AIR TRAFFIC ORGANIZATION
Cost Estimating
Introductory Course
ATO Finance, and
Investment Planning and Analysis
Maria DiPasquantonio, Manager
September 27th - 28th, 2005
Class Participation Guidelines







Participate freely in discussions
Listen to other viewpoints
Avoid distracting behaviors including sidebar conversations
Try to relate your own experiences
Ask questions when you need clarification
Arrive on time
Please turn your cell phone to either off or vibrate. Please do
not interrupt the class by walking in or out of the classroom to
answer the phone. Get it at the next break.
 Please don’t use your e-mail on wireless devices during the
class. It is obvious and distracting.
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
2
Topics to be Covered
Top Level View of Curriculum
Kickoff/Introductions/Course Objectives
Role of Cost Estimating and Analysis
Cost Estimating Process
Data Sources and Collection
Cost Estimating Techniques
Sensitivity and Cost Risk
Software Cost Estimating
Financial and Economic Analysis
References
Next Course Overview
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
3
More detailed view of Curriculum
Andrews Conference Room, BAE SYSTEMS @ the
Aerospace 901 D St, Suite 850, Washington DC 20024.
Time to
Deliver
Date for
Instruction
(hours)
 Kickoff/Introductions/Course Objectives
0.5
27 Sept05
 The Role of Cost Estimating and Analysis in FAA-ATO
 What is it?
 Why is it done?
 Who does it?
 When is it done?
0.75
27 Sept05
 Cost Estimating Process
 Steps in the cost estimating process
 The FAA cost estimating process
 Work Breakdown Structures (WBS)
 Life Cycle Costs and the AMS
 The hallmarks of a good cost estimate
0.75
27 Sept 05
 Data Sources and Collection
2.5
27 Sept 05




September 27th - 28th, 2005
Sources and Collection
Index numbers, Inflation. Then year vs. Constant year
Exercise
Personnel Costs
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
4
More detailed view of Curriculum
cont’d.
Andrews Conference Room, BAE SYSTEMS @ the Aerospace 901 D
St, Suite 850, Washington DC 20024.
Time to
Deliver
(hours)
Date for
Instruction
3.5
27 Sept 05
 Sensitivity and Cost Risk
1.5
28 Sept 05
 Software Cost Estimating
1.5
28 Sept 05
• Financial and Economic Analysis
•Benefit-to-cost ratios
•Discounting
•Present Value
•Exercise
2.0
28 Sept 05
 References
0.5
28 Sept 05
 Next Course Overview
0.5
28 Sept 05
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
 Cost Estimating Techniques
 Analogies
 Parametric
 Cost Factors
• ATO Below-the-line cost factors
• Proposed Exercise: Pocket Estimating Guide (PEG
Cost Factors
–
–
–
–
–
–
–
–
September 27th - 28th, 2005
Definition and Life Cycle
Inherent difficulties
Software Growth
Software Development
Software Maintenance
Commercial models
Data Sources and collection lessons
COTS
5
Curriculum
Kickoff/Introductions/Course Objectives
Role of Cost Estimating and Analysis
Cost Estimating Process
Data Sources and Collection
Cost Estimating Techniques
Sensitivity and Cost Risk
Software Cost Estimating
Financial and Economic Analysis
References
Next Course Overview
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
6
Course Contents
 This course provides a broad-based understanding of the cost
analysis activities involved in the acquisition and support of
FAA programs. The course will introduce you to the methods
used to perform cost estimates and help you to understand the
fundamentals and terminology of the acquisition process.
Topics include:
–
–
–:
FAA Acquisition and Management
System (AMS) and Decision processes
Development, use and analysis of
estimating techniques
Statistical and non-statistical cost
estimating relationships ( Analogy,
Parametric and Engineering Build-Up)
September 27th - 28th, 2005
–
–
–
–
–
Inflation indices
Time phasing of a cost estimate
Risk and uncertainty analysis
Time value of money
Economic analysis
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
7
My Experience in the Cost
Estimating Profession
POSITION
MATH
UNIVERSITY PROFESSOR
X
ARMY-OPS RES. ANALYST
X
ECON
M&S
CE/A
X
X
X
X
EUROPE-CH.ECONOMIC
ANALYSIS
X
X
X
NAVAIR-DEP CH CE/A
X
X
X
NAVAL CENTER FOR COST
ANALYSIS-DIRECTOR
X
X
X
BOOZ ALLEN HAMILTON—
PRINCIPAL
X
X
X
NAVAL POSTGRAUATE SCHOOL-VISITING PROFESSOR
X
X
Cost Estimating and Economics Seem Ubiquitous
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
8
Air Traffic Organization cont’d.
We are organized around our customers’ service needs, with special focus on safety, service delivery,
and financial management.
National leadership & policy
Administrator
&
Deputy Administrator
Agency Liaisons
Chief
Operating Officer
(COO)
Agency Liaisons
Joint Planning &
Development Office (JPDO)
DIRECTOR
ATO Transition*
SR. VICE PRESIDENT
*temporary
Support Service Units
Associate Administrator for
Regulation & Certification
Office of
System Safety
Safety
VICE PRESIDENT
Communications
VICE PRESIDENT
Office of Government
& Industry Affairs
Office of
Public Affairs
Assistant Administrator for
Region & Center Operations
Operations
Planning
VICE PRESIDENT
Finance
SR. VICE PRESIDENT
Acquisition &
Business Services
VICE PRESIDENT
Federal Acquisition Exec.
Terminal
VICE PRESIDENT
Flight Services
VICE PRESIDENT
System Operations
VICE PRESIDENT
Assistant Administrator for
Human Resource
Management
Office of the
Chief Counsel
Assistant Administrator
for Civil Rights
Operating Service Units
En Route & Oceanic
VICE PRESIDENT
Assistant Administrator
for
Financial Services/Chief
Financial Officer
Technical Operations
VICE PRESIDENT
Assistant Administrator for
Information Services/
Chief Information Officer
Assistant Administrator
for Aviation Policy,
Planning & Environment
Associate Administrator
for Commercial Space
Transportation
Assistant Administrator
for International Aviation
Assistant Administrator for
Security & Hazardous Mtls.
Associate Administrator
for Airports
Cost estimates are developed within this organization
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
9
Four Major Appropriations
Fund the FAA
 Research, Engineering, & Development (RE&D) – supports
research to improve safety, security, productivity, and capacity to
meet the future needs of the national ATC system
 Facilities & Equipment (F&E) – sustains current infrastructure
and supports FAA’s plan to modernize the NAS
 Operations & Maintenance (O&M) – supports the day-to-day
operation of the National Airspace System (NAS) and its
personnel and support costs
 Airport Improvement Program (AIP) grants – supports airport
planning and development, safety, security, and noise mitigation
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
10
Four Major Appropriations
Fund the FAA cont’d.
 Research, Engineering, & Development (RE&D) – supports
research to improve safety, security, productivity, and capacity to
meet the future needs of the national ATC system
 Facilities & Equipment (F&E) – sustains current infrastructure and
supports FAA’s plan to modernize the NAS
 Operations & Maintenance (O&M) – supports the day-to-day
operation of the National Airspace System (NAS) and its personnel
and support costs
 Airport Improvement Program (AIP) grants – supports airport
planning and development, safety, security, and noise mitigation
Cost estimates are developed for
projects using this appropriation
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
11
FAA Budget, FY 2000-2006 (est.)
FAA Budget, FY 2000-2006 (est)
16000
14000
12000
$M
10000
8000
6000
4000
2000
0
2000
2001
2002
2003
2004
2005
2006
FY
F&E
September 27th - 28th, 2005
OPS
R&D
AIP
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
12
Curriculum
Kickoff/Introductions
Role of Cost Estimating and Analysis in FAA-ATO
– What is it?
– When is it done?
– Why is it done?
– Who does it?
Cost Estimating Process
Data Sources and Collection
Cost Estimating Techniques
Sensitivity and Cost Risk
Software Cost Estimating
Financial and Economic Analysis
References
Next Course Overview
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
13
The Need for Cost Estimating
Skills at FAA-ATO
 Cost Growth and Schedule Delays of Major Acquisitions
Continue To Stall NAS Modernization Efforts*
 FAA Needs To Develop a Comprehensive Strategy for
Modernizing the NAS To Ensure Major Acquisition
Programs Are Delivered Within Cost, Schedule, and
Performance Milestones*
*STATUS OF FAA’S MAJOR ACQUISITIONS:
COST GROWTH AND SCHEDULE DELAYS CONTINUE TO
STALL AIR TRAFFIC MODERNIZATION
Federal Aviation Administration
Report Number: AV-2005-061
Date Issued: May 26, 2005
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
14
Cost Estimating- What?
 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
– The art of approximating the probable worth (or cost)
of something based on information available at the
time
– The act of developing, analyzing, and documenting
(the process, data, techniques, and results of) cost
estimates using analytical approaches and techniques
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
15
Definition: Cost Estimating is 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
What Can Cost Estimating Do?
Good Cost Estimating Drives Good Decisions
 Determine and communicate a realistic view
of the likely cost outcome, which can form
the basis of the plan for executing the work
 Provide standardized procedures for
developing budgets and consistent basis of
estimate (BOE) in developing budgets
 Enhance accuracy and credibility of budget
estimates
 Make better decisions based on metrics, not
feeling
 Make decisions on program viability,
structure, and resource requirements
 Establish, Support and defend budgets
– Translate requirements associated
with programs, projects, or processes
into budget requests
– Assess reasonableness of the budget
– Quickly/accurately determine impacts
of budget cuts on program baselines
and associated functionality
 Assess resource implications of technology
 Assist in source selection/design trade-offs
COST AND
BENEFIT
ANALYSIS
CRITERIA
COST AND
BENEFIT
DATA
BENEFIT
DATA
INVESTMENT
DECISION
EXAMPLE
INVESTMENT METRICS
• Net Present Value (NPV)
• Internal Rate of Return
(IRR)
• Benefit to Cost Ratio
(BCR)
• Payback Period
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
16
Purposes of cost estimating
 Translate system/functional requirements associated with programs,
projects, 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
 Develop a source of resource information for planning purposes
 Provide a quantitative basis for management decisions regarding optimal
allocation of resources
– Facilitate the decision-making process of choosing one option from
among several alternatives
– Enable review and evaluation of progress towards goals
A cost analyst helps to decide which of the possible alternatives is more
desirable and recommends a course of action that will steer decision
makers towards it and away from undesirable alternatives
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
17
When is Cost Estimating Done?
 Make decisions on program
viability, structure, and
resource requirements
 Establish and defend budgets
 Assess technology changes
 Provide basis for evaluating
competing systems and
/initiatives (cost/benefit
analyses and AoAs)
 Conduct analysis of
alternatives (AoA)




