AMERICA’S ARMY: THE STRENGTH OF THE NATION
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Cost-Benefit Analysis (CBA)
Four-Day Training Briefing
Day 1
CBA Introduction and Overview
25 June 2012
Visit our CBA Website for more information regarding locations,
signing up, upcoming training sessions, and more
https://cpp.army.mil
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Welcome
• The Army's senior leaders are committed in making
resource-informed decisions by means of CBAs
• Army leaders have identified cost culture as one of the
highest priorities in adapting to an increasingly
resource-constrained environment.
Mr. Stephen G. Barth
Deputy Assistant Secretary of the Army
(Cost & Economics)
AUSA National Meeting
October 2010
2
Class Participation Guidelines
CBA Four-Day TRAINING SLIDES
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Participants are expected to:
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Attend all four days of training
Be punctual for each session
Participate in discussions
Relate his or her own experiences
Ask questions
Listen to others
Avoid disrupting the class (i.e., side conversations)
Refrain from using wireless devices during class:
– Turn cell phones to either “off,” “silent,” or “vibrate”
– Unless an emergency, do not use cell phones

Please, wait until the break
3
Evaluation
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Each student will be assigned a final grade based
on:
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Attendance
Participation in mini-case exercises
Performance on CBA Capstone Case Study
Performance on final exam: writing a 2-hour CBA*
* Individuals with an average grade (attendance, mini-case
exercises, CBA Capstone Case Study) in the top 25% of
the class will be waived from the final exam and may
leave a day early.
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Final Exam and Grading Procedures
• Given a case study, individually perform and
write a CBA (2 hours).
• The final product will be evaluated one-on-one
by an instructor, and assigned a grade of A (“We
think you’ve got it”), B (“Pass, but study more”),
or C (“Not yet mastered CBA methodology”).
• Grade will determine access to class materials
on AKO.
• Not grading for grading’s sake, but a chance for
free one-on-one hands-on evaluation.
5
Four-Day CBA Training Objectives
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Objectives:
• Provide an overview of the Army’s CBA policies,
regulations, methodology, and roles
• Discuss CBA workflow automation tools
• Offer additional tools to develop quality CBAs, such as:
– Analytical and graphical tools and techniques
– Cost analysis methodologies, databases, and models
– Financial and operational benefits analyses
• Review case studies and conduct exercises to illustrate
the application of these tools and methodology
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CBA Four-Day TRAINING SLIDES
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Purpose of the Class
• The aim of the class is NOT to give an
introduction to Cost-Benefit Analysis. A fourhour class exists for that purpose, as well as a
CBA Guide.
• The purpose of this course is to provide rigorous,
analytical instruction, opportunities for handson application in performing Cost-Benefit
Analyses, and one-on-one evaluation of work
produced.
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Four-Day CBA Training Schedule
Monday
UNCLASSIFIED
CBA Introduction and
Overview
Step 1:
Problem/Opportunity
and Objective
Step 2: Define CBA
Boundaries and
Parameters
Tuesday
Step 3: Define Alternatives
CBA Four-Day TRAINING SLIDES
Capstone Groups
Assigned
Step 6: Alternative
Selection Criteria
Step 4: Develop Cost
Estimates for Each
Alternative
Step 7: Compare
Alternatives
Mini-case # 4
Step 8: Report Results and
Recommendations
Step 5: Benefits
Mini-case #5, 6
Mini-case #1, 2, 3
Wednesday
Thursday
Capstone Case Study
Presentation and Review
Mini-case Exercises: #7, 8,
9, 10
Capstone Case Study
Groups Meet
8
Day 1 Agenda
1200 – 1330: “CBA Introduction and Overview”
1340 – 1425: “Step 1: Problem/Opportunity and Objective”
1435 – 1520: “Step 2: Define CBA Boundaries and Parameters”
1530 – 1700: Mini-case exercises #1, 2, 3
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Key Learning Objectives
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The goal is to understand:
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What a CBA is
Guidance from senior leaders
Value of a CBA
Responsibilities of key players
Role of CBA in HQDA-level decision-making process
Process of CBA (high-level perspective)
Structure of a CBA
Pre-CBA Considerations
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A Note About Perspective
Although this course draws largely on
policies and activities at Headquarters,
Department of the Army, the content
and guidance are readily transferrable
to subordinate command and
installation level.
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POLICY GUIDANCE
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CBA Policies: OSD and the Army
Department of Army Directive
(Jan 07, 2011)
(Dec 30, 2009)
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The Secretary of Defense Directive
(Dec 27, 2010)
(Aug 16, 2010)
• “every new proposal
or initiative will come
with a cost estimate”
• “effective 1 Feb
2011, calculate costs
associated with
[studies & events]”
• “Require a cost estimate
for all program and policy
proposals”
• “use Cost-Benefit
Analysis (CBA) or
similar analytical
approaches/tools to
support resourceinformed decision
making”
• “each unfunded
requirement and new or
expanded program…be
accompanied by a
thorough cost-benefit
analysis”
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Impact of the Army Directive
• USA/VCSA memo was sent to
HQDA principal officials (see
back-up section for complete list
of addressees)
• As expected, the requirement is
“trickling down.”
– HQDA officials are requesting
CBAs from the field
– Subordinate commands are
requiring CBAs internally
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Army Leadership Expectations
Leadership Expectations:
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• Ensure the CBA results and efficiencies comply with Department of
Defense, Department of the Army, and congressional directives
• Allocate limited funding to achieve Army’s strategic priorities
efficiently
• Collaborate with stakeholders to develop effective and efficient
solutions
• Use CBA to:
– Make resource-informed decisions
– Deliver strong value proposition for the Army
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CBA DEFINITION
AND DESCRIPTION
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What is a CBA?
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Cost-Benefit Analysis:
• Is a structured methodology used to identify alternative solutions
to a problem, determine the costs and benefits of each
alternative, define the appropriate decision criteria, and select
the best alternative.
• Produces a strong value proposition – a clear statement that the
benefits outweigh the costs and risks.
• In English:
1.
2.
3.
4.
Define a problem or opportunity
Identify alternatives
Determine their costs and benefits
Evaluate and select the best alternative
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CBA and the “Cost Culture”
CBA is part of a high-priority initiative to inculcate
a cost culture throughout the Army.
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• In any organization, “culture” is the beliefs and principles that guide the
behavior of the people in that organization.
– For example: The Army’s military culture is based on mission accomplishment, selfless
service, valor, and dedication. These concepts establish the foundation for how Soldiers and
Civilians go about their duties.
• In a cost culture:
– Cost is an integral part of every decision
– Soldiers and Civilians strive to find better and cost effective ways to operate the Army
enterprise
– Leaders at all levels engage in cost control and management activities, which are supported
by talented cost staffs
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VALUE OF CBA
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Why Do We Need CBAs?
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Purpose:
• Supplement (but not replace) professional experience, subject
matter expertise, and military judgment with rigorous analytical
techniques
• Make best possible use of constrained resources
• When making resource decisions:
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Ensure that all decisions are resource-informed
Treat cost a consideration from the outset, not as an afterthought
Understand how much benefit will be derived
Identify billpayers
Consider second- and third-order effects
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REQUIREMENT FOR HQDALEVEL REVIEW
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CBAs Requiring HQDA Review
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UNCLASSIFIED
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CBA Four-Day TRAINING SLIDES
Unfunded requirements, new program proposals, or expansions
being presented to the Senior Leaders of the Department of the
Army.
Issues presented to HQDA forums/processes:
POM/BES
Army Campaign Plan (ACP)
Army Requirements and Resourcing
Board (AR2B)
Force Design Update (FDU)
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Army Requirements Oversight
Council (AROC)
Training Resources Arbitration Panel
(TRAP)
… and more to follow
Issues that are important to the Army leadership, OSD, or
Congress
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CBA Four-Day TRAINING SLIDES
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CBARB
• The Cost-Benefit Analysis Review Board, or
CBARB, reviews each CBA submitted to HQDA
and makes a recommendation to the Deputy
Assistant Secretary of the Army (Cost and
Economics) as to whether the CBA is suitable to
support decision making.
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CBA-RB Role for CBAs Submitted to HQDA
CBA is submitted
UNCLASSIFIED
•
CBA-RB reviews CBA:
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Cost estimate
Analytical rigor
Assumptions
Methodology and logic
DASA-CE decision, based on CBARB
recommendation:
–
CBA Four-Day TRAINING SLIDES
CBA-RB reviews CBA
and makes
recommendation
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Is the CBA suitable or adequate to support
decision making?
