Army Cost Review Board Office Mort Anvari Mort. Anvari@us. army. mil (703) 601 -4150 Mar-05
HQDA SA UNDER ASA (CW) ASA(FM&C) FO Mar-05 RB ASA (I&E) CSA VCSA ASA (MR&A) Budget ASA (ALT) DASA-CE
Situation • You have just been tasked to develop a cost estimate, that is, a professional opinion about the cost of an item, a service or a thing. • Let’s discuss a process for organizing and developing this cost estimate. Mar-05 3
Cost Estimating Process • Definition & Planning – – – • • Purpose of the Estimate Defining the System and Schedule Ground rules & Assumptions Estimating Approach Estimating Team Data Collection and Analysis Estimate Formulation Review and Presentation Final Documentation Mar-05 4
Definition and Planning • Influences the success of the estimate • Understanding the requirements and how you approach the process will establish the guidelines and procedures for the estimate. • Ask lots of questions…They help you understand the requirement. Mar-05 5
Questions • Why is this cost estimate needed? • What decisions are pending on the results of this estimate? • Will the estimate be briefed and to whom? • Will the results be incorporated into some document? • What does the recipient expect to have included or excluded? • What excursions or variations from the baseline are anticipated? Mar-05 6
Questions Continued • What are the program and funding constraints especially if the program is a Joint Program? • What are the time constraints for this estimate? • What is the acquisition phase of the program? • Is the program definition mature? • Does technology exist today to design, develop, test and manufacture the system? • What is the interrelationship with other systems? • Are there previous contracts? How many? What type? • How have the contractors performed to date? Mar-05 7
Definition and Planning Know Purpose of the Estimate • Main purposes of estimates: – Budget Formulation – Comparative Studies – Source Selection Mar-05 8
Purpose of Estimate Budget Formulation Estimates • • Mar-05 Program Office Estimate (POE) Component Cost Analysis (CCA) Independent Cost Estimate (ICE) What-if exercises Rough Order of Magnitude (ROM) Should Cost Estimates CAIV 9
Purpose of Estimate Comparative Studies Estimates • Making cost & benefit comparisons between alternatives – Economic Analysis (EA) – Analysis of Alternatives (Ao. A) – Force Structure – Trade-off Studies – Source Selection – Prioritization Mar-05 10
Definition and Planning Defining the System • Adequate description of the technical and program characteristics of the system • What are the physical and performance characteristics? • What are the development, production, and deployment schedules? • How many systems are to be produced? • How will the systems be supported: contract, inhouse, two or three levels of maintenance? Mar-05 11
Defining the System Integrated System Schedule Mar-05
Defining the System Work Breakdown Structure (WBS) • WBS defined in MIL-HDBK-881 as: – product-oriented breakdown of hardware, software, services, data and facilities that define the system. • WBS breaks a total job down into manageable pieces & portrays the way work is to be done. • WBS displays a company’s reporting structure. • Program managers may cite MIL-HDBK-881 “for guidance only” in contract solicitations. Mar-05 13
MIL-Handbook-881 (WBS) Mar-05
Defining the System Work Breakdown Structure (WBS) 1. 0 Research Development Test & Evaluation (RDT&E) 2. 0 Production 3. 0 Military Construction (MILCON) 4. 0 Military Pay and Allowances (MPA) 5. 0 Operating and Maintenance Army (OMA) Mar-05 15
Defining the System COST ELEMENT STRUCTURE – 1. 0 RDT&E CES# ELEMENT: FY 00 C$M TY$M $ 39. 039 M 1. 01 DEV. ENG. 0. 408 1. 02 PEP 0. 457 1. 03 DEV. TOOL. 110. 421 1. 04 PROTO MFG. 78. 266 1. 05 SEPM 11. 112 1. 06 SYS T&E 1. 989 1. 07 TRAINING 3. 439 1. 08 DATA 4. 897 1. 09 SUPP EQUIP. 0. 0 1. 10 DEV. FACILITIES 0. 968 1. 11 OTHER Mar-05 $38. 260 M 0. 386 0. 450 107. 724 76. 363 10. 927 1. 954 3. 413 4. 758 0. 0 0. 928