Perform source selection
Perform design trade-offs
Comply with public law
Satisfy oversight
requirements
 Identify and objectively
quantify the impact of
program risks (technical
and schedule risks)
 Evaluate proposals for
cost reasonableness
Cost estimating, as part of a total systems analysis, provides
an analytic underpinning to support decision makers
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
18
Why Credible Cost Estimates
are Important

Overestimates lead to planning and
budget disasters
–
–
–

 Provide senior
decision makers an
understanding of
options and
constraints
Underutilized resources
Excess capacity
Wasteful, un-competitive pricing

Underestimates lead to implementation
disasters
–
–
–
–
Insufficient resources
Panicked decisions
Unrealistic expectations
Imprudent economics
Prevent
making and
breaking of
programs
 Increased
Risk
At the Service, OMB and Congressional levels, loss of credibility results in loss
of program and financial flexibility, such as Congress’ legislating de facto cost
caps and/or schedules in attempts to avoid future cost growth
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
19
Skillsets and Environment for Cost
Estimators and Analysts
ENGINEER
• Production Process
• Scheduling
• Materials
• Performance Parameters
• System Integration
• Production Engineering
• Test Program Development
STATISTICIAN
• Regression Analysis
• Forecasting
• Sensitivity Testing
• Learning Curve Applications
• Analysis of Commercial Models
ACCOUNTANT
• Financial Analysis
• Cost Data Analysis
• Proposal Analysis
• Overhead Analysis
BUDGETING
•Appropriation Process
•Program Specific
• Internal Company (Industry)
• Defense Budget Appropriations
September 27th - 28th, 2005
COMPUTER SCIENTIST/
MATHEMATICIAN
• Model Development
• CER Development
• Programming
• Analysis of Proposals
• Analysis of Commercial Model
ECONOMIST
COST ESTIMATOR/ANALYST
SALESPERSON
• Sell Estimate
• Sell Approach
• Sell Self as Knowledgeable
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
• Inflation-vs-Foreign
Exchange Rates
• Labor Agreements
• Break Even Analysis
• Present Value Analysis
PUBLIC AFFAIRS
•Congressional Process//Motivations
• GAO
• General Public
• Press
O R G A N I Z A T I O N
20
The Context of Investment Analysis –
Applicable Orders and Guidelines
Government




OMB A-94
DOT
Benefit-Cost and Cost-Effectiveness
 Policy Values
Analysis
* Fatalities
Alternatives Analysis
* Injuries
Net Present Value
* Passenger Time
Discount Rates
Best Practices
FAA/APO
 Aviation Forecasts
 Economic Values
* Aircraft Operating Costs
* Aircraft Replacement
Costs
OMB A-11 (Exhibit A-300)
 New Budget Submittal Rqmts.
(Capital Planning and
Investment Control)
* Business Case Focus
* ROI: NPV and Payback
* Risk Analysis &
Mitigation Plans
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
FAA/ATO F & P
 Probabilistic Analysis
 Work Breakdown Structure of
Costs and Benefits
 Risk Analysis
Legislation/Congress
 Clinger – Cohen Act (IT
investment management)
 Government Performance
and
Results Act (GPRA)
 Chief Financial Officer's
(CFO) Act
O R G A N I Z A T I O N
21
Why is Investment Analysis Needed and What
is the Motivation for Business Case Analysis?

To match capital investments
with agency strategy, goals, and
objectives (e.g., new capabilities)


To match capital investment with
operating needs

To support allocation of scarce
capital resources
(e.g., dollars, people) to the
highest value opportunities





To comply with governmental
directions (e.g., Congress’
Clinger-Cohen Act, Government
Performance and Results Act
(GPRA), Office of Management
and Budget (OMB) Circular A-94,
and OMB Circular A-11)
September 27th - 28th, 2005

Implement integrated corporate
investment decision making
process
Baseline programs
Shorten acquisition cycle
Focus on life cycle management
Establish system-wide decision
criteria
Involve FAA lines of business
(LOB), users, and industry
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
22
FAA Investment Analysis Process
Figure 2.4.1 illustrates the phases and decision points of investment analysis, which is conducted to ensure the agency’s critical needs
are satisfied by practical and affordable solutions. Initial investment analysis rigorously evaluates alternative solutions to mission
need and determines which offers the best value and most benefit to the agency and its customers within acceptable cost and
risk. Final investment analysis develops detailed plans and final requirements for the proposed investment program, including a
lifecycle program baseline that establishes cost, schedule, performance, benefits, and risk-management boundaries for program
execution.
Define
Evaluation
Factors
IIA-2
Mission
Need
Decision
Form
Investment Analysis
Team
IIA-1
Develop
Initial
Lifecycle Program
Baseline(s)
IIA-7
Finalize
Investment Analysis
Plan
IIA-4
Conduct
Market
Research
IIA-3
Prepare for
Initial
Investment Decision
IIA-8
Analyze
Alternatives
IIA-5
Assess
Affordability
IIA-6
Initial
Investment
Decision
Prepare Action Plan
for Final Investment
Analysis
IIA-9
Cost estimates are developed at this stage of the IA process organization
• The Business Case Analysis (BCA) is at the heart of the decision process at FAA
• Business Case Analysis provides insights/decision-making structure to allocate F&E
funds
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
23
Explosion in Requirements and
Motivation to do Cost Estimating
GOVERNMENT
 FAA–Need to expand, enhance
and professionalize cost
estimating community
 DoD---by statute, every major
program requires an independent
cost estimate (ICE)
 Intelligence Community-- by
statute, every major program
requires an ICE
 NASA- ISSPO overruns, failed
missions, Challenger tragedy, etc.
September 27th - 28th, 2005
COMMERCIAL
 Federal Acquisition Regulation
(FAR) drives requirements for
Cost Estimating System
 Competitive Environment forces
need to understand and control
costs
 Mergers and Acquisitions force
focus on enterprise-wide
consistency issues
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
24
Curriculum
Kickoff/Introductions
Role of Cost Estimating and Analysis
Cost Estimating Process
–
–
–
–
–
Steps in the cost estimating process
The hallmarks of a good cost estimate
The FAA cost estimating process
Work Breakdown Structures (WBS)
Life Cycle Costs and the AMS
Data Sources and Collection
Cost Estimating Techniques
Sensitivity and Cost Risk
Software Cost Estimating
Financial and Economic Analysis
References
Next Course Overview
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
25
Understand the Proposed
Program and Existing Estimates
1.0
Understand the
Proposed
Program and
Existing Estimates
3.0
Collect 2.0
Data for
Cost
Analysis
Each WBS
Planning
Element
2.0
2.0
Cost
Cost
Analysis
Analysis
Planning
Planning
5.0
Time-Phase the
Life Cycle Costs in
Then-Year
Dollars
4.0
2.0
Complete
Cost
Analysis
Cost
Planning
Estimate
7.0
Conduct2.0
External
Cost
Analysis
Review and
Planning
Coordinate
6.0
2.0
Conduct
Cost
Analysis
Internal
Planning
Review
As with any scientific undertaking, there is a
repeatable process at the core
8.0
2.0
Complete
CostReports
Analysis
Final
Planning
and Documents
From FAA Standard Cost Estimation Methodology, April 2003, v.1
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
26
The hallmarks of a good cost
estimate
 Good Cost estimating Practices
– Anchored in historical program
performance
– Reflects future process and design
improvements
– Understood by program and business
leaders
 Cost leadership provides
– Confidence in cost estimates
– Understanding of financial issues and risks
 Major Attributes of Credible Cost
Estimates
 Major Attributes of Credible Cost
Estimating Process
– Consistent WBS – fixed reference for
requirements and performance
– Consistent ground rules & assumptions for
annual estimates
– Validated estimating methodologies –
technically based models correlated to
empirical data
– Cost data collection in sufficient detail and
structure to support cost model
development
– Explainable to variety of audiences
– Requirements Driven – programmatic and
system requirements documented
– Well-defined content and risk areas –
technical basis for estimating methods
– Can be validated by independent means –
within estimating/modeling accuracy
– Traceable and Auditable – can be recreated from basis of estimates
This is the Basic Guidance to Follow as You Choose
Methodologies for Developing the Cost Estimate
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
27
Specify Ground Rules
and Assumptions
 Scope And Limitations
 Schedule
 Base/Year
 Time Phasing
 Inflation Indices
 Transition from F&E to O&M funding
 Participants, including Contractors
 Relationship to/dependencies on other
programs
September 27th - 28th, 2005
Q: What is the difference between a
Ground Rule and an Assumption?
Ground Rules--specified by the sponsor or
agency; represent standard procedures or
practices; may clarify the boundaries
between programs or services
Assumptions--made by the estimator or
sponsor; provide a basis for needed inputs
in the absence of firm data or analysis.
NOTE: Good cost analysts assess how
varying assumptions affect the outcome
(sensitivity analysis)
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
28
Why Cost Estimates “Fail”
 Lack of clear definition
 Requirements are misstated
or misunderstood
 Lack of accurate size
and functionality data
 Full scope of the job not
captured (e.g.- integration, COTS, CM,
QA, documentation)
 Inexperienced personnel
 Contractor counts on ECPs to “get well”
 Program changes, but estimates are not
revised
September 27th - 28th, 2005
The cost estimator’s job
is not only to provide a
number, but to
communicate how good
the numbers are….
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
29
What is a
Work Breakdown Structure?