DASA-CE approval is not approval of the
recommendation in the CBA
DASA-CE approves
CBA
•
Decision Maker uses
CBA to make
resource-informed
decision
CBA-RB members:
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Board chair - Division Chief
Standing members:
 Army Budget Office (ABO)
 PAED
 G-3/5/7
Other members, as needed based on the subject
matter:
 Appropriate DASA(CE) divisions
 PEG representatives (as determined by
PAED)
 ABO appropriation sponsors
 HQDA functional proponents
 Manpower specialist from G-1
 Other functional proponent(s)
Commands and installations are encouraged to establish similar
teams to review and validate CBAs
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Questions for Reviewers
CBARB will determine whether the CBA is technically and functionally sound
Problem Statement, Assumptions, and Constraints
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Is the Problem Statement clear, and does it accurately identify the issue?
Are the assumptions clearly stated and realistic?
Are all relevant constraints identified?
Is the Problem Statement, assumptions, or constraints structured in a manner that is clearly intended to
favor one alternative?
Alternatives Development
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Is each of the alternatives feasible?
Are the alternatives distinctly different?
Are there obvious alternative that are not presented?
Does the CBA adequately identify (with supporting
documentation) the costs and benefits of each alternative?
Accuracy
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Is the CBA technically correct
(math, formulas, models, data
sources, etc.)?
Is the CBA functionally correct
(facts, not opinions)?
Analysis and Conclusions
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Are the decision criteria clearly identified?
Does the CBA use appropriate analytical techniques for the situation?
Is the recommended alternative compatible with the assumptions and constraints?
Does the analysis clearly explain how the recommended alterative is better than the others at satisfying
the decision criteria?
Does the recommended alternative satisfy the Problem Statement?
Have the risks been adequately expressed in the analysis and recommendation?
Does the decision briefing (or other final product) support the recommended alternative?
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CBA Four-Day TRAINING SLIDES
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METHODOLOGY OVERVIEW
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Surprisingly Simple
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CBA is easy to do!
It’s not rocket science.
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Eight-Step Methodology
1. Define Problem/Opportunity and Objective
2. Define CBA Boundaries and Parameters
UNCLASSIFIED
3. Define Alternatives
4. Develop Cost Estimate for each Alternative
CBA Four-Day TRAINING SLIDES
5. Identify Quantifiable and Non-Quantifiable Benefits
6. Define Alternative Selection Criteria
7. Compare Alternatives
8. Report Results and Recommendations
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UNCLASSIFIED
Cost Benefit Analysis and the MDMP
CBA Methodology
Military Decision-Making
Process (MDMP) *
1. Define Problem/Opportunity and Objective
Receive Mission
2. Define Scope; Formulate Facts and
Assumptions
Analyze Restated Mission (includes
assumptions and constraints)
3. Define Alternatives
Develop Alternatives
4. Develop Cost Estimate for each Alternative
CBA Four-Day TRAINING SLIDES
Analyze Alternatives
5. Identify Quantifiable and Non-Quantifiable
Benefits
Compare Alternatives
6. Define Alternative
Selection Criteria
Approve Alternatives
7. Compare Alternatives
8. Report Results and Recommendations
Issue Implementing Orders
* As prescribed in FM 5-0.
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CBA is Not a Linear Process
Objective
Recommendation
Assumptions
Sensitivity Analysis
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Alternatives
Compare
Alternatives
Selection
Criteria


Benefits
Estimate
Cost
Estimates
At any step in the process, the team’s findings and analysis might make
it necessary to revisit previous steps.
Significant findings might require asking the decision maker for revised
guidance.
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Step 1: Define the Problem/Opportunity
and Objective
1. Define the Problem/Opportunity and
Objective
2. Define CBA Boundaries and Parameters
Before beginning, determine
whether the proposal is realistic
and will be seriously considered.
UNCLASSIFIED
3. Define Alternatives
4. Develop Cost Estimate for each Alternative
5. Identify Quantifiable and
Non- Quantifiable Benefits
CBA Four-Day TRAINING SLIDES
6. Define Alternative
Selection Criteria
7. Compare Alternatives
8. Report Results and Recommendations
• The Problem Statement clearly defines the
problem/opportunity that:
– Requires a solution
– Describes what the effort will accomplish
• The objective of the analysis:
– Describes the role of the CBA: what is the decision to
be made, and how does the CBA inform and
support it.
31
Step 2: Define CBA Boundaries and Parameters
1. Define the Problem/Opportunity and
Objective
2. Define CBA Boundaries and Parameters
UNCLASSIFIED
3. Define Alternatives
4. Develop Cost Estimate for each Alternative
5. Identify Quantifiable and
Non- Quantifiable Benefits
CBA Four-Day TRAINING SLIDES
6. Define Alternative
Selection Criteria
7. Compare Alternatives
The Boundaries and Parameters of a CBA are the
specifications that make an analysis feasible and
practicable. They are expressed by Scope, Facts, and
Assumptions.
• Scope: Defines the range of coverage encompassed by
an initiative or proposal along specific dimensions like
time, location, and organization.
• Fact: A verifiable statement that is real and something
that has happened or is happening.
• Assumption: A condition or situation over which we
have no control but is essential to the success of our
proposed solution.
8. Report Results and Recommendations
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Step 3: Define Alternatives
1. Define the Problem/Opportunity and
Objective
2.Define CBA Boundaries and Parameters
UNCLASSIFIED
3. Define Alternatives
4. Develop Cost Estimate for each Alternative
• Alternatives:
– Potential solutions to the Problem
Statement, given Scope, Facts, Assumptions,
and Constraints.
– They must include the status quo or current
state, if applicable.
5. Identify Quantifiable and
Non- Quantifiable Benefits
CBA Four-Day TRAINING SLIDES
6. Define Alternative
Selection Criteria
7. Compare Alternatives
8. Report Results and Recommendations
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Step 4: Develop Cost Estimate for Each Alternative
1. Define the Problem/Opportunity and
Objective
Cost Estimates:
2. Define the Scope; Formulate Facts and
Assumptions
• Capture the total cost of each alternative over
the appropriate period of analysis.
UNCLASSIFIED
3. Define Alternatives
4. Develop Cost Estimate for each Alternative
5. Identify Quantifiable and
Non- Quantifiable Benefits
CBA Four-Day TRAINING SLIDES
6. Define Alternative
Selection Criteria
Types of Cost Estimates:
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•
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Historical
Parametric
Analogy
Engineering
7. Compare Alternatives
8. Report Results and Recommendations
Document the cost estimate with data sources,
computations, rationale, etc. as this is essential
to the review/validation process.
34
Step 5: Identify Quantifiable and
Non-Quantifiable Benefits
1. Define the Problem/Opportunity and
Objective
2.Define CBA Boundaries and Parameters
UNCLASSIFIED
3. Define Alternatives
4. Develop Cost Estimate for each Alternative
5. Identify Quantifiable and
Non- Quantifiable Benefits
CBA Four-Day TRAINING SLIDES
6. Define Alternative
Selection Criteria
7. Compare Alternatives
• Benefits: “Benefits of a chosen
alternative are results expected in
return for costs incurred. They are the
quantitative and qualitative results
expected or resulting from the
implementation of a project/initiative
(which may include but are not limited
to the following: equipment, facilities,
hardware, systems, etc.).”
(CBA guide, “Step 5”)
8. Report Results and Recommendations
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Step 6: Define Alternative Selection Criteria
1. Define the Problem/Opportunity and
Objective
2. Define CBA Boundaries and Parameters
UNCLASSIFIED
3. Define Alternatives
• The standards upon which the decision will be
based
– Criteria must be consistent with the Problem Statement
and the benefits
4. Develop Cost Estimate for each Alternative
5. Identify Quantifiable and
Non- Quantifiable Benefits
6. Define Alternative
Selection Criteria
CBA Four-Day TRAINING SLIDES
Alternative Selection Criteria:
CBAs must:
• Identify the recommended decision criteria
• Elucidate how much each alternative satisfies
the criteria
7. Compare Alternatives
8. Report Results and Recommendations
Leadership Engagement:
The Lead Analyst should work with the Functional Manager to ensure they agree on the selection
criteria, particularly if criteria will be weighted in the evaluation phase
36
Step 7: Compare Alternatives
1. Define the Problem/Opportunity and
Objective
2. Define CBA Boundaries and Parameters
UNCLASSIFIED
3. Define Alternatives
4. Develop Cost Estimate for each Alternative
5. Identify Quantifiable and
Non- Quantifiable Benefits
CBA Four-Day TRAINING SLIDES
6. Define Alternative
Selection Criteria
7. Compare Alternatives
8. Report Results and Recommendations
Alternative Comparison: Compare alternatives using
the selection criteria to identify the preferred
alternative.