Defining the System COST ELEMENT STRUCTURE – 2. 0 PROCUREMENT CES# ELEMENT: FY 00 C$M TY$M 2. 01 NON REC PROD. $ 16. 110 M $ 16. 583 M 2. 02 REC. PROD 1, 169. 348 1, 312. 377 2. 03 ENG. CHG 0. 0 2. 04 SEPM 116. 637 132. 258 2. 05 SYS T&E 12. 564 14. 437 2. 06 TRAINING 28. 880 31. 499 2. 07 DATA 2. 300 2. 073 2. 08 SUPP. EQUIP. 146. 460 158. 304 2. 09 OPER. /SITE/ACT. 0. 0 2. 10 FIELDING 89. 525 101. 635 2. 11 TRAIN. AMMO/MSLS 79. 482 59. 001 2. 12 WAR RESV. 0. 0 0. 0 2. 13 MODS 280. 729 236. 619 2. 14 OTHER 51. 739 64. 129 Mar-05
Defining the System COST ELEMENT STRUCTURE – 3. 0 MILCON CES# ELEMENT: FY 00 C$M TY$M 3. 01 DEVELOP. CONSTRUCTION 3. 02 PRODUCT. CONSTRUCTION 3. 03 OPERATION/SITE ACTIVATION 3. 04 OTHER MILCON Mar-05
Defining the System COST ELEMENT STRUCTURE – 4. 0 Military Pay&Allowances (MPA) CES# ELEMENT: FY 00 C$M TY$M 4. 01 CREW 4. 02 MAINTENANCE 4. 03 SYSTEM SPECIFIC SUPPORT 4. 04 SEPM 4. 05 REPLACEMENT PERSONNEL 4. 06 OTHER MPA Mar-05
Defining the System COST ELEMENT STRUCTURE – 5. 0 Operating & Maintenance Army (OMA) CES# ELEMENT: FY 00 C$M TY$M 5. 01 FIELD MAINT. , CIV LABOR 5. 02 SYS. SPECIFIC BASE OPS 5. 03 REPLENISHMENT DLRs 5. 04 REPLEN. CONSUMMABLES 5. 05 POL 5. 06 END ITEM MAINTENANCE 5. 07 TRANSPORTATION 5. 08 SOFTWARE 5. 09 SEPM 5. 10 TRAINING 5. 11 OTHER OMA Mar-05
Defining the System Cost Analysis Requirements Description (CARD) • Source of a system’s description • Describes important features • Is provided to other groups preparing cost estimates • Helps ensure all groups are costing out the same “program. ” • Prepared by program office; approved by Do. D Component Program Executive Officer Mar-05 21
Defining the System Cost Analysis Requirements Description (CARD) Divided into a number of sections, each focusing on a particular aspect of the program being assessed. 1. 1. 1 System Description 1. 1. 4 Government-Furnished Equipment and Property 1. 2. 1 Technical and Physical Description 1. 2. 1. x (. . x. . ) Subsystem Description 1. 2. 1. x. 3 Material, Processes, and Parts 1. 2. 2 Software Description. Mar-05 22
Defining the System Cost Analysis Requirements Description (CARD) Continued Mar-05 23
Defining the System CARD Continued Mar-05
Defining the System Sample CARD Mar-05
Definition and Planning Ground Rules & Assumptions • State the conditions which must take place in order for the estimate to be valid • Ground rules and assumptions must be documented since changes in these areas provide an audit trail for changes in the cost estimate. Mar-05 26
Definition and Planning Select the Estimating Approach • Techniques available – Analogy – Parametric – Engineering – Extrapolation – Expert Opinion Select the technique that is most applicable to a specific WBS element Mar-05 27
Definition and Planning Estimating Methods Mar-05 • Analogy – Basic Comparison – Factors • Parametric – Regression Analysis • Engineering – Detailed • Expert Opinion – Committee – Delphi 28
Cost Estimating Methods Analogy Method • Based on direct comparison with historical information of similar existing activities, systems, or components. • Compares new system with one or more existing similar systems where there is accurate cost and technical data. • Analyst must show validity of comparison. Mar-05 29
Cost Estimating Methods Analogy Method • Based on known costs of a similar program • Adjustments for complexity, technical, physical • Strengths – Based on representative experience – Less time consuming than others – Can be used as a check on other techniques • Weaknesses – Small sample size – Heavy reliance on judgment – Sometimes difficult to identify analogy and associated costs Mar-05 30
Analogy Estimating with Factors Cost(New) = Cost(Old) x Adjustment Factor Element Old Sys 1 Old Sys 2 Old Sys 3 New Sys Airframe $500/lb Engine 2 M/Unit 3 M/Unit 5 M/Unit. 8 x. S 3 Avionics $3 K/lb Payload 6 M/Unit 8 M/Unit 7 M/Unit. 65 x. S 1 Mar-05 $250/lb $2 K/lb $750/lb $4 K/lb 1. 25 x. S 1 1. 0 S 2 31