A Work Breakdown Structure (WBS) is a
hierarchical tree of all activities necessary to
produce a product, accomplish a task, or
provide a service
 A WBS identifies work elements and relates
them to each other and to the end-product,
task, or service
 The FAA Standard WBS captures 100% of a
project’s activities over its life cycle
Level 0
Level 1
–
Contractor labor, material, travel, fees, etc.
– In-house labor, travel, etc.

Level 2
Costs are estimated for individual elements of
the FAA WBS
–
Cost estimating methods must be selected for
each element
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
30
FAA Standard WBS Structure
(Version 4.1)
The latest official version of
the FAA Standard WBS 4.0,
can be found at
http://faa.fast.gov
Project Specific Activities
Pre-Project Activities
FAA Standard Work Breakdown Structure
1.0
Mission
Analysis
2.0
Investment
Analysis
3.0
Solution
Development
3.1 Program Management
1.1 Identify Projected
Demand for Services
1.2 Identify Technological
Opportunities
1.3 Identify Projected
Supply of Services
2.1 Initial Investment
Decision
2.2 Final Investment
Decision
2.3 Rebaselining
Decision
1.5 Initial Requirements
Definition
Legend
4.2 Engineering
4.3 Environmental,
3.3 HW/SW Design,
Occupational Safety and
Development and
Health Compliance
Production
4.4 Site Selection and
3.4 Physical and Airspace
Acquisition
Development
Analysis and Assessment
4.1 Program Management
3.2 System Engineering
Infrastructure Design and
1.4 Mission Needs
4.0
Implementation
4.5 Construction
4.6 Site Preparation,
Installation, Test and
3.5 Test and Evaluation
Checkout
3.6 Data and
4.7 JAI/Commissioning/
Documentation
Closeout
3.7 Logistics Support
4.8 Telecommunications
= Decomposes to lower level WBS elements
4.9 Implementation Training
5.0
In-Service
Management
6.0
Disposition
5.1 Preventive Maintenance/
Certification
5.2 Corrective Maintenance
5.3 Modifications
5.4 Maintenance Control
5.5 Technical Teaming
5.6 Watch Standing Coverage
5.7 Program Support
5.8 Logistics
5.9 In-Service Training
6.1 Program Management
6.2 Decommissioning
6.3 Engineering
6.4 Environmental
Activities
6.5 Dismantle/Removal
6.6 Site
Restoration/Closeout
5.10 Second Level Engineering
5.11 Infrastructure Support
5.12 Flight Inspections & SIAP
Development
5.13 System Performance
Assessment
5.14 System Operations
5.15 Travel To And From Sites
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
31
Cost Terminology