Billpayer Analysis: Identify the billpayer if there is a
bill associated with the recommended alternative.
Effects Analysis: Identify the positive and negative
impacts of the 2nd and 3rd order effects. What must
be done to manage the negative impacts?
Sensitivity Analysis: Determine the robustness of the
conclusions. If anything changes (i.e., assumptions,
costs, benefits) would the recommendation change?
Risk Analysis: Identify the high-risk aspects of the
recommended alternative and define appropriate
risk mitigation measures.
37
Step 8: Report Results and Recommendations
1. Define the Problem/Opportunity and
Objective
2. Define CBA Boundaries and Parameters
Results and Recommendations:
•
•
UNCLASSIFIED
3. Define Alternatives
4. Develop Cost Estimate for each Alternative
•
•
Summarize the analysis
Make conclusive statements about each of the
alternatives and how they were evaluated
Present specific recommended solution
Include documentation used in all steps
5. Identify Quantifiable and
Non- Quantifiable Benefits
CBA Four-Day TRAINING SLIDES
6. Define Alternative
Selection Criteria
7. Compare Alternatives
8. Report Results and Recommendations
38
Packaging the Complete Product
Preferred document format is a narrative.
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• Narrative provides all the words that would accompany a briefing and
therefore is more clearly understood
• Cost estimates are easier to document by including spreadsheets
Key elements for both formats:
• Clarity:
•
•
Does not contain vague, unsubstantiated statements/data
Presented in suitable terms for the intended recipient
• Analytical rigor:
•
Steps are supported by and consistent with the preceding steps
• Completeness:
•
Key deliverables are addressed at each step of the methodology
CBA examples of narrative and briefing forms are
in “Appendix E,” CBA Guide, https://cpp.army.mil
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In Summary: CBA is Not Rocket Science
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At the conclusion of this class, if you
continue to follow the methodology we
teach, you’ll find that a CBA is
40
CBA Four-Day TRAINING SLIDES
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IMPORTANT: CBA Guide
• Establishes the standard procedure for
preparation of CBAs, located at
https://cpp.army.mil under “Documents” tab.
• All preparers should refer to and follow the
procedures set forth in the CBA guide. These are
the standards against which all CBAs will be
evaluated.
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CBA Four-Day TRAINING SLIDES
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QUICK REVIEW
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Quick Review
CBAs:
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• Are becoming embedded in the Army’s decision-making
processes
• Are based on a sound, logical approach to problem solving
Value of CBAs:
• Supplement (but not replace) professional experience, subject
matter expertise, and military judgment
• Ensure the efficient allocation of the Army’s limited funds by
enabling leaders to make better cost-informed decisions
43
Expectations and Tips
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What senior leaders expect:
• Support of the Army’s strategic priorities, directives,
and regulations
• Analytical rigor and innovative thinking
• Collaboration with stakeholders to develop effective
and efficient solutions
• Feasible alternatives
To plan for success in your CBA role:
• Form a capable CBA team with clear roles and responsibilities
• Understand the CBA eight-step methodology and the key
deliverables
• Establish a timeline to monitor progress
• Leverage available support (identified in the “Resources” section of
this briefing)
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RESOURCES
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Available Tools and Models for Cost Data
Some of the websites listed here require user accounts. In most cases, anyone with a dot mil address can
obtain an account. You are encouraged to scan these sites and request an account to any site that you think
will be useful to you. This will save time when you need to use any sites to support a CBA or other projects.
Tool/Model
UNCLASSIFIED
Purpose
https://www.osmisweb.army.mil/forces/login.aspx
Suite of models that provides quick
and reasonable unit cost estimates to
a wide variety of users
https://www.osmisweb.army.mil/amcos/app/home.aspx
Personnel costs for military, civilian,
and/or contractor
ASA(FM&C) Website
http://asafm.army.mil/Documents/OfficeDocuments/CostEconomics/
rates/indices.xls
Inflation indices
Capabilities Knowledge
Base
http://asafm.army.mil/Documents/officedocuments/costeconomics/
guidances/ckb-ui.pdf
http://asafm.army.mil/offices/CE/Ckb.aspx?OfficeCode=1400
Research, development, and
acquisition costing for major
weapon/material systems
https://www.osmisweb.army.mil/osmisrdb/login.aspx
Operating and support information for
major weapon/material systems
FORCES Cost Models
CBA Four-Day TRAINING SLIDES
URL
Army Military-Civilian Cost
System (AMCOS)
Operating and Support
Management Information
System (OSMIS)
Access links through the “Resources” tab in the CBA Portal at https://cpp.army.mil
46
References and Assistance
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• Cost-Benefit Analysis Portal
– Go to the Cost & Performance Portal (CPP) at https://cpp.army.mil
– If you already have a CPP account, click Enter Site. If not, click Request a New
Account and follow the instructions to register your Common Access Card (CAC).
– If you get the message, There is a problem with this website’s security certificate,
click on Continue to this Website.
– On the next screen, in the upper-left corner
• For the CBA Guide, examples, and related tools, click on Cost Benefit Analysis
(CBA) Portal.
• To submit or track the status of CBAs, click on CBA Workflow Tool.
• Dedicated mailbox provides authoritative answers to all questions:
– NIPR: CBA@conus.army.mil
– SIPR: CBA@hqda-s.army.smil.mil
47
Before Beginning a CBA
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• Pre-CBA Considerations:
– Ensure that a CBA is needed
– Select a qualified CBA team
– Ensure that the relevant decision-making forum is aware of
the CBA review, so that the work of the CBA and review is a
“value-added” process.
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Pre-CBA Considerations - Need for CBA
• A CBA is appropriate whenever
decision-makers can be aided by an
objective and resource-informed
analysis of problems and alternatives.
• When a CBA is required: VCS/USA
Memo, 30 Dec 2009—“…each
unfunded requirement and new or
expanded program proposal
submitted to the Secretary of the
Army, Chief of Staff, Army, Under
Secretary of the Army or Vice Chief of
Staff, Army, [must] be accompanied
by a thorough cost-benefit analysis
(CBA).”
49
Pre-CBA Considerations - CBA Team Identification
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Validate the
need for a CBA
CBA Team
• CBA is a team effort, not an individual effort
• CBA Lead Analyst: Integrates efforts of CBA team
• CBA Functional Proponents and Representatives: Provide data, assist in COA
development, determine cost elements, validate/provide assumptions and
constraints
• CBA team members should:
– Attend CBA training or orientation
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CBA Four-Day TRAINING SLIDES
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UNCLASSIFIED
AMERICA’S ARMY: THE STRENGTH OF THE NATION
CBA Four-Day TRAINING SLIDES
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Cost-Benefit Analysis (CBA)
Four-Day Training Briefing
Step 1: Problem/Opportunity and
Objective
Version 3.0 (Draft)
Last Updated: 10 November 2011
Visit our CBA Website for more information regarding locations,
signing up, upcoming training sessions, and more
https://cpp.army.mil
52
Key Learning Objectives
CBA team members will:
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• Use tools and techniques to develop statements
describing:
– Problem/Opportunity
– Objectives
– Background
53
Step 1 Overview: Define Problem/Opportunity
and Objective
1. Define Problem/Opportunity
and Objective
•
–
•
2. Define Scope; Formulate Facts and
Assumptions
UNCLASSIFIED
CBA Four-Day TRAINING SLIDES
The Problem/Opportunity Statement:
Defines unfulfilled customers’/stakeholders’ needs
and expectations
– Defines an opportunity to optimize/improve the performance of a
product and/or service for the end user
•
The Objective:
–
5. Identify Quantifiable and Non1 Benefits
Quantifiable
6. Define Alternative
Selection Criteria
Provides the contextual information needed to understand the
problem, need, or opportunity addressed in the CBA.