Cost Estimating Methods Parametric Method • Known as Statistical Method or Top Down Method • Relates cost to physical attributes or performance characteristics • Uses database of elements from similar systems • Uses multiple systems • Most beneficial in earlier stages of the system or project life cycle Mar-05 32
Cost Estimating Methods Parametric Method • Statistical relationships between cost and physical or performance parameters of past systems. • Strengths – Captures major portion of cost – Quick what if type estimates • Weaknesses – Less detailed – Getting accurate data Mar-05 33
Cost Estimating Methods Parametric Method (Extrapolation) • Use historical values to establish a trend for the future. • Example problem: Given the actual productivity and labor rates in the given table. How much will it take to complete a 3 -year software development project of 10 K lines of code, if 50% is completed in the second year and 25% is completed in first and third years? Mar-05 34
Learning Curve Theory As the quantity of a product produced doubles, the man-hoursper-unit expended to produce the product decreases at a fixed rate or constant percentage (usually 10% to 20%). Mar-05
Learning Curve Theory Factors Contributing to Efficiency • Job familiarization by both production workers and supervisory personnel. • Changes in product design which do not materially affect the product, but result in increased ease and speed of production. • Changes in tooling, machinery, and equipment which simplify or speed up the production process. • Improved production planning and scheduling, and improvements in production techniques and operational methods. • Improvements in shop organization, engineering coordination and liaison. • Improvements in the handling and flow of materials, and in the materials and parts supply systems Mar-05
Learning Curve Theory The table is based on the assumption that the first unit required 100 person-hours to produce. The table indicates a constant rate of reduction of 20% for each doubling of the unit number; the value of the second and each succeeding item in the table is 80% of the value of the preceding item. TABLE FOR FIGURES F-1 -1 and F-1 -2 Unit No. Mar-05 1 2 4 8 16 32 64 Unit Person-hours 100. 00 80. 00 64. 00 51. 20 40. 96 32. 77 26. 21
Learning Curve Theory 80% Unit Curve on Arithmetic Paper Mar-05
Learning Curve Theory Mar-05 39
Learning Curve Theory Uses – Evaluating contract production costs. – Assessing impact of production interruptions, product changes and production rate change. – Rate of improvement experienced by a particular contractor on a prior product may be indicative of rate of improvement expected on new product of similar size, complexity, and construction. – Improvement curve pattern experienced in the production of past item can be extended to calculate costs of future items. Mar-05 40
Cost Estimating Methods Engineering Method • Known as bottom up method • Requires extensive knowledge of system characteristics • Divide into segments; estimate costs for each segment • Combine segments plus integration cost • Uses a combination of cost estimating methods • Detailed knowledge of new technologies may not be available. Mar-05 41
Cost Estimating Methods Engineering Method • Strengths – Detailed • Best when long stable production process • Weaknesses – Requires a lot of time – Cost – Cannot be used until system well defined Mar-05 42
Cost Estimating Methods Expert Opinion Method • Subjective judgment of an experienced individual or group • Use if time does not permit a more thorough analysis • Document source(s) of opinion of experts • List attributes of the source(s) Example: Delphi Technique Mar-05 43
Cost Estimating Methods Expert Opinion Method • Consulting with one or more experts who use their knowledge and experience to arrive at an estimate • Group techniques include – Consensus (Committee) – Delphi • Strengths and weaknesses Mar-05 44