Recurring vs Nonrecurring costs
Direct Costs vs Indirect Costs
Fixed Costs vs Variable Costs
Overhead Costs
Sunk Costs
Opportunity Costs
Life Cycle Costs
Cost is not a uniquely defined term
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
32
Cost Terminology
 Recurring Costs are those costs that are repetitive and occur when a
company produces similar goods or services on a continuing basis.
A fixed cost that is paid on a repeatable basis is a recurring cost (i.e.,
rent). For example, for a company that provides architectural
services, office space rental - which is a fixed cost - is also a
recurring cost. Can be tied to Quantity Produced.
 Nonrecurring Costs are those costs that are not repetitive, even
though the total expenditure may be cumulative over a relatively
short period of time. Nonrecurring costs typically involve developing
or establishing a capacity to operate. For example, the cost of
purchasing real estate upon which a plant will be built is a
nonrecurring cost, as the cost of constructing the plant itself. Cannot
be tied to Quantity.
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
33
Cost Terminology
 Direct Costs are those costs that can be reasonably measured and
allocated to a specific output/product or work activity
– Typical direct costs include the labor and material costs directly
associated with a product, service, or construction activity
 Indirect Costs are those costs that are difficult to attribute or allocate
to a specific output or work activity. Costs that involve too much
effort to allocate directly to a specific output; instead, they are
allocated through a selected formula (i.e., proportional to direct labor
hours or direct material dollars). Cannot be tied to a specific product.
– Typical indirect costs include the costs of common tools, general
supplies, equipment maintenance
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
34
Cost Terminology
 Fixed Costs are those costs which are unaffected by changes in
output quantity over a feasible range of operations for the available
production capability
– Typical fixed costs include insurance and taxes on facilities,
general management and administrative salaries, and interest
costs on borrowed capital. These are Non-Recurring Costs.
 Variable Costs are those costs associated with production that vary
with quantity of output. Variable costs are the primary costs that
should be considered when making an economic analysis of a
proposed change to an existing operation.
– Typical variable costs include material and labor; these are
Recurring Costs
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
35
Cost Terminology
 Overhead Costs consist of plant operating costs that are not direct
labor or direct material costs. (Indirect costs, overhead, and burden
are terms that are sometimes used interchangeably)
– Typical overhead costs include electricity, general repairs,
property taxes, supervision
– Various methods are used to allocate overhead costs among
products, services, or activities
• Most commonly used methods involve allocation in proportion
to direct labor costs, direct labor hours, direct materials costs,
the sum of direct labor and material costs, or machine hours
(refer to example)
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
36
Cost Terminology
 Sunk Costs are those costs that have occurred in the past and have
no relevance to estimates of future costs and revenues for
alternative course of action
– Common to all alternatives, not part of prospective cash flows in
the future
– Not used in cost analysis but required in OMB-300
 Opportunity Costs are those costs incurred because of the use of a
limited resource. The opportunity to use that same resource to
monetary advantage in an alternative use is foregone.
– The cost of the best rejected or foregone opportunity
– Often hidden or implied
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
37
Types of Cost Estimates
 Life Cycle Cost Estimate (LCCE): Cradle-to-grave estimate includes
R&D, production, operations/support, and disposal
 Independent Cost Estimate (ICE): LCCE of most likely cost developed
by an independent organization
 Budget Estimate: For inclusion in budget to support current activities
 Rough-Order-of-Magnitude (ROM): Pre design effort, with very little
specific information about the project
 Analysis of Alternatives (AoA): Evaluates costs, benefits, advantages
and disadvantages of different alternatives
 Activity Based Costing (ABC): Accounting methodology that assigns
resources and overhead costs to activities, products and services to
support making decisions about pricing, outsourcing, capital
expenditures and operational efficiency
There are many types of cost estimates, each with a different
purpose. Know the purpose of the cost estimate before you start
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
38
Curriculum
Kickoff/Introductions
Role of Cost Estimating and Analysis
Cost Estimating Process
Data Sources and Collection
–
–
–
–
Sources and Collection
Index numbers, Inflation. Then year vs. Constant year
Exercise
Personnel Costs
Cost Estimating Techniques
Sensitivity and Cost Risk
Software Cost Estimating
Financial and Economic Analysis
References
Next Course Overview
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
39
Data Sources
 Three types we want to collect:
– Cost/Resource Data (QUANTITATIVE)
• Product - NAS System, Facilities
• Functional - Engineering, Program Management
• Activity – General Maintenance, Depot Repair
• Catalog Prices
• Cost Reports (EVM)
– Technical Data (QUANTITATIVE)
• Size
• Performance
• Technology
– Programmatic Data (QUALITATIVE)
• The Acquisition Environment
• Acquisition Schedule
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
40
Problems with Data Sources
 Differences in categories/accounting methodologies
among contractors
– Information in the wrong format
– Sometimes previous program managers did not buy
data
 The “Matching up” or Integration Problem
 The Influence of Temporal Factors
– Manufacturing Methods
– Technological Changes
 Comparability Problems
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
41
Information and Data Sources
 Product teams and Offices
 FASThttp://fast.faa.gov/ams/non_index/investab.htm
 NASA/JSC
http://www1.jsc.nasa.gov/bu2/inflation/nasa/inflateNA
SA.html
 Society of Cost Estimating and Analysis (SCEA):
http://www.sceaonline.net/
 US Army Corps of Engineers, Directorate of Civil
Works
(http://www.hq.usace.army.mil/cemp/e/ec/PAX/paxtoc
.htm)
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
42
Data Normalization
 One of the most challenging and perennial problems
confronting the cost analyst is the identification and
normalization of cost data
 The adjustment of actual cost to a uniform basis has two
objectives:
– Reduces the dispersion of the data points – “Consistency”
– Expands the number of comparable data points –
“Homogeneity”
 Also, since historic cost data involves the purchasing of goods
and services in different time periods, we need to know how to
compare the dollar cost of goods and services in one period
with the dollar cost of comparable items in another period
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
43
Data Normalization cont’d.
 Normalization provides consistent cost data by neutralizing the
impacts of external influences
 The three broad Normalization topics are:
– Inflation
– Content
– Quantity
 Normalization efforts involve adjustments for:
– Technology changes
– Data collection differences
– Production methodology enhancements
– Design Improvements
– Inflation and deflation
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
44
Inflation
 “The consistent rise in the price of a given market basket
of goods produced by an economy”
– A rise in the general price level of goods and services
produced in an economy
– Measured by the rate of rise of some general productprice index in percent per year – examples?
 Many different measures of inflation are required
because prices do not rise evenly
 Similarly, FAA uses different measures as well, e.g., FAA
personnel at 5%
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
45
Normalization for Inflation
 We do most of our normalization to account for inflation
 If System X costs $1M today, how much will that same
system cost five years from now?
 A reflection of the fact that a dollar spent today buys
more than it will in the future but buys less than it did in
the past
– the effects of inflation over time
Of all the topics discussed in cost analysis, none will be
encountered more frequently than inflation
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
46
Year XX$  Year YY$
 Locate page for applicable appropriation with
any base year
 On that page, locate the raw inflation index for
year XX in column headed “RAW INDEX”
 Divide the dollar amount by this index
 On the same page, locate the raw inflation index
for year YY in the same column.\Multiply the
result of (3) by this index
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
47
Inflation Normalization Exercises
System
Average Unit
Cost ($M)
Reference
$
System 1
540.1
FY95$
System 2
890.1
FY90$
Personnel
Costs
146.5
FY06$
Personnel
Costs
841.9
FY05$
September 27th - 28th, 2005
FY07$
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
48
Inflation and Escalation Terms
Term
Definition
Base Year
A point of reference representing a fixed price level
Constant Dollar
Money or prices expressed in terms of the
purchasing power prevailing in a specified base
year
Current Dollar
Money or prices expressed in terms of values
actually observed in the economy at any given time
Then-Year Dollar
Total budget that includes a slice of inflation to
cover escalation of expenditures over a multiyear
period
Inflation Rate
Percentage change in the price of an identical item
from one period to another
Outlay Profile
In percentage terms, the rate at which dollars in
each appropriation are expected to be expended
based on historical experience
Raw Inflation Index
A number which represents the change in prices
relative to a base year of 1.000
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
49
Normalization for Content
 Is there an “apples-to-apples” comparison?
 This is largely a problem of mapping different data sets
My WBS
Air Vehicle
Airframe
Powerplant
Communications
Navigation
ECM
Auto Flight Control
Mission Subsystem
SE/PM
Data
September 27th - 28th, 2005
Historical Data
Air Vehicle
Airframe
Propulsion
Comm / Nav
Avionics
SE
PM
Data
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
50
Curriculum
Kickoff/Introductions
Role of Cost Estimating and Analysis
Cost Estimating Process
Data Sources and Collection
Cost Estimating Techniques
– Analogies
– Parametric
Sensitivity and Cost Risk
Software Cost Estimating
Financial and Economic Analysis
References
Next Course Overview
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
51
How is Cost Estimating Done?
Three Essential Costing Techniques
Analogy: “It’s like one of these” subjectively compares the new system with
one or more existing similar systems for which there is accurate cost and
technical data.
Parametric: “This pattern holds” sometimes known as the statistical method,
this technique generates an estimate based on system performance or
design characteristics. It uses a database of elements from similar
systems. It differs from analogy in that it uses multiple systems and
makes statistical inferences about the cost estimating relationships.
Build-Up: “It’s made up of these” “bottom-up” method of cost analysis that is
the most detailed of all the techniques and the most costly to implement.
Each WBS element must be costed to build the cost estimate for the entire
program.
Expert Opinion: “The other methods are not available”
Costing Techniques rely on statistical properties, logical relationships,
emotional appeal, and they are based on historical data
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
52
Analogy Estimating Technique
 Cost Estimating Method by which we assume our new system will
behave “cost-wise” like a similar historical system
 Define the new system in terms of:
– Design or Physical Parameters
– Performance Characteristics
– Known Similar System(s)
 Tailor the WBS for the New and Historical System
 Map Historical System WBS to New System WBS so they look
similar
 Obtain Data on Historic System’s Design, Performance and Cost
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
53
Analogy – It’s like one of these
Attribute
Engine:
Thrust:
Cost:
Old System
F-100
12,000 lbs
$5.2M
New System
F-200
16,000 lbs
?
Q: What is the unit cost of the F-200?
A: $5.2M * (16,000/12,000) = $6.9M
Warning 1: An
adjusted analogy is like
a regression, but the
slope is just a guess.
Tip: The mischief in
analogy most often
arises in the
adjustment. Why do
we so readily believe a
linear relationship on
weight which passes
through the origin?
Warning 2: An adjusted analogy
is, by definition, estimating
outside the range of the data.
Source: Society of Cost Estimating and Analysis (SCEA)
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
54
How to Develop an Analogy
 Using a known item’s value, apply quantified adjustments to that
item which measure the differences when compared to the new
 This requires good actual data and someone to quantify the
differences
 Recent historical data should be similar not only in performance
characteristics, but also similar from the standpoint of
manufacturing technology
 Questions to ask when assessing the relative differences
between the old and the new item:
– How much different is the new compared to the old?
– What portion of the old is just like the new?
– How many components will be exactly the same?
– What is the ratio of complexity between the two systems?
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
55
Utility of Analogy Technique
 Many new programs consist of modified or improved versions of
existing components, combined in a new way to meet a new
need
 In the analogy technique we break the new system down into
components (usually via a WBS) that can be compared to similar
existing components
 The basis for comparison can be in terms of capabilities, size,
weight, reliability, material composition, or a less well-defined, but
often used, term, complexity
 When production and development cost estimates are needed,
the analogy technique offers several approaches
– Separate development and production estimates, each based
on data related specifically to development and production
– Production estimates based on production data, then use
historical ratio factors to estimate development costs
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
56
Parametric Approach
 Parameter in the sense of a “characteristic”
– Cost = f(physical and performance characteristics)
 Estimating relationships using explanatory variables such as weight,
power, speed, frequency, thrust are used to predict cost at a higher
level of aggregation
– Procedure consists of statistically fitting a line or function to a set
of related historical data and then substituting the appropriate
parameter of the new system into the resulting equation
 Developed from a set of sample points which realistically reflect the
typical delays, problems, mistakes, redirection, and changing
characteristics that occur during development of a new system
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
57
Examples of CERs
Building Construction
CER VARIABLES
Cost is a function of:
• Type, e.g., Sedan,
Passenger Car
Cost is a function of:
Aircraft
Cost is a function of:
September 27th - 28th, 2005
• Floor Space
• Numbers of Floors
• Schedule
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
SUV
• Doors
• Passenger Seating
• Cylinders/Horsepower
• Empty Weight
• Speed
• Useful Load
• Wing Area
• Power
• Range
• Schedule
O R G A N I Z A T I O N
58
Parametric Estimating –
This pattern holds
 A mathematical relationship between a parameter and cost (Also
called “Cost Estimating Relationship”or CER)
– Parameter may be physical, performance, operational,
programmatic, or cost
 Uses multiple systems to develop relationship
 Allows statistical inferences to be made
200
150
100
50
0
0
September 27th - 28th, 2005
200
400
600
800
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
1000
O R G A N I Z A T I O N
59
Analyze data for likely
statistical relationships
Power Output vs. Cost
$25
$ 000'S
$20
$15
$10
$5
$0
0
100
200
300
400
500
Power Output (w)
 Visual Data Analysis
– Identify underlying trends
 Scatter Diagrams provide insight
into the nature of the relationship
exhibited by the data
– Linear
– Log/Linear
– Log/Log
Power Output vs. Cost
Power Output vs. Cost
$100
$25
$ 000'S
$ 000'S
$20
$15
$10
$10
$1
$5
$0
$0
0.1
1
10
Power Output (w)
September 27th - 28th, 2005
100
1000
0.1
1
10
100
1000
Power Output (w)
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
60
How to develop a parametric CER
Define Estimating
“Hypothesis”
Collect
“Relationship”
Data
Perform Statistical
(Regression)
Analysis
Evaluate and
Normalize Data
Analyze Data
for Candidate
Relationships
Test
Relationships
Select Cost
Estimating
Relationship
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
61
Example: Max Take Off Weight vs.
Max Payload Weight
MAVW = 174.6 + 5.116 x Payload Weight
Where MAVW is Max Air Vehicle Weight
3000
2500
Predator
Chart Key
2000
 = actual data
Hunter
1500
1000
 = estimated data
R2 adj = 83%
Outrider
500
Skyeye
Pioneer
0
0
100
200
300
400
500
Max Payload Weight (lbs)
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
62
Utility of Parametric Approach
 Requires an extensive data base of historic cost and performance
data
 Assumes that historic cost relationships will continue to hold true
 Regression analysis is the fundamental tool of parametric cost
estimation
– Excellent for use early in program life cycle before a detailed
design exists
– Used as the design progresses to capture changes
 Good as a cross-check for other methods