–
3. Define Alternatives
4. Develop Cost Estimate for each
Alternative
The Background/Strategic Context
•
Describes the role of the CBA: what is the decision to be made,
and how does the CBA inform and support it. What is the purpose
of the analysis?
Background:
–
Discusses the circumstances that describe a need for the CBA
7. Compare Alternatives
8. Report Results and Recommendations
Key Questions:
–
–
Does the Problem/Opportunity Statement provide a definition of the output performance issue/need?
Does the objective meet the leadership’s needs? What major stakeholders are likely to be impacted?
* Product(s) and/or service(s) are outputs with expected levels of performance (i.e., levels of efficiency and effectiveness) from a customer/stakeholder.
54
When customer/stakeholder expectations are not met, then there is an issue/problem requiring an alternative/solution.
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Background/Strategic Context
• “The background and circumstances define and assess
the current state/condition. They provide the
contextual information needed to fully understand the
problem, need, or opportunity addressed in the Cost
Benefit Analysis” (CBA Guide, “Step 1”
https://cpp.army.mil)
55
Background and Strategic Context
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• The problem/opportunity statement and objective should be
accompanied by additional background information to help the
reader understand various aspects of the problem
– The context in which the problem exists
– The guidance from senior leaders that establishes the importance of the
requirement
– The history of how the current situation came to exist
• Background information should be substantial enough for all
stakeholders to understand and support the
Problem/Opportunity Statement.
56
Background and the Status Quo
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• If the status quo isn’t considered a valid solution, the background
information should explain why. Guideline: The status quo
might not be a valid option if the required performance is not
being achieved. For example:
– If the CBA addresses a new requirement – one that is currently not being
accomplished either well or poorly – there might not be a status quo.
– If the CBA objective is to improve output to a level that far exceeds the
current level, there might not be a status quo. In this case, the implicit
decision has already been made to select a COA beyond the status quo.
– If the status quo achieves the desired output but does so at a high cost,
the status quo might not be considered a valid alternative.
57
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Problem/Opportunity Statements
• “A problem statement clearly defines the problem, mission need,
and required capability. When developing a problem or
opportunity statement, the key is to state the problem or
opportunity in terms of the organization’s mission that requires a
solution to describe what the effort intends to accomplish.” (CBA
Guide, “Step 1”, https://cpp.army.mil)
58
Problem/Opportunity Statement Key Questions
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Define the problem/opportunity succinctly in terms of Who, What,
When, Where, and Extent.
WHO



Who is experiencing the issue?
Who will receive the benefits from an improved product or service?
Specifically, who are the stakeholders/process owners?
WHAT


What required performance is not being achieved?
What are the problems being addressed: defects, delays, rework, mistakes,
etc.?
WHEN/HOW/
WHERE


When, how, and where does the problem/opportunity occur?
When did it begin? This could be as simple as “as long as we know”.
EXTENT

What is the extent of the problem in terms of magnitude or trend (changes
in magnitude)?
The Problem/Opportunity Statement should include this information.
59
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Determining Unfulfilled needs
Observations
Problem/Opportunity
I am always transferred to three
or more different people
Quality of Service:
Sorting of incoming calls,
assignment of the correct
assistant to customer
I’m getting my bill
at different times
of the month
Delivery of Service: Lack of
consistent standard for delivery
date
It takes too long to process the
application
Efficiency of Process:
Loan Cycle Time
60
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Common Mistakes
•
Problem stated as predetermined solution instead of
as problem, as in the form, “We need more money.”
•
Problem does not reflect the stakeholder concerns
•
Problem is based on anecdotal information
61
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Problem/Opportunity Statement Exercises
1) The total operating budget at Fort Hampton (in then-year
dollars) has increased at a rate of 2.5% per year for the past 8
years, while the inflation rate for the same period has remained
constant at 3% per year. This fiscal year, the budget has been
abruptly cut by 10% compared to the previous year. Two
hundred HMMWVs manufactured each year are temporarily
stored in a facility at Ft. Hampton, which will soon be under
repair and unavailable for use.
Determine the correct problem statement.
62
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Problem/Opportunity Statement Exercises
1) The total operating budget at Fort Hampton (in then-year
dollars) has increased at a rate of 2.5% per year for the past 8
years, while the inflation rate for the same period has remained
constant at 3% per year. This fiscal year, the budget has been
abruptly cut by 10% compared to the previous year. Two
hundred HMMWVs manufactured each year are temporarily
stored in a facility at Ft. Hampton, which will soon be under
repair and unavailable for use.
Solution: Because the current storage facility at Ft. Hampton will
soon be unavailable for use, the Army must determine the best
way to store HMMWVs.
63
Problem/Opportunity Statement Exercises
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
2) The Commander, USCENTCOM has asked for a comparison of
three alternatives for clearance of IEDs along a major supply
route. Determine the problem statement and objective.
64
Problem/Opportunity Statement Exercises
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
2) The Commander, USCENTCOM has asked for a comparison of
three alternatives for clearance of IEDs along a major supply
route in Afghanistan. Determine the problem statement and
objective.
Solution: Problem statement—IEDs placed along major roads
threaten the lives of coalition troops and the movement of
critical supplies. Objective—to inform Commander, USCENTCOM
decision on alternatives for IED clearance.
65
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Validate the CBA Problem/Opportunity
Defining the problem/opportunity is
the first step in developing a CBA;
however, it is important to
collaborate with CBA key players to
ensure leadership agrees that the
CBA addresses the decision.
66
Example - Stakeholders in the Army
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Typical Stakeholders by CBA
CBA Title
Stakeholders
“Detrick Earth Station Direct Communications
Link In-sourcing Initiative”
Dept. of State, White House Communications
Agency, OSD, U.S. Northern Command
“US Army Pacific G-2X (CI/HUMINT)”
U.S. Army Pacific Command, TRADOC, Intel
CoE, NETCOM
“Reserve Components Soldier Medical
Support Center”
U.S. Army Reserve Command, G1, OSD, Dept.
of Veterans Affairs
“Command Chief Warrant Officer Cost Benefit
Analysis”
USAR, Operational & Functional Commands,
Expeditionary Sustainment Commands
“Transition of the Combat Support Agency
Command”
Combat Support Agency Command, Military
Intelligence Readiness Command
“Stryker Cost Benefit Analysis”
Army Capabilities Integration Center,
FORSCOM, AMC, G8 FD, ASA(ALT)
67
Objective Statement
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• The objective statement describes the role of the CBA: what is
the decision to be made, and how does the CBA inform and
support it? What is the purpose of the analysis?
68
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Objective Statement: Examples
• “To inform Congressional decision on funding for winter storage
of HMMWVs at Fort Benning.”
• “To inform senior leader decision on the allocation of DAC,
contractor, and military labor to perform the physical security
function at Camp Victory.”
69
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Review Exercise: Henry Ford
• In a rented garage at 58 Bagley Street in Detroit, Henry Ford
completed his first gas-powered car on the morning of June 4,
1896. He had spent $250 FY1896 dollars on equipment to build
the car, and $100 on labor. The garage cost $15 per month to
rent. After the car was assembled, it was clear that it would not
be able to fit through the door of the rented garage. The car was
to be used as a model for the two-year long test-driving phase of
his R&D process, with the final goal of arriving at a model for
mass production and sale. Determine the correct
problem/opportunity statement and objective.
70
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Review Exercise: Henry Ford
• In a rented garage at 58 Bagley Street in Detroit, Henry Ford
completed his first gas-powered car on the morning of June 4,
1896. He had spent $250 FY1896 dollars on equipment to build
the car, and $100 on labor. The garage cost $15 per month to
rent. After the car was assembled, it was clear that it would not
be able to fit through the door of the rented garage. The car was
to be used as a model for the two-year long test-driving phase of
his R&D process, with the final goal of arriving at a model for
mass production and sale. Determine the correct
problem/opportunity statement and objective.
Solution: Problem statement—the next phase of Ford’s R&D process
cannot proceed without a drivable car. Objective—to inform
Ford’s decision on how to obtain a car for test-driving.
