Equipment etc. required for production

24. Production Manufacture of items for service use Bought-out Complete functioning items or systems from specialist suppliers Labour Personnel employed by or at production centre Materials Materials in raw or semi-finished form Finished product

25. Support costs Crew Pay and allowances Support and welfare Training Pay, NI, pensions etc. Medical, victualling etc Training for both primary and any secondary duties Total crew cost Often, cost of maintaining a qualified person in post >>cost of paying person in post Non-crew Consumables Spares & Repairs Preventative Maintenance Replacement or refurbishment of items becoming unserviceable during use. Replacement of material consumed intentionally during use eg fuel and ammunition. Replacement or refurbishment of items to promote continued availability Total non-crew running cost

26. Disposal There are different costs for disposal by: • Sale for reuse • Sale for scrap • Destruction/ incineration • Terminal use • Indefinite storage • Land fill/ dump at sea Employment of environmentally damaging materials can impose high disposal costs. May invoke wider legal and ecological issues.

27. Influences on cost(Other than technical characteristics of the equipment in question)

28. RDT&E • Precursor designs • (But, new has still to be proven) • Sharing costs through collaboration • (But, this generates extra overheads) • Parallel development of variants • (Often, a price of collaboration)

29. Production Investment • intended production quantity and rate • variants of basic design P.I. Multiple variants Single design 0 Quantity/Rate

30. 0 Production Worst of all worlds is to plan for many and make actually only a few in many variants Learning is a fragile plant whose progress takes very little to set it back Unit production cost Multiple variants Single design Quantity (Also rate in some cases)

31. Support costs • Crew • Deployment and rouelment • Other duties • -Career/command structure • -Training needs • Non-Crew • Deployment • Availability • -Surge capacity • -Training needs Running costs are as much a matter of user policy as of equipment characteristics

32. Disposal • Can be a negative cost if the equipment is sold on. • Can be sensitive to use of hazardous materials. • Disposal (or, even, non-disposal) of nuclear materials is a special problem.

33. Questions & Contact Details Arthur Griffiths HVR Consulting Services Ltd Selborne House Mill Lane Alton Hants GU 34 2QJ Tel: 01420-87977 Email: arthur.griffiths@hvr-csl.co.uk