Source: Society of Cost Estimating and Analysis (SCEA)
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
63
Engineering Build-Up Approach
It’s made up of these
 A detailed, “bottoms-up” application of labor and material
costs
 Many detailed estimates are summed together to form
the total estimate
 Used when you know detailed product information at the
lowest level
 Data intensive, time consuming
– Typically expen$ive to produce
Build-Up could also be called Engineering Build-Up, Industrial
Engineering (IE), Catalog/Handbook
Source: Society of Cost Estimating and Analysis (SCEA)
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
64
Build-Up –
Advantages/Disadvantages
 Advantages
– Easy to see exactly what the estimate includes
– Can include Time and Motion Study of actual process
– Variance Factors based on historical data for a given program or
a specific manufacturer
 Disadvantages
– Expensive and requires detailed data to be collected, maintained,
and analyzed
– Detailed specifications required and changes must be reflected
– Small errors can be magnified
– Omissions are likely
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
65
Other Cost Estimating
Methodologies
 Expert Opinion: Delphi technique
 Little, if any, analytical basis
 Extrapolation from “actuals”
– For systems that have been in production for some
time
– Accurate historical cost data exists
– Used after production has already begun in order to
estimate the cost of continued production
– Usually needed after a major change in quantity or
performance
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
66
Program Maturity Influences Cost
Estimating Techniques
Mission
Analysis
September 27th - 28th, 2005
Investment
Analysis
Implementation:
Solution
Development
In-Service
Management
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
Disposition
O R G A N I Z A T I O N
67
Curriculum
Kickoff/Introductions
Role of Cost Estimating and Analysis
Cost Estimating Process
Data Sources and Collection
Cost Estimating Techniques
Sensitivity and Cost Risk
Software Cost Estimating
Financial and Economic Analysis
References
Next Course Overview
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
68
Cost Risk: What is the Probability of
Achieving a Specified Cost Target?
Cost Risk
Technical Risk
Schedule Risk
Risk due to economic factors, rate uncertainties, cost estimating
errors, statistical uncertainty and the manifestation of
performance/schedule risks
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
69
What is Cost Risk?
 Cost risk is the probability that the estimated costs will
differ from the actual costs
– Unless each component of the estimate is known with certainty,
the point estimate represents only one of several possible
outcomes
– Cost Risk Analysis quantifies the possible outcomes and their
likelihood
 Risk-adjusted cost estimates incorporate historical
patterns based on data and expert judgment
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
70
What is Cost Risk? cont’d.
 Potential causes of cost risk include:
– Technical Challenges that Require Additional Effort to Achieve
Success
– Schedule Constraints that Result in Inefficient Resource
Consumption
– Inherent Imperfection of Cost Estimating Methods
– Changing Programmatic Requirements or Organizational
Conditions
– Schedule Risk
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
71
Why Estimate Cost Risk?
 Every program has some degree of risk and uncertainty
 Decision makers want to know about the risks in advance so
they can make risk-adjusted investment decisions
 Realistic baselines must include funding to mitigate the risks
and uncertainties (and this funding must be considered part of
program cost)
 Accounting for risks lessens the likelihood that rebaselining
will be necessary (and lessens its extent if it becomes
necessary)
From Building Realistic Baselines Through Cost-Risk Analysis, February 2002
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
72
Identify Key Cost Variables
Concurrent with identifying data sources and estimating
methodologies, identify, assess, and understand the relationships
and risk factors between the variables
Cost Drivers
Technical
Drivers
Cost Drivers:
– Labor Rates
– Material Costs
– Inflation/Discount Rates
– Economic Conditions
Schedule
Drivers
Technical Requirements:
– Stable or Fluid Design?
– Mil Std or Commercial?
– Technology: Mature or Emerging?
– Staffing: Experienced or Novice;
Available?
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
Schedule Requirements:
– Aggressive or Relaxed?
– Stable or Fluid?
– Staffing: Experienced or
Novice; Available?
O R G A N I Z A T I O N
73
Estimating Cost Risk
 The cost estimator creates a cost model that represents
cost elements as uncertainty variables with a range of
possible values
 To obtain a risk estimate, the cost estimator and subject
matter experts (SMEs) evaluate the program’s risk at the
WBS level by:
– Identifying the costs of risk mitigation activities (costs that should
be included in the risk-adjusted estimate)
– Assigning the appropriate probability distribution shape (typically
triangular) and input parameters of the uncertainty variables
– Typically, FAA cost estimators then use Crystal Ball®, a Microsoft
Excel add-in, to automate the process of estimating the effects
of risks on program cost
The FAA defines risk-adjusted estimates at the 80% confidence level
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
74
Estimating Cost Risk cont’d.
 Cost estimators typically generate a
single, “point” cost estimate
“Most
Likely”
Estimate
 Typically all programs, public- and
private-sector experience some cost
growth
Cost Estimating
The question is: how
do these
uncertainties, or
risks, affect cost?
Sources of
Risk and
Uncertainty
Schedule
September 27th - 28th, 2005
Technical/
Performance
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
75
Sensitivity Analysis
 A process for assessing how sensitive a cost estimate is
to change by varying non-cost parameters
 Tool for determining effect of changes for decisionmaking
 Addresses uncertainty of requirements more than cost
uncertainty
 Results may be used to provide a range of possible
outcomes
A good estimating practice is to
check if the estimated cost is
sensitive to variations in
assumed inputs!
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
76
Illustration: Apply Triangular
Cost Distribution
Subsystem 1
Probability
1 Standard
Deviation
0.108
0.90
Best-Case/
Minimum
Value
Mode
“Most Likely”
Value
A triangular distribution
is defined by 3 values:
minimum, maximum
and “most likely”
Median
1.03
1.0
The “most likely”
value is not
necessarily the
“point estimate”
0.108
1.15
1.1
1.28
Mean
1.40
Worst-Case/
Maximum
Value
1.08
Illustration from E. Kujawski,
“Notes on the Triangular Distribution”.
http://www.engr.sjsu.edu/kujawski/labs/triang_dist.ppt
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
77
What is Monte Carlo Analysis?
 It is a technique for combining distributions, and thereby
propagating more than just summary statistics
 It uses random number generation, rather than analytic
calculations
 It is increasingly popular due to the availability of high
speed personal computers
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
78
Why Perform Monte Carlo
Analysis?
 Combining distributions
 With more than two distributions, solving analytically is
very difficult; or in some situations, impossible
 Simple calculations lose information
– Mean  mean = mean
– 95% %ile  95%ile  95%ile!
– Gets “worse” with 3 or more distributions
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
79
Monte Carlo Analysis
 Takes an equation
– example: Risk = probability  consequence
 Instead of simple numbers, draws randomly from defined
distributions
 Multiplies the two, stores the answer
 Repeats this over and over and over…
 Then the set of results is displayed as a new, combined
distribution
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
80
Using Crystal Ball for Cost Risk
 Crystal Ball uses Monte Carlo
techniques to repeatedly
calculate program costs,
sampling values from the
probability distributions for the
uncertainty variables and
using those values for the cost
elements
 Based on collecting the results
of thousands of scenario runs,
Crystal Ball generates a
probability distribution of
predicted program costs
September 27th - 28th, 2005
“Most
Likely”
Estimate
Forecast: Then Year Total
5,000 Trials
FrequencyChart
0 Outliers
. 025
125
. 019
93.75
. 013
62.5
. 006
31.25
. 000
0
$850. 0
$987. 5
$1,125. 0
$1,262. 5
$1,400. 0
Cert ainty is 80. 00% f rom -I nfinit y t o $1, 196. 9 Dollars in M illions
The FAA typically budgets to the
predicted cost that will not be
exceeded 80 percent of the time
(the “risk-adjusted” value)
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
81
Cost Risk: What is the Probability of
Achieving a Specified Cost Target?
70%
60%
50%
Technical Risk
Schedule Risk
40%
30%
20%
10%
30
60
90
100
120
150
180
Stealth Bomber Cost $B
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
82
Curriculum
Kickoff/Introductions
Role of Cost Estimating and Analysis
Cost Estimating Process
Data Sources and Collection
Cost Estimating Techniques
Sensitivity and Cost Risk
Software Cost Estimating
–Definition and Life Cycle
–Inherent difficulties
–Software Growth
–Software Development
–Software Maintenance
–Data Sources and collection lessons
–Commercial models
Financial and Economic Analysis
References
Next Course Overview
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
83
What is Software?
 Software usually refers to a set of advanced computer
modules that allow the user to plan efficient surveys,
organize and acquire satellite navigation data, verify and
download data, process and analyze measurements,
perform network adjustments, and report and archive the
final results
 The program or instructions that tell the computer what
to do
 A generic term for computer programs, including
systems programs which operate the computer itself,
and applications programs which control the particular
task at hand
 The entire set of programs, procedures, and related
documentation associated with a computer system
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
84
Software Life Cycle Phases
and WBS
Software WBS
Requirements Definition
Software Development
– Interface
Definition
– Requirements
Analysis
– Requirement
Specification
– Architecture
Development
– Op Concept
Development
– Design, Code,
and Unit Test
Software
– Algorithm
Development
September 27th - 28th, 2005
System Test