71
AMERICA’S ARMY: THE STRENGTH OF THE NATION
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Cost-Benefit Analysis (CBA)
Four-Day Training Briefing
Step 2: Define CBA Boundaries and
Parameters
Version 3.0 (Draft)
Last Updated: 10 November 2011
Visit our CBA Website for more information regarding locations,
signing up, upcoming training sessions, and more
https://cpp.army.mil
72
Defining CBA Boundaries and Parameters
1. Define Problem/Opportunity and Objective
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
2. Define Scope; Formulate Facts
and Assumptions
3. Define Alternatives
4. Develop Cost Estimate for each Alternative
5. Identify Quantifiable and Non-Quantifiable
Benefits
The Boundaries and Parameters of a CBA are the
specifications that make an analysis feasible and
practicable. They are expressed by Scope, Facts,
and Assumptions.
• Scope: Defines the range of coverage encompassed
by an initiative or proposal along specific dimensions
like time, location, and organization.
• Fact: A verifiable statement that is real and
something that has happened or is happening.
• Assumption: A conclusion drawn from facts and
observations describing a status or condition that is
not certain to exist.
6. Define Alternative
Selection Criteria
7. Compare Alternatives
8. Report Results and Recommendations
The CBA should state the involved stakeholders, period of
time that the analysis covers, and Stakeholders’ Needs not
addressed in the analysis.
73
Boundaries and Parameters
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Boundaries and parameters provide the limiting conditions that
make a controlled analysis of alternatives possible. Consider:
– Difficulty of analysis in an unbounded problem: how to achieve world
peace.
– Possibility of analysis in a bounded problem: how best to neutralize the
threat of potential Iranian nuclear capability by the strategic deployment
of a new missile defense system, given an annual budget allocation of
$1.5B, and given that several potential deployment sites exist in Eastern
Europe and the Middle East.
74
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Boundaries and Parameters
• In a CBA, the boundaries and parameters are
expressed in the Scope, Facts, and Assumptions.
75
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Definition: Scope
• “The scope of the analysis defines the range of coverage
encompassed by the project along specific dimensions such as
time, location, organization, technology or function. The CBA
should state the involved stakeholders, period of time that the
analysis covers, as well as organizations or requirements not
covered or addressed in the analysis.” (CBA Guide, “Step 2”,
https://cpp.army.mil)
76
Scope
• The choice of scope is very significant, and can distort the analysis in favor
of one or more COAs. Consider:
– The cost of buying versus leasing a car
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• over a period of one year
• over a period of fifteen years
– O&M costs of Pentagon office space from the perspective of:
•
•
•
•
Individual DoD employee
Department of the Army
Department of Defense
Taxpayer
– Impact of 2008 Lehman Brothers bankruptcy on:
•
•
•
•
•
Lehman Brothers 2008 summer intern
Lehman clients
Barclays
U.S. and international financial markets
2011 Occupy Wall Street protesters
77
Scope
Different scopes entail different cost estimates: For example, Flyaway, Weapon
System, Procurement, Program Acquisition, and Life Cycle Costs all encompass
different types of costs.
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
•
78
Scope
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• The scope chosen for the CBA
– Must be the same across all COAs.
– Must allow for a fair comparison
between the costs and benefits of all
alternatives. “Normalization.”
• For instance, if the cost of COA1 starts off
very high in the first year but drops off
sharply in later years, and the cost of COA2
starts off low but rises sharply in later
years, the time scope chosen should be
sufficiently large to accurately capture the
effects of both trends.
79
Scope Exercise
• Properly scope the following CBA:
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
– A comparison of two new weapons systems, Sys 1 and Sys 2, to be
procured by all FORSCOM units. Sys 1 has a lifecycle of 6 years, Sys 2 has a
lifecycle of 4 years. O&S costs are shown in the table below. Give the
appropriate length of analysis for this CBA.
FY1
FY2
FY3
FY4
FY5
FY6
Sys 1
$3M
$0.5M
$0.5M
$0.2M
$0.4M
$0.7M
Sys 2
$1M
$1M
$1M
$0.8M
---------
---------
Note: Fictional
80
Scope Exercise
• Properly scope the following CBA:
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
– A comparison of two new weapons systems, Sys 1 and Sys 2, to be
procured by all FORSCOM units. Sys 1 has a lifecycle of 6 years, Sys 2 has a
lifecycle of 4 years. O&S costs are shown in the table below. Give the
appropriate length of analysis for this CBA.
FY1
FY2
FY3
FY4
FY5
FY6
Sys 1
$3M
$0.5M
$0.5M
$0.2M
$0.4M
$0.7M
Sys 2
$1M
$1M
$1M
$0.8M
---------
---------
Solution: The appropriate time span is 12 years … the lowest common
multiple of the four- and six-year lifecycles for the two systems.
Note: Fictional
81
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Scope Exercise
• An office within HQDA is expanding by 10 people and requires
additional desk space within the Pentagon. Since the office space
is provided to the Army by DOD without charge, one analyst has
suggested that all COAs within the Pentagon are cost-free, and
therefore only benefits need to be considered. Determine if this
reasoning is correct, and determine the appropriate scope for
the analysis.
82
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Scope Exercise
• An office within HQDA is expanding by 10 people and requires additional desk
space within the Pentagon. Since the office space is provided to the Army by
DOD without charge, one analyst has suggested that all COAs within the
Pentagon are cost-free, and therefore only benefits need to be considered.
Determine if this reasoning is correct, and determine the appropriate scope
for the analysis.
Solution: Scoping the cost to the Army, the cost of office space is not captured.
The appropriate scope which captures the full cost is from the perspective of DOD.
Note: These answers assume that the additional staff must be in the Pentagon. If
putting the 10 people in another building is a viable alternative, then the
solution shown here would probably change.
83
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Scope Exercise
• An Army organization currently employs 1000 people, all DACs.
This organization has prepared a CBA comparing the costs of
converting 5 of the current DACs to 5 contractors (working the
same number of hours). The annual cost to employ each DAC is
$100K, and due to training expenses, the cost to employ each
contractor is $110K. In the CBA, the cost of COA1 (all DACs) is
listed as $100M, and the cost of COA2 (995 DACs, 5 Contractors)
is listed as $100.05M. What is wrong with the scope of this CBA?
84
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Scope Exercise
• An Army organization currently employs 1000 people, all DACs.
This organization has prepared a CBA comparing the costs of
converting 5 of the current DACs to 5 contractors (working the
same number of hours). The annual cost to employ each DAC is
$100K, and due to training expenses, the cost to employ each
contractor is $110K. In the CBA, the cost of COA1 (all DACs) is
listed as $100M, and the cost of COA2 (995 DACs, 5 Contractors)
is listed as $100.05M. What is wrong with the scope of this CBA?
Solution: The scope should be confined to the five positions that are
being considered for conversion. The comparison should be
between five DACs and five Contractors.
85
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Definition: Facts
Facts:
• A verifiable statement that describes an objective
condition or event, something that has happened
or is happening. The most relevant facts are those
that constrain the CBA.
• Constraints are the “limits placed on resources to
be devoted to the project. All managers are faced
with certain constraints within which they
operate. Constraining organizational policies or
procedures, funding considerations, physical
limitations, and time-related considerations need
to be addressed in the CBA. These
policies/considerations could stem from technical,
environmental, ethical, or political constraints.”
(CBA guide, “Step 2”, https://cpp.army.mil)
86
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Definition: Assumptions
Assumptions:
• A condition or situation over which we have no control but is essential to
the success of our proposed solution.
• Assumptions impose risk on the solution. The risks and risk mitigation
measures must be specified in the CBA.
• Sensitivity analyses are performed by purposefully strengthening or
weakening individual assumptions, and noting the effect on the COA
recommended. The best COAs are those that remain the optimal course of
action over a wide range of assumptions.
87
Assumptions
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Assumptions made for one COA should be made to the same
degree in all other COAs as relevant. For instance:
– It is not reasonable to assume in one COA that 20 people will required to
perform a task if in another COA it is assumed that only 15 people are
required to perform the same task.
– It is not reasonable to assume in one COA that a particular resource will
be available in 10 years, if in another COA it is assumed that it will be
available only for the next year.
88
Facts and Assumptions Examples
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• “Army War College S&P Department Expansion CBA”
– Fact: Course demands through the Strategy and Policy Department at the
War College have increased by 65% over the past three years.
– Fact: 60% of the S&P Department faculty will be 70 or older in the next
five years.
– Assumption: Workload for department faculty will increase.
– Assumption: More than one third of the S&P faculty will retire within the
next five years.