Expert Opinion Method Delphi Technique • • • Query expert opinion from group Seek information from each expert Summarize the results Send report to each expert Gather second opinion after each individual reviews report • Summarize results • Iterative process continues until the experts reach a consensus, or near‑consensus. Mar-05 45
Expert Opinion Method Example Labor type Hours Needed % of Total Hourly Rate Hrs %*rate Senior Engineer 1000 $13 10. 5 $1. 37 Design Engineer 3000 $11 31. 6 $3. 48 Tool & Die 500 $11 5. 3 $. 58 5000 $9 52. 6 $4. 73 Machinist Totals Mar-05 9500 $10. 16 46
Cost Estimating Methods Laying Out the Estimating Approach Aircraft System – sum of level II elements (cross-check with analogy) Air Vehicle – sum of level III elements Airframe – CERs Air Vehicle Software – Expert Opinion Propulsion – CERs Avionics – Analogy Armament – Catalog Price System Eng/Program Mgt – Factor of Air Vehicle System Test & Evaluation – Factor of Air Vehicle Training – Factor of Air Vehicle Data – Factor of Air Vehicle Peculiar Support Equipment – Factor of Air Vehicle Initial Spares – Factor of Air Vehicle Mar-05 47
Cost Analysis (CA) Working-level Integrated Process Team (WIPT) PM Co-Chairs C&E ASA(I&E) DCSOPS CRB-WG DCSLOG Army Materiel Command (AMC) Army Budget Office AMCOM Mar-05 PA&E ASA(ALT) AMC’s MSCs CECOM TACOM STRICOM TRADOC DISC 4
Data Collection and Analysis • The direction we take in collecting historical data will be determined by our choice of estimating methodologies. • This step may also dictate a change in estimating approach due to the availability or non-availability of certain data. • Data collection is not limited to cost data. We must also collect technical and program data if we want the total picture of the historical systems. This will help us ensure the comparability of the systems that we are collecting data on with the system we are estimating. Mar-05 49
Data Collection and Analysis Most Difficult Task in Cost Estimating • Data Sources – Data Types: Cost/Resource, Technical, Program – Categories: Primary, Secondary • Data Problems – Wrong Format – Matching up – Definition – Temporal Factors - comparability • Normalization • Data Location Mar-05 50
Data Collection and Analysis • Collection and analysis represent a significant amount of the overall estimating task in terms of time. The analysis will include decisions on what programs to include in the data set to whether to truncate lot data on a program for which you are calculating a learning curve. • Document data in your analysis, and any assumptions you make Mar-05 51
Estimate Formulation • We have defined our tasks, planned the estimate, assigned cost responsibilities, and performed data collection and analysis. • Here we apply our estimating methodologies and tools: develop the factors, analogies, CERs, and learning curves. • We will aggregate the various cost elements into development, production, and O&S estimates, fiscally spread the costs, and apply inflation. Mar-05 52
Estimate Formulation Life Cycle Cost (LCC) Total cost to the Government of a system over its entire life. LCC: • Serves as cost input for decisions whether or not to continue, modify, or terminate development, production, and fielding • Provides basis for budget requests to Congress Mar-05 53
Total Ownership Cost (TOC) Total Ownership Cost Includes All Costs Associated With the Research, Development, Procurement, Operation, Logistical Support and Disposal of an Individual Weapon System Including the Total Supporting Infrastructure That Plans, Manages and Executes That Weapon System Program Over Its Full Life. And: "The Cost of Requirements for Common Support Items and Systems That Are Incurred Because of Introduction of That Weapon System. " But: "Excludes Indirect "Non-linked" Infrastructure Costs That Are Not Affected by Individual Weapon Systems' Development, Introduction, Deployment or Operations. “ Mar-05 Generally, TOC Is Synonymous With Life Cycle Costs.