– Test Planning
– Test Development
– Integration and
Testing
– Acceptance Testing
Software Management
– Project
Management
– Supplier
Management
– Personnel
Management
– Team Building
– Integration and
Testing
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
Software Support
– CM
– QA
– Software
Environment
Readiness
– Test Benches
– Security and
Net. Admin.
O R G A N I Z A T I O N
85
Software Development
Cost Estimating Process
Estimate Project Size
– Source Lines of Code
(SLOC)
– Function Points (FP)
Develop Productivity
Measures
Estimate Schedule
– In person - months
– SLOC/time
– FP/time
Labor
Rates
Estimate Costs
– Total
– Time-phased
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
86
Measuring Software Size
 Key software measurement: Size
– How big is the software application or system being
evaluated?
 Current sizing methods
– Source lines of code (SLOC)
• Oldest and most widely used
• Large programs sized in KSLOC (thousands)
– Function points
• Established in late 1970s
• Estimates size based on user-defined functionality
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
87
Software Cost-Estimating
Concerns
 Hardware Cost-Estimating Philosophy is not
Applicable to Software
– Software Development Tasks Are All Nonrecurring
Development
• All Research and Testing, No Production
– Software Cost Is Uniquely Personnel-intensive: Even
Within Same Company or Workgroup, Productivity
May Vary As Much As 100 to 1 Among Programmers
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
88
Software Cost-Estimating Concerns
cont’d.
 Software Requirements Cannot Be Fully Captured in Any
Finite List: True List of Requirements Is Virtually Infinite
 Software Engineers’ High Self-esteem or Traditional
Optimism Underestimates How Much Code Is Needed
 Initial Delivered Code Often Performs Inadequately and
Fundamental Modification Costs Are Prohibitive
 Hardware Deficiencies That Cannot Be Fixed During
Later Stages of Project Are Circumvented by Re-tasking
Software
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
89
Software Cost-Risk Experience
 Cost Histories of Software-Development Projects Show
a Definite Trend Toward Significant Underestimation of
Number of Lines of Code and Cost
– Aerospace Corp. Study Found Lines-of-Code Growth of about
150% for Space-Related Ground-System Software Projects
– Naval Center for Cost Analysis Found Average Lines-of-Code
Growth of 63% for Software Projects of Various Types
(http://www.ncca.navy.mil/software/handbook/software.htm)
 Developer Productivity, Measured in Lines of Code per
Developer-Month, is Typically Overestimated
– This Results in Cost Growth, Even if Lines-of-Code Estimate is
Accurate
– Data Collected Over Time Appear to Show Some Productivity
Improvement, but not Enough to Overcome Estimating Optimism
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
90
Worst-Case for Software Costs
 It’s 8 (times the Contractor Estimate)
– Number of Lines of Code Grows by Factor of 2.5
– Contractors Usually Assume Programmer Productivity to Be 300 Lines
per Developer-Month
– Unfortunately, History Shows That Productivity Inevitably Slips to 85
Lines per Developer-Month as Project Moves Forward, which is
Equivalent to Cost-growth Factor of 300/85 = 3.5
– 2.5 × 3.5 = 8.75
 Worst-Case Multiple is Applied to WBS Elements that
Require Estimation of Software Costs
– Cost Distribution Will Be Right-triangular
– L = M, but H = 8M
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
91
USAF Space-Related Ground-System
Software Development Costs
 Definitions
– High Complexity: Majority of Package Involves Operating System
Software, Interactive Operations, Real-Time Command and Control,
and Tight Timing Constraints
– Low Complexity: Majority of Package Involves Data Storage and
Retrieval, String Manipulation, Mathematical Computations, Routine
Diagnostics
 Mission Operations Software Costs (FY02$)
– High Complexity: $314 per Line of Code  $108 one sigma
– Neither High nor Low: $254 per Line of Code  $81 one sigma Low
Complexity: $201 per Line of Code  $55 one sigma
 Mission Support Software Costs (FY02$)
– High Complexity: $281 per Line of Code  $81one sigma
– Neither High nor Low: $227 per Line of Code  $55 one sigma Low
Complexity: $141 per Line of Code  $27 one sigma
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
92
Post-Development Software Costs
 Software Maintenance Costs
– Generally Maintenance is Assumed to be Required
over a 10-Year Life Cycle
– Maintenance Budget is Typically Set at 100% to 150%
of Software Development Cost
– Annual Budget for Software Maintenance Ranges
from 10% of Development Cost to 15% of
Development Cost
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
93
Curriculum
Kickoff/Introductions
Role of Cost Estimating and Analysis
Cost Estimating Process
Data Sources and Collection
Cost Estimating Techniques
Sensitivity and Cost Risk
Software Cost Estimating
Financial and Economic Analysis
References
Next Course Overview
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
94
Economic Analysis
Examples
Manned vs. Unmanned System
New vs. Upgraded system
Fix or Repair Car
Buy or Rent House
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
95
Structure of Economic Analysis
Economic Analysis--A systematic approach to the problem of
resource allocation, comparing two or more alternatives in
terms of cost and benefits.
–
–
–
–
–
–
Objectives of the action being considered
Specification of assumptions / constraints
Identification of alternatives
Listing of benefits for all feasible alternatives
Cost estimates for each feasible alternative
A ranking of alternatives in terms of costs
and benefits
– Risk / uncertainty analysis
– Conclusions / recommendations
Structure of
an Economic
Analysis
Economic analysis examines and compares the benefits, costs, and uncertainties of
each alternative determine the most cost effective means of meeting the objective
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
96
Business Case Analysis Process
Return On Investment (ROI)
Life Cycle Cost
Facilities &
Equipment
Development
Mission Benefits
Quantifiable Returns,
in Cost or Financial
terms
Quantifiable Returns,
in terms other than
Cost or Financial
Non-Quantifiable
Returns
Production
Maintenance
& Support
Operations &
ROI Metrics
•
•
•
September 27th - 28th, 2005
Return on Investment Analysis
Break-Even Analysis
Internal Rate of Return
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
97
Definition of the Objective
 Should clearly define and quantify the function to be
accomplished
 Must be as objective as possible
– Should not assume a specific means of achieving the desired
result
– Must be worded to reflect a totally unbiased point of view
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
98
Assumptions and Constraints
 Assumptions: Explicit statements used to describe the present and
future environment upon which the economic analysis is based
 Required Assumptions:
(1) Economic life
– the period of time over which benefits from an alternative are
expected to accrue. Usually constrained by physical, mission or
technological life
(2) Period of Comparison (period of analysis)
– begins when money is spent on the first alternative requiring
expenditure of funds and ends when the alternative with the longest
economic life ceases to produce benefits
– There is one period of comparison for an economic analysis
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
99
Limits on Economic Life
 Physical life
– The estimated number of years that an asset can physically be
used
 Mission life
– The estimated number of years over which the need for the asset
is anticipated
 Technological life
– The estimated number of years a facility, piece of equipment, or
automated information system will be used before it becomes
obsolete due to changes in technology
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
100
Constraints
 External factors that limit alternatives to problem solutions
– Physical
• a fixed amount of space
– Time-Related
• a fixed deadline
– Financial
• a limited amount of resources
– Institutional
• policy or regulation
 Conditions that are beyond the control of the decision maker
that limit the number of available alternatives
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
101
List of Alternatives
 All reasonable ways of satisfying the objective should be
documented and discussed
 At a minimum, each of the following alternatives must be considered:
– Status quo
• the existing way of meeting the objective must be included even if it’s
considered to be infeasible
– Modification of existing assets
• renovation, conversion, upgrade, expansion, or other forms of improvement
of existing assets or services
– Leasing or privatization
– New acquisition
 Alternatives dismissed as infeasible must be discussed, but need not
be formally compared in the analysis
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
102
Analysis of Benefits
 Benefits = outputs expected for the costs incurred
– Synonymous with results, effectiveness, or performance
 Should present the decision maker with an objective,
orderly, comprehensive, and meaningful display of the
benefits expected for each alternative
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
103
Analysis of Costs
 Includes identification and evaluation of all anticipated
expenditures associated with each alternative over its
entire life cycle
– Encompasses costs of research and development, investments
in procurement & facilities, operating and support, and disposal
– Magnitude and timing of expenditures are equally important
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
104
Comparison of Alternatives
 Four conditions are possible:
(1) Both benefits and costs are equal
– A subjective choice may be made
(2) Benefits are equal and costs are unequal
– Recommend the least cost alternative
(3) Benefits are unequal and costs are equal
– Recommend the alternative with greater benefits
(4) Both benefits and costs are unequal
– The most common outcome and the most difficult to analyze
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
105
Comparison of Alternatives cont’d.
 Benefits and costs are unequal
– Rank order the alternatives in terms of benefits and
also in terms of costs
• Recommend an alternative based on the relative importance
of benefits and costs
– Compare benefit-to-cost ratios
• Divide the quantifiable benefits by the uniform annual cost
• Provides a measure of efficiency of resource utilization
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