– Assumption: After an initial training period, each new hire will be able to
perform as much work as the recently retired faculty member.
– Fact/Constraint: the War College Dean has allocated no more than
$1.2M/year to pay the salaries of new faculty members.
89
Facts and Assumptions Examples
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• “U.S. Army Central Command Afghanistan Police Force Training”
– Fact: President Obama has announced that all U.S. troops will withdraw
from Afghanistan by the end of 2014.
– Assumption: Troop withdrawal will proceed as scheduled.
– Fact: American troops provide for 80% of current domestic
counterterrorism force training in Afghanistan.
– Assumption: demand for counterterrorism training will not decrease after
U.S. withdrawal.
– Assumption: without coordinated assistance, security training resources
will be understaffed after U.S. withdrawal.
Note: Notional
90
Facts and Assumptions Exercise
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• You are preparing a Cost-Benefit Analysis to aid in the decision to
sell or lease an older fleet of U.S. Army helicopters to the Iraqi
Army. From the following facts listed, draw possible assumptions
relevant to the analysis:
– Fact: under the current agreement, a lease may be extended or concluded
at the end of every two years, at the discretion of the Iraqi Army. At the
conclusion of the lease, the helicopters will be returned to the U.S. Army.
The RAF will be accountable for any damages beyond normal wear.
– Fact: The fleet has been used extensively in Operation Desert Storm (Iraq,
1991). They will also be used by the Iraqi Army in a similar climate.
– Fact: Recent sales of used helicopters have been at “as-is” condition.
91
Facts and Assumptions Exercise
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Possible assumptions:
– Under a lease, the Iraqi Army will have less of an incentive to properly
maintain the fleet against “normal wear,” and the actual life cycle of the
fleet may be reduced as a result.
– Since conditions of use are similar, future wear can be approximated by
historical wear.
– By selling the fleet, the U.S. Army will not be responsible for further costs
of maintaining the fleet (i.e. the buyer assumes the risk).
• Other facts to be determined that would aid the analysis:
– Estimate of remaining lifetime of the fleet.
– “Lease” and “Buy” prices at which Iraqi Army is willing to settle.
– Remaining utility of fleet to U.S. Army.
92
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Review Exercise: Henry Ford
• In a rented garage at 58 Bagley Street in Detroit, Henry Ford
completed his first gas-powered car on the morning of June 4,
1896. He had spent $250 FY1896 dollars on equipment to build
the car, and $100 on labor. The garage cost $15 per month to
rent. After the car was assembled, it was clear that it would not
be able to fit through the door of the rented garage. The car was
to be used as a model for the two-year long test-driving phase of
his R&D process, with the final goal of arriving at a model for
mass production and sale. Define the scope and identify facts
and assumptions.
93
Mini-case Exercise #1
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
or “who, oh who should overtime bill?”
• Following the President’s announcement of the scheduled deployment of
three BCTs to Australia, it has been determined that a secure communications
link must be established between the White House, Pentagon, State
Department, and the new Australian base. SECDEF and CJCS have tasked Army
WEBCOM with the extra responsibility of managing the new communications
link. Currently, 35 Army civilian GS-11 employees in WEBCOM are assigned to
U.S. Army Pacific. It is anticipated that 42,800 total work hours per year will be
required to maintain the new communications link. Each of the 35 Army
civilians currently works full time. For Army civilians, if less than 200 hours of
overtime is worked per year, the pay rate for overtime is $60 per hour. If
between 200 and 400 hours of overtime is worked per year, the pay rate is
$80 per hour of overtime. If more than 400 hours of overtime is worked in
one year, the pay rate is $120 per hour of overtime. Contractors may be hired.
No vendor quotes are currently available, but from the GSA catalog it has
been determined that hourly rates can be estimated to be $88/hr. for this
type of contractor labor. Currently, WEBCOM has been placed under a hiring
freeze for Army civilians only. Perform all 8 CBA steps to support a decision.
94
Mini-case Exercise #2
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
or “how much for one building?”
• In preparation for BRAC, the Army plans to build 20 office
buildings (20 acres per office building) for use at Fort Beatrix.
Army planners have identified 400 acres of uneven land near Fort
Beatrix that it owns, and it has been valued at $45K per acre The
cost to the army of constructing the first building is $2.25M, and
the cost of constructing each additional building increases by
$.25M for each building built due to increasing marginal cost of
developing the uneven land (i.e., the second costs $2.5M, the
third costs $2.75M, and so on). Alternatively, a contracting
company is willing to construct any number of office buildings at
a flat rate of $3M each. Perform all 8 CBA steps to support a
decision.
95
Mini-case Exercise #3
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
or “what’s the cheapest route to Baghdad?”
• Due to the impending drawdown and changing mission
requirements, the General Officer overseeing three forward
operating bases in Iraq—FOB Ironman, FOB Danger, and FOB
Python—has been tasked to come up with 200 soldiers as
transportation and logistics specialists within the next six
months. However, the GO has been given no new growth
mandates. The 200 must be relocated to Baghdad, which is a
distance of 100 mi., 200 mi., and 150 mi. from Ironman, Danger,
and Python, respectively. Each FOB has provided a list of
nonessential personnel available for transfer to Baghdad, along
with salary data. Perform all 8 CBA steps to support a decision.
96
AMERICA’S ARMY: THE STRENGTH OF THE NATION
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Cost-Benefit Analysis (CBA)
Four-Day Training Briefing
Step 3: Define Alternatives
Version 3.0 (Draft)
Last Updated: 10 November 2011
Visit our CBA Website for more information regarding locations,
signing up, upcoming training sessions, and more
https://cpp.army.mil
97
Four-Day CBA Training Schedule
Monday
UNCLASSIFIED
CBA Introduction and
Overview
Step 1:
Problem/Opportunity
and Objective
Step 2: Define CBA
Boundaries and
Parameters
Tuesday
Step 3: Define Alternatives
CBA Four-Day TRAINING SLIDES
Step 6: Alternative
Selection Criteria
Step 4: Develop Cost
Estimates for Each
Alternative
Step 7: Compare
Alternatives
Mini-case # 4
Step 8: Report Results and
Recommendations
Step 5: Benefits
Mini-case #5, 6
Mini-case #1, 2, 3
Wednesday
Thursday
Capstone Case Study
Presentation and Review
Mini-case Exercises: #7, 8
Capstone Case Study
Groups Meet
Capstone Groups
Assigned
98
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Day 2 Agenda
• 0830 – 0915: “Step 3: Define Alternatives”
• 0930 – 1200: “Step 4: Developing Cost Estimates for
Each Alternative” and Mini-case #4
• 1200 – 1300: Lunch
• 1300 – 1630: “Step 5: Benefits” and Mini-case exercises
#5 and 6
99
Step 3: Define Alternatives
1. Define Problem/Opportunity and Objectives
Use problem solving techniques to identify innovative and
robust alternatives.
2. Define Scope; Formulate Facts and
Assumptions
UNCLASSIFIED
• Alternatives:
3. Define Alternatives
CBA Four-Day TRAINING SLIDES
4. Develop Cost Estimate for Each Alternative
– Potentially optimal solutions to the
Problem Statement, given Scope, Facts,
Assumptions, and Constraints.
– They should include the status quo or
current state, if applicable.
5. Identify Quantifiable and Non-Quantifiable
Benefits
6. Define Alternative
Selection Criteria
7. Compare Alternatives
8. Report Results and Recommendations
Questions for the reviewer:
- Have all feasible alternatives been considered to include alternatives that
represent creative thinking?
- Have the alternatives been defined and described clearly to a sufficient level
of detail to support the development of a cost estimate?
- Is the status quo included, or is its absence explained?
- Do the alternatives span a reasonably wide range of potential solutions?
100
Define the Status Quo
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Status Quo (“As-Is” state):
• The status quo is the “baseline” program, process, or system: the solution
that will exist if everything proceeds along the current trajectory.
• The CBA must be forward-looking, not historical. Therefore, the status quo is
not always static—it must account for scheduled changes that might occur
within the timeframe of the analysis.
101
Assess the Status Quo for Viability
Is the status quo a viable alternative?
• Ask this question: Can the status quo solve the problem, given the scope
and facts/constraints we’re dealing with?