Army Tools for Total Ownership Cost Estimating Life Cycle Cost Management Tools Mar-05
Automated Cost Estimator (ACE) • Automated Cost Estimator (Ace)—is a Model-building Tool. Part Spreadsheet, Part Database, It Incorporates Enough Structure to Eliminate Most of the Automation Tasks You Would Have to Perform If You Used a Spreadsheet, Yet It’s Flexible Enough to Perform Nearly Any Kind of Analysis. The Analyst’s Productivity Is Increased Through Built-in Inflation, Learning, Time Phasing, Documentation, Sensitivity/what-if, and Other Analysis Capabilities. Mar-05
Automated Cost Data Base (ACDB) ACDB Is ACEIT’s Automated Cost Database. Just As ACE Is a Modelbuilding Tool, ACDB Is a Database- Building Tool. It Contains Powerful Database Entry and Administration Tools to Enable Any Site/office to Create Its Own Tailored Database. When You Populate It, ACDB Lets You Search and Retrieve Cost, Schedule, Technical, and Programmatic Data. Mar-05
Operating Support (O&S) Costing Installation Cost (Base Operations / Real Property Maintenance) Operating & Support Management Information System (OSMIS) Force Cost Model(s) Mar-05
Mar-05
Force Costing / Models FORCES: Unit Operations & Support • Updated Annually • Provides Input to 5 Defense Models • Supports 9 Separate Study Groups • Avg 25 Major Estimates Per Year Mar-05
OSMIS U. S. Army Cost & Economic Analysis Center OSMIS Operating & Support Management Information System • • • Parts (NSN Level) & Fuel Ammunition Intermediate Maintenance Depot Maintenance Activity Data (miles/Hours) Year of Manufacture Mar-05 Database
Review and Presentation • We want to ensure that the estimate is reasonable, realistic, and complete. • Reasonableness addresses areas such as: using appropriate and acceptable methodologies; presenting methodologies systematically; the use of relevant data; and ensuring that assumptions are valid and clearly stated. Mar-05 62
Review and Presentation (Continued) • The realism test checks to see if the assumptions and ground rules are consistent with the statement of work and if the costs are in line with historical data. • We evaluate completeness by determining whether the estimate includes all the work stated in the request for proposal and whether the costs are traceable and reconcilable. Mar-05 63
Final Documentation • Provide the means for other analysts to get the same results that we have in our cost estimate. • Providing good directions and a clear trail to follow are essential in having an estimate that can be replicated. • Provide step-by-step documentation of the methodologies, supporting data, ground rules, and assumptions, equations, examples, etc. , • Ability to interpret or evaluate someone else’s cost documentation is as important as ability to prepare good cost documentation. Mar-05 64
Cost Estimating Process Definition Data Collect Planning Normalize Estimate Formulation Review/ Presentation Final Document DOCUMENTATION Mar-05 65
Cost Analysis Model Data/CERs LCC Estimates Cost Drivers Develop Cost Estimate Structure and WBS Start Establish Ground Rules and Assumptions Compile Data Base/ CERs/Models Mar-05 Prepare Cost Estimates for Each Element Test Total System Estimate Engineering Analogy Parametrics Expert Opinion Reasonableness Sensitivity Analysis Cost-Risk Assessment Prepare Documentation
Cost Review Board (CRB) Process Overview PM - develops Program Office Estimate (POE) Cost Review Board is a quality assurance built in the Cost Analysis Process in support of decisions and PPBES CRBWG - Reconciles & Recommends ACP to CRB CEAC - develops Independent Cost Estimate Recommended ACP Briefed to CRB Principles ASA(FM&C) Approves Army Cost Position • ASARC • OSD • PPBES • APB • CAIV • AOA • OSD CAIG develops ICE for ACAT ID programs as part of the DAB process • CEAC develop ICE for ACAT IC programs Mar-05 67
Cost Estimating Process Questions • We have talked about a process for estimating the project as well as various techniques for estimating specific cost elements. • Questions? • Let’s talk about the current scenario of cost estimating for SMART. Mar-05 68
What is SMART? • SMART is a framework to accomplish the vision of using M&S to reduce the cycle time of providing solutions for Army needs, hopefully at cost savings. Mar-05 69