106
Sensitivity and Risk Analyses
 Uncertainty is always present in economic decision
making because of the assumptions required in
conducting the analysis and estimating benefits and
costs
 It is important to analyze whether changes in
assumptions, quantitative values, or priorities will affect
the recommendation
 A range of expected benefits and costs will provide more
information of which to base a decision than the basic
analysis alone
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
107
Benefits Analysis
 Presents the decision maker with an objective, orderly,
comprehensive, and meaningful display of the benefits
expected for each alternative
 Benefits:
– “Outputs or measures of effectiveness or performance”
 Costs and benefits must be defined so that they are
mutually exclusive
– Cost savings or avoidances, which are reductions in the
resources used, should be reflected in cost analysis
• Such savings should not be counted again as a benefit
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
108
While it’s easy to identify benefits,
it’s difficult to quantify them
•
•
•
•
•
•
•
•
•
Simplicity - Will operations be simplified or
made more complex?
Speed - Will you be able to respond more
quickly to requests?
Redundancy - Will the investment reduce
redundant tasks?
Accuracy - Does the investment improve
error rates or accuracy of information?
Reliability - Will the investment increase
the reliability of the processes?
Adaptability - Is the investment adapting
to recognized standards?
Retirement - Is the investment replacing
existing systems?
Morale - Will the investment improve the
working environment?
Management Effectiveness - Will the
investment improve the ability to manage
decisions?
September 27th - 28th, 2005
•
•
•
•
•
•
•
•
•
Production - Will capacity increase and can
more be done with less?
Quality - Will a better product or service be
produced?
Versatility - Will the scope and ability of the
staff increase because of the investment?
Flexibility - Will the staff be able to respond
to a greater number and variety of requests?
Facilities - Can facility space be reduced or
eliminated?
Security - Will security and the ability to
protect information increase?
Consistency - Will the quality of the service
or product become more consistent?
Administrative Actions -Will the amount of
administrative work increase or decrease?
Materials and Supplies - Will the amount of
materials and supplies decrease?
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
109
Cost Analysis
 Begins with the life cycle cost estimate for each alternative
– Encompasses R&D, investments in procurement & facilities, operating
and support, and disposal
• Analogy, industrial engineering, parametric
 Sunk costs may be mentioned in the narrative but are not included in
the economic analysis
– Only costs influenced by the decision maker are included
 Residual value: “the value of an asset at any given point in time”
– Counted as an offset only if money is expected to change hands,
representing a positive cash flow for the investment
• Salvage Value: the expected value of an asset at the end of its useful life
• Terminal Value: the estimated value of an asset at a point in time
subsequent to its initial fielding
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
110
Special Considerations
 Phase-out costs: “costs that must be incurred for parallel
operations of the status quo while the development or
modification is taking place”
– must be added to the life cycle cost for the new system
 Inflation is an important consideration
– Analyses normally done using constant (un-inflated) dollars of a
particular base year
– Can also be done using current (inflated) dollars by applying
compound inflation indices
• Constant dollars are preferable to current dollars
• Do not use then-year dollars
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
111
Special Considerations cont’d.
 The time value of money (discounting) must also be
considered
– Time phasing of expenditures is important
• when money must be paid out, it is preferable to pay it at some
future date rather than now because of the opportunity to earn
interest on money held
– Costs should be allocated according to the fiscal year in which
payment will be made
To compare the value of a dollar in the future to the value of
a dollar held now, an adjustment to a common point in time
must be made using a technique called discounting
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
112
Special Considerations cont’d.
 By discounting, present values of future cash
streams can be calculated to facilitate valid
comparisons
– The discount rate is the interest rate used to
determine the present value of a future cash stream
• Represents the opportunity cost of making the investment
– The government’s cost of borrowing is the basis for
discount rates used in conducting economic analysis
within DoD
• Discount rate used represents the average interest rate on
Treasury securities of maturity similar to the expected project
length
• Must be compliant with OMB- Circular A94
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
113
Inflation vs. Discounting
 Inflation and time value of money are two different effects
– Two different reasons why a dollar today is worth more than a dollar to
be received in the future
• Inflation causes a loss of purchasing power due to a general rise in prices
• A dollar held today can be invested; interest earned makes it more valuable
than a dollar received in the future
 Effects of inflation are already removed when performing constant
dollars analysis
– Constant dollars must still be discounted to obtain their present value
 Effects of inflation and discounting must be accounted for when
performing current dollar analysis
– Current dollars must be deflated and discounted to derive the present
value of future cash flows
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
114
Compound Interest or Future Value
 Value of a sum after
investing it over one or
more periods
Known as compounding
 For example, $ 200
invested now at 20%
compound interest for 4
years would yield:
n
=
+
1
FVn P* ( i )
0
1
2
3
4
20%
200
414.72
F4 = $200( 1 + 0.20 )^4 = $415
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
115
Discounting or Present Value
 The value of future cash flows
discounted at the appropriate
discount rate
 Opposite of compounding
 For example, $ 414.72,
available 4 years from now,
when the prevailing discount
rate is 20%, has a present (or
“discounted”) value of $200
n
PVn = P/ ( 1 + i )
0
1
2
3
4
20%
200
414.72
PV4 = $414.72/(1 + 0.20 )^4 = $200
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
116
Compounding and Discounting Tables
FV
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
3.0%
1.0300
1.0609
1.0927
1.1255
1.1593
1.1941
1.2299
1.2668
1.3048
1.3439
1.3842
1.4258
1.4685
1.5126
1.5580
1.6047
1.6528
1.7024
1.7535
1.8061
4.0%
1.0400
1.0816
1.1249
1.1699
1.2167
1.2653
1.3159
1.3686
1.4233
1.4802
1.5395
1.6010
1.6651
1.7317
1.8009
1.8730
1.9479
2.0258
2.1068
2.1911
5.0%
1.0500
1.1025
1.1576
1.2155
1.2763
1.3401
1.4071
1.4775
1.5513
1.6289
1.7103
1.7959
1.8856
1.9799
2.0789
2.1829
2.2920
2.4066
2.5270
2.6533
6.0%
1.0600
1.1236
1.1910
1.2625
1.3382
1.4185
1.5036
1.5938
1.6895
1.7908
1.8983
2.0122
2.1329
2.2609
2.3966
2.5404
2.6928
2.8543
3.0256
3.2071
7.0%
1.0700
1.1449
1.2250
1.3108
1.4026
1.5007
1.6058
1.7182
1.8385
1.9672
2.1049
2.2522
2.4098
2.5785
2.7590
2.9522
3.1588
3.3799
3.6165
3.8697
8.0%
1.0800
1.1664
1.2597
1.3605
1.4693
1.5869
1.7138
1.8509
1.9990
2.1589
2.3316
2.5182
2.7196
2.9372
3.1722
3.4259
3.7000
3.9960
4.3157
4.6610
9.0%
1.0900
1.1881
1.2950
1.4116
1.5386
1.6771
1.8280
1.9926
2.1719
2.3674
2.5804
2.8127
3.0658
3.3417
3.6425
3.9703
4.3276
4.7171
5.1417
5.6044
10.0%
1.1000
1.2100
1.3310
1.4641
1.6105
1.7716
1.9487
2.1436
2.3579
2.5937
2.8531
3.1384
3.4523
3.7975
4.1772
4.5950
5.0545
5.5599
6.1159
6.7275
11.0%
1.1100
1.2321
1.3676
1.5181
1.6851
1.8704
2.0762
2.3045
2.5580
2.8394
3.1518
3.4985
3.8833
4.3104
4.7846
5.3109
5.8951
6.5436
7.2633
8.0623
12.0%
1.1200
1.2544
1.4049
1.5735
1.7623
1.9738
2.2107
2.4760
2.7731
3.1058
3.4785
3.8960
4.3635
4.8871
5.4736
6.1304
6.8660
7.6900
8.6128
9.6463
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
3.0%
0.9709
0.9426
0.9151
0.8885
0.8626
0.8375
0.8131
0.7894
0.7664
0.7441
0.7224
0.7014
0.6810
0.6611
0.6419
0.6232
0.6050
0.5874
0.5703
4.0%
0.9615
0.9246
0.8890
0.8548
0.8219
0.7903
0.7599
0.7307
0.7026
0.6756
0.6496
0.6246
0.6006
0.5775
0.5553
0.5339
0.5134
0.4936
0.4746
5.0%
0.9524
0.9070
0.8638
0.8227
0.7835
0.7462
0.7107
0.6768
0.6446
0.6139
0.5847
0.5568
0.5303
0.5051
0.4810
0.4581
0.4363
0.4155
0.3957
6.0%
0.9434
0.8900
0.8396
0.7921
0.7473
0.7050
0.6651
0.6274
0.5919
0.5584
0.5268
0.4970
0.4688
0.4423
0.4173
0.3936
0.3714
0.3503
0.3305
7.0%
0.9346
0.8734
0.8163
0.7629
0.7130
0.6663
0.6227
0.5820
0.5439
0.5083
0.4751
0.4440
0.4150
0.3878
0.3624
0.3387
0.3166
0.2959
0.2765
8.0%
0.9259
0.8573
0.7938
0.7350
0.6806
0.6302
0.5835
0.5403
0.5002
0.4632
0.4289
0.3971
0.3677
0.3405
0.3152
0.2919
0.2703
0.2502
0.2317
9.0%
0.9174
0.8417
0.7722
0.7084
0.6499
0.5963
0.5470
0.5019
0.4604
0.4224
0.3875
0.3555
0.3262
0.2992
0.2745
0.2519
0.2311
0.2120
0.1945
10.0%
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
0.5132
0.4665
0.4241
0.3855
0.3505
0.3186
0.2897
0.2633
0.2394
0.2176
0.1978
0.1799
0.1635
11.0%
0.9009
0.8116
0.7312
0.6587
0.5935
0.5346
0.4817
0.4339
0.3909
0.3522
0.3173
0.2858
0.2575
0.2320
0.2090
0.1883
0.1696
0.1528
0.1377
12.0%
0.8929
0.7972
0.7118
0.6355
0.5674
0.5066
0.4523
0.4039
0.3606
0.3220
0.2875
0.2567
0.2292
0.2046
0.1827
0.1631
0.1456
0.1300
0.1161
PV
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
117
Financial Measures and Calculations
 Payback Period
– The simplest way of looking at major project ideas, this
method shows how long it will take to earn back money
spent on the project
 Net Present Value (NPV)
– Measures Annual Net Cash Flows - Beginning Investment
in “today's dollars”
– Requires a discount factor or a cost of capital
– If NPV > 0 then the project should be considered
n
NPV =
September 27th - 28th, 2005
CF t
 (1  k )
t 0
t
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
118
Curriculum
Kickoff/Introductions
Role of Cost Estimating and Analysis
Cost Estimating Process
Data Sources and Collection
Cost Estimating Techniques
Sensitivity and Cost Risk
Software Cost Estimating
Financial and Economic Analysis
References
Next Course Overview
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
119
For Further Information