CBA Four-Day TRAINING SLIDES
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– Yes: Status quo is viable
– No: Status quo is not viable
• For example:
– Problem: A storage depot is given a new task to store sensitive items that
cannot be exposed to the weather
– Fact: Existing storage facilities are concrete pads with overhead cover but no
walls
– Conclusion: Status quo cannot solve the problem and is therefore not viable
If the status quo is not viable:
 It should still be costed and mentioned in the CBA.
 In the CBA, explain why the status quo was rejected
102
CBA Four-Day TRAINING SLIDES
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Developing Alternative Courses of Action
• Beyond defining the status quo, there is no prescribed doctrine or
methodology for developing other courses of action.
• So long as facts, assumptions, and scope are taken into account,
any COA that falls within the boundaries and parameters thus
defined can be a potential solution to the problem statement.
Only COAs that are potentially optimal solutions should be
included in the CBA.
103
Developing Alternative Courses of Action
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UNCLASSIFIED
• The number of possible COAs generally increase with the number of decisions
being made.
104
Developing Alternative Courses of Action
• The set of COAs included in a CBA should
CBA Four-Day TRAINING SLIDES
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– be potentially optimal solutions to the problem
– represent the potential range of solutions
• COAs should not
– be “anchored”: they should not be affected by a psychological bias
towards a favored alternative.
– be subsets of each other—the COAs should not all be different “flavors” of
the same alternative.
105
Developing Alternative Courses of Action
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• For example, if the objective of a CBA is to determine what four-passenger car
to buy, and if the selection criteria are cost and reliability:
– Including just Mercedes and Porsche as the two COAs under consideration would
not cover the span of possible solutions. It can only be representative of those
solutions that are both expensive and reliable.
– Including a COA that purchases a used car with 300,000 miles would also be
unreasonable—this is not likely to be a reliable car and clearly not a potentially
optimal solution.
– A set of COAs that spans a wider range of possible solutions and is also potentially
optimal (i.e., spanning a wide range of costs and all reliable) might be COA1: New
Porsche Panamera, COA2: New Toyota Corolla, COA3: Used Nissan Maxima with
80,000 miles.
106
CBA Four-Day TRAINING SLIDES
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Example: Finding Optimal Solutions
U.S. Army Central Command has secured $198M for the
procurement of two different models of the “HIMARS
2” multiple rocket launcher—class X and class Y—for
deployment to Afghanistan. The class Y HIMARS 2 costs
$11M each and weighs 27,000 pounds. The class X
HIMARS 2 costs $9M and weighs 12,000 pounds. After
procurement, all the HIMARS 2 will be transported to
Afghanistan by a fleet of ten C-130 Hercules aircraft,
each with a maximum payload of 40,500 pounds.
107
Example: Finding Optimal Solutions
CBA Four-Day TRAINING SLIDES
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How do you maximize the total number of HIMARS
procured?
If you buy only Class X, you can afford 18.
If you buy only Class Y, you can carry 15.
So is “buy 18 Class X HIMARS” the optimal solution?
108
CBA Four-Day TRAINING SLIDES
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Example: Finding Optimal Solutions
COA 2
COA 3
COA 4
COA 1 (Status Quo)
109
Example: Finding Optimal Solutions
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UNCLASSIFIED
You can procure 9 Class X and 11 Class Y HIMARS,
for a total of 20.
Moral of the exercise: analysis is sometimes
necessary to determine the optimal solution.
110
Suggested Methods for COA Development
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• DOTMLPF: A methodology used by JCIDS to brainstorm possible
solutions within the dimensions of Doctrine, Organization,
Training, Materiel, Leadership, Personnel, and Facilities.
• Consult Stakeholders, team members, and subject matter
experts.
• Mathematical analysis and/or optimization.
111
Courses of Action
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Common mistakes
• Proposing the hoped-for course of action along with several
obviously less attractive options in an attempt to force the
decision in favor of one COA. In other words: presenting only one
feasible option.
• Adding a course of action where the main difference is the funding
solution
112
Developing Alternatives: Example 1
UNCLASSIFIED
Situation
Because of BRAC moves, the transportation office will have to process property shipments
for three times the number of people that it normally supports. The current process is
based on face-to-face meetings with individuals and manual preparation of forms. The
increased workload level will last for 3-4 years.
Conventional Solution
Since workload is increasing by a factor of three, the solution is to triple the office’s
manpower.
CBA Four-Day TRAINING SLIDES


Innovative Problem Solving
Don’t assume that existing policies, procedures, and standards cannot be changed.
Consider wide range of solutions, such as:
 Increase manpower staffing
 Outsource part of the process
 Automate the preparation of forms
 Reduce time for face-to-face meetings by enabling individuals to conduct part of the
interview online
 Challenge existing requirements for forms and data collection (i.e., the policies and
rules that govern the process)
113
Developing Alternatives: Example 2
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Problem Statement: a review panel has determined that an
annex facility in Arlington, VA housing an Army weapons costing
division does not meet information security requirements.
• Possible alternatives:
– Determine unmet requirements, and install the necessary modifications
to meet them.
– Move the costing division to another facility that meets security
requirements.
– Keep the costing division in its current facility, but only allocate work with
a non-sensitive classification.
114
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Developing Alternatives: Exercise
Due to BRAC, it is anticipated that demand for electric power at Ft. Hood will
decrease by 40%. There are currently five separate power plants supplying
electricity exclusively to Ft. Hood, with full operational capacities of 1.2 GW
(gigawatts), 1.8 GW, 0.8 GW, 1 GW, and 1.5GW. Normal operational capacity is
75%. To run each plant, there is a fixed cost of $1M per month, and a variable
cost of $0.5M per GW-month. If the objective is to reduce cost where
possible, propose at least four alternative courses of action for this (fictional)
scenario.
115
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Review Exercise: Henry Ford
• In a rented garage at 58 Bagley Street in Detroit, Henry Ford
completed his first gas-powered car on the morning of June 4,
1896. He had spent $250 FY1896 dollars on equipment to build
the car, and $100 on labor. The garage cost $15 per month to
rent. After the car was assembled, it was clear that it would not
be able to fit through the door of the rented garage. The car was
to be used as a model for the two-year long test-driving phase of
his R&D process, with the final goal of arriving at a model for
mass production and sale. Define possible alternative Courses of
Action.
116
AMERICA’S ARMY: THE STRENGTH OF THE NATION
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Cost-Benefit Analysis (CBA)
Four-Day Training Briefing
Step 4: Develop Cost Estimates for
Each Alternative
Version 3.0 (Draft)
Last Updated: 10 November 2011
Visit our CBA Website for more information regarding locations,
signing up, upcoming training sessions, and more
https://cpp.army.mil
Key Learning Objectives
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Objectives:
• Obtain an introduction to cost estimating
• Understand cost fundamentals
• Understand the cost estimating process
–
–
–
–
–
–
–
Prepare for the cost estimate
Establish a framework for the estimate
Establish the timeframe for the estimate
Identify data sources and collect data
Develop the estimate
Identify cost of second- and third-order effects
Prepare supporting documentation
118
Step 4: Develop Cost Estimates for Each
Alternative
1. Define the Problem/Opportunity and
Objective
Cost Estimate:
2. Define the Scope; Formulate Facts and
Assumptions
• Captures the total cost of each alternative over
its relevant life cycle
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
3. Define Alternatives
4. Develop Cost Estimates for Each
Alternative
5. Identify Quantifiable and
Non-Quantifiable Benefits
Cost estimate requires robust documentation to
facilitate review and validation of the CBA.
6. Define Alternative
Selection Criteria
7. Compare Alternatives
8. Report Results and Recommendations
119
CBA Four-Day TRAINING SLIDES
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Outline
•
•
•
•
•
•
Introduction and overview
Cost fundamentals – a brief primer
Principles and rules
Tools
Cost Estimating Methods
Summary and conclusion
120
CBA Four-Day TRAINING SLIDES
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Introduction and
Overview
121
Cost and Cost Estimating Definition
Cost:
•
The monetary representation of resources used, sacrificed, or liabilities
incurred to achieve an objective.
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
– Example:
 The resources expended in acquiring or producing a good
 The resources expended in performing an activity or service
Cost Estimating:
•
The process of collecting and analyzing data and applying quantitative
models, techniques, tools, and databases to estimate the future cost of an
item, product, program, or task.
Cost estimating is thought by some to be difficult, but the skills
and knowledge are logical and straightforward. It isn’t rocket
science.