Army Cost & Economic Analysis Center’s M&S Architecture Army’s SMART EXECUTION PLAN • Objective 2. 1: Develop and implement an integrated, interoperable Total Ownership Cost analysis capability – 2. 1. 1: Establish & fund an appropriate process that directs research in cost estimation and emerging technologies. – 2. 1. 2: Establish a means of developing CERs for software intensive platforms. – 2. 1. 3 -2. 1. 4: Identify and assess the range and types of cost estimating tools current available in government, industry and academia. – 2. 1. 5: Based on results, determine the delta between Army needs and the tools available from industry and academia. Mar-05
Cost Analysis Requirement MS I MS 0 O L D Concept Exploration MS III Program Definition & Risk Reduction Engineering & Manufacturing Development (EMD) Production, Fielding/ Deployment Cost Estimates Needed A N E W C B Concept Exploration Component Advanced Development Review Concept & Technology Development Pre-Systems Acquisition Mar-05 System Integration System Demo Production Readiness & LRIP Review System Development& Demonstration Rate Production & Deployment Review Support Production & Deployment Systems Acquisition (Engineering and Manufacturing Development, Demonstration, LRIP & Production) Sustainment
Cost Analysis Domain Inputs (Descriptions) Requirements Acquisition Assumptions Design Parameters Risk Assessment Process (Models) Cost Analysis Process Databases, Tools, & Models Outputs (Costs) ASARC CAIG, DAB APB PPBES AOA Types of Cost Studies Performance Based and Design Based Cost Models Currently do not Exist Mar-05
Army Cost & Economic Analysis Center’s M&S Architecture Top Level Tool Requirement Models 1. Cost tools to communicate with engineering and requirements models. 2. Component level to assist engineers and designers with cost capability. 3. Integrated Performance-Based Cost Model Mar-05
Top Level Tool Requirement Models Cost Tools Interface Protocols ACEIT ACDB Interface Protocols Engineering Tools SEER Pro-E PRICE CAD CAI* Auto-CAD Databases Others Mar-05 *Composite Affordability Initiative Others
Army Cost & Economic Analysis Center’s M&S Architecture ACE-IT Army Legacy Cost Models / Tools ACDB AMCOS PRICE SEER OSMIS FORCES Cost Data Acquisition Layer Component Level Cost Model Gather Refine Aggregate Performance-Based Cost Models Archive Cost Data Warehouse Cost Synthesis process Cost Information Store Layer Cost Analysts Engineers Cost Knowledge Mar-05 Delivery Layer Cost Data Mart CEAC KM Feeder Systems to Army Enterprise System Acquisition Requirements
Cost As An Independent Variable (CAIV) • Best time to reduce cost is early in the process. • Involves the stakeholders in the process. • Cost tradeoffs must be addressed early in the acquisition process and embedded in program requirement documents, Request For Proposals (RFPs), contract provisions, and source selection process. Mar-05 76
CAIV Process • Set realistic but aggressive cost objectives early in acquisition program • Manage risks • Track progress using appropriate metrics • Motivate Government and industry managers to achieve program objectives • Incorporate incentives to reduce O&S costs for fielded systems Mar-05
Analysis of Alternatives • Set realistic, aggressive cost objectives early in development • Manage risks • Track progress with appropriate metrics • Motivate government/industry managers to achieve program objectives • Incorporate incentives to reduce O&S costs for fielded systems. Mar-05
Benefits of SMART • SMART expected to yield 4 significant benefits. . vital to Army transformation: – Reduce time to field new or upgraded systems – Increased military worth of fielded systems – Concurrent fielding of systems & training devices – Reduce total ownership cost & sustainment burden Mar-05 79
Reduce Total Ownership Cost (TOC) & Sustainment with M&S • Link Cost/Performance Models to Engineering Design Models to reduce TOC & Sustainment • Optimize performance/cost of system by addressing in early design phase Mar-05 80
M&S Plan Cost Analysis: Art or Science? ? Mar-05
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