FAA Standards and Guidance Websites
– http://fast.faa.gov/ams/non_index/investab.htm
– http://www1.faa.gov/asd/ia-or/ia-resources.htm#standards-guidelines
•
•
•
•
•

Cost Basis of Estimate (BOE)
Life Cycle Cost Estimating Handbook
Cost Work Breakdown Structure (WBS)
Cost Factors Handbook
Cost Analysis Methodology
FAA Cost Resources
Send comments,
corrections or questions
on this section to
infoshaman@runbox.com
– ASD-410 (Cost Analysis Branch): Katrina Hall
(202) 385-7282, mail to: katrina.halll@faa.gov
– AFZ-400 (AF HQ Financial Management Division): Cynthia Beck
(202) 267-3588, mail to: cynthia.beck@faa.gov
– Lifecycle Phases and Decisions - Investment Analysis

Professional Estimator Organizations
– International Society of Parametric Analysis (ISPA, http://ispa-cost.org)
– Society for Cost Estimating and Analysis (SCEA, http://www.sceaonline.net/)
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
120
For Further Information cont’d.
 Society of Cost Estimating and Analysis
(http://www.sceaonline.net/)
 Naval Postgraduate School library Cost Estimation & Analysis
http://library.nps.navy.mil/home/CostEstimation.htm
 NASA Johnson Space center
(http://www1.jsc.nasa.gov/bu2/inflation/nasa/inflateNASA.html)
 US Army Corps of Engineers, Directorate of Civil Works
(http://www.hq.usace.army.mil/cemp/e/ec/PAX/paxtoc.htm)
 http://fast.faa.gov/ams/non_index/investab.htm
 FAA CE_factors.pdf
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
121
Curriculum
Kickoff/Introductions
Role of Cost Estimating and Analysis
Cost Estimating Process
Data Sources and Collection
Cost Estimating Techniques
Financial and Economic Analysis
Sensitivity and Cost Risk
Software Cost Estimating
References
Next Course Overview
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
122
Next Course Overview
 The ATO-F Cost Estimating Training Team are
conducting several initiatives
– “Gap” Analysis to determine where the cost estimating
knowledge deficiencies are in our in-house skill set
– Determine and develop training needed to close the “gap”
 Future courses will focus on:
–
–
–
–
Operations and Maintenance (O&M) Cost Estimating
Intermediate Cost Estimating Course
Cost Risk Course with Crystal Ball Exercises
Others as determined
 Submit course suggestions on your evaluation form
September 27th - 28th, 2005
FE D E R A L A V I A T I O N A D M I N I S T R A T I O N • A I R T R A F F I C
O R G A N I Z A T I O N
123