122
Purpose of Cost Estimating
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• Enable managers to
–
–
–
–
Make resource-informed decisions
Develop and defend budgets
Identify specific cost drivers
Improve cost controls
• Translate system/functional needs associated with
programs, projects, proposals, or processes into
costs
• Determine and communicate a realistic view of the
probable costs, which will be used to inform the
decision-making process.
123
Characteristics of a Good Cost Estimate
• Well documented
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–
–
–
Includes source data and its significance
Clearly details calculations and results
Contains explanations for choosing a particular method or reference
• Comprehensive
–
Ensures a level of detail where cost elements are neither omitted nor double
counted
• Accurate
–
–
Avoids bias and overly conservative or optimistic estimates
Bases its assessments on most likely scenarios and assumptions
• Credible
–
Discusses any limitations of the analysis deriving from the uncertainty/bias of the
data or assumptions
124
CBA Four-Day TRAINING SLIDES
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Cost Fundamentals
A Brief Primer
125
CBA Four-Day TRAINING SLIDES
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Examples of Cost Estimates
 This discussion will focus on
cost estimating to support
CBAs
 But … these types of
estimates are not totally
separate from each other.
Concepts from other types
can also apply to CBA.
• Cost estimates may be used in
any decision-making process, but
particularly in:
– Contracts and acquisitions
– Cost Benefit Analysis (CBA)
• Analysis of Alternatives (AoA)
• Economic Analysis (EA)
• Business Case Analysis (BCA)
– Independent Cost Assessment
126
CBA Four-Day TRAINING SLIDES
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Some Characteristics of Costs
Costs may be:
• Direct or indirect
• Recurring or nonrecurring
• Burdened or unburdened
• Variable or fixed
127
Direct vs. Indirect
Direct Cost
• Can be easily and conveniently traced to a specific cost element/objective
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– Example: The cost of ammunition fired in a training event at the firing range
Indirect Cost
• Cannot be easily and conveniently traced to a specific cost element/objective
– Example: Installation support to the firing range (utilities, upkeep, etc)
128
Recurring vs. Nonrecurring
Recurring Cost
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
•
Cost that is incurred regularly in producing a product or providing a service
– Examples: Civilian and military personnel who conduct the activity, recurring
sustainment of facilities, supplies, personnel training, utilities, equipment
maintenance, janitorial service, office supplies
Non-Recurring Cost
• Cost that only occur once or infrequently.
– Examples: Major items of equipment, major and minor construction, one-time
training in new procedures, activities conducted in direct support of individual
process improvement efforts
129
Burdened vs. Unburdened
Unburdened Cost
CBA Four-Day TRAINING SLIDES
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•
Cost of a product/service that does not consider other related costs necessary to
provide that product/service.
– Examples: Direct compensation, cost of a gallon of fuel in a theater of
operations, etc.
Burdened Cost
•
Cost of a product/service plus an apportioned cost of other related costs necessary
to provide that product/service.
– Examples: Salary plus the cost of benefits (health, retirement, etc.), facilities
support cost allocated to an activity or personnel
– There are degrees of burden in a CBA. For example:
• Direct compensation for military and civilian personnel is always burdened
with the cost of personnel benefits
• Facilities support cost is allocated to a COA only if it can demonstrated that
the COA causes the cost to be incurred
130
CBA Four-Day TRAINING SLIDES
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Variable vs. Fixed
Variable Cost
• A cost that varies based on the level of activity or output. This can be either a linear
relationship or a step function.
– Examples: Fuel cost for vehicles varies in a linear fashion relative to the number
of miles driven. The number of instructors needed to teach a class can vary in a
step function based on the number of students (e.g., 1 instructor for 25 students,
2 instructors for 26-50 students, etc).
Fixed Cost
• A cost that does not vary based on the level of activity or output.
– Example: At an Army installation, the cost associated with the commander and
his/her immediate staff is unlikely to vary as the installation population or other
variables change.
Fuel Cost as a Function of
Miles Traveled
Instructors as a Function
of Class Size
100
5
80
4
60
3
40
2
20
1
0
1000
900
800
700
600
500
400
300
200
100
0
0
100
200
300
Variable
400
Note: Most
costs are semivariable
Cost of Cmd Gp ($K) as a
Function of Installation
Population
5 9 1317212529333741454953
Semi-Variable
5,000 10,000 15,000 20,000
Fixed Cost
131
Cost Drivers
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Organizations perform work activities to
deliver products/services to a stakeholder.
 Definition: Factors, activities, or events that cause costs to be incurred
 Usually can be quantified/measured (e.g., number of hours spent on a task,
supported population)
 Analyst should identify and focus on the primary cost drivers that affect total
cost
 Helps to ensure the accuracy and reliability of the cost estimate
 Makes it easier to control costs within the organization
 Examples:
 The labor cost associated with assembling a HMMWV at a the factory would be
driven by the quantity of vehicles produced
 Energy consumption at the PX is driven by the square footage of the building and
the operating hours
 The cost of printing budget documents for the Office of Management and Budget is
driven by the number of pages in each set and the number of sets needed
132
Second Order Effects
CBA Four-Day TRAINING SLIDES
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• The cost of second order effects—the effects of the COA under
consideration beyond the immediate effects—must be taken into
account in the cost estimate.
133
Normalization and Inflation
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Adjusting for inflation is a specific form of normalization, an
adjustment intended to make a given data set consistent and
comparable with other data sets
• A frequent use of simple normalization is to adjust based on
quantities. For example:
– In a manufacturing process, COA 1 produces 17,000 widgets per year at a
total cost of $33,765 and COA 2 produces 14,500 widgets at a total cost of
$28,725. It’s difficult to evaluate these COAs unless we normalize by
computing a unit cost, which shows us that COA 2, with a unit cost of
$1.95 per widget, is preferable to COA 1, which has a unit cost of $1.99.
134
What is Inflation?
Definition
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• A rise in the general level of prices
• Measure of change in the dollars’ purchasing power
• In other words
•
•
A given dollar amount will have less buying power next year than it
does this year
To maintain consistent buying power, we must adjust this year’s
dollars with the inflation factor from year to year
Common methods for normalization:
• Discounting
• Constant (Base) Year
Of all the topics discussed in cost analysis, none will be
encountered more frequently than inflation.
135
Inflated Dollars – Terminology and Uses
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Type of Dollar
Other Terms
When Used
Constant
Base Year
Uninflated
Used in the cost estimate of a CBA to
compare COAs and to make the
decision
Current
Then-year
Inflated
Used to determine the POM/budget
resourcing impact of a COA. For the
approved COA, the current dollar
estimate is the amount that must be
funded in each year.
Therefore, it is also used to determine
the dollar amount of required billpayers.
 Constant-dollar values must be accompanied by a base year:
The fiscal year in which the program was initially funded or the
analysis was performed.
 Constant and current year data cannot be used in the same
analysis.
136
Inflation Calculation and Examples
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Basic calculations:
– (Constant Dollars) * (Inflation Factor) = Current (Dollars)
– Inflation is compounded from year to year (i.e., multiplied, not added).
• Example: A loaf of bread in 1950 cost $0.25. In 2011, it costs $3.00. Supposing
that the price of bread is a good indicator of the general price of goods, then
FY1950 $0.25 is worth $3.00 in 2012. In other words, $0.25 could buy in 1950
what $3.00 buys in 2011—and between 1950 and 2011 there was 1100%
inflation (12 x). The average annual inflation rate can be calculated to be
about 4.1% (12 raised to 1/61 power, so that 1.041^61 = 12).
• If between 2007 and 2011 there was 3% inflation each year, then $1 in 2007
could have bought what $1 x 1.03 x 1.03 x 1.03 x 1.03 x 1.03 = $1.16 can buy
in 2011.
137
Example—Current Dollar Calculation
• Data: We’ve calculated the annual cost for a given COA in FY12
constant dollars:
To implement this COA in the
POM/budget, the dollar
amounts in the three righthand columns would be used.
To cost the COA in the CBA, the
Const. Dollar Cost column
should be used.
– Civilian personnel: $145,000
– Contract support: $100,000 (paid by OMA appropriation)
UNCLASSIFIED
• Applicable inflation factors:
– Civilian personnel: 2% per year
– OMA appropriation: 3% per year
• Calculation for the first three years of the life-cycle:
CBA Four-Day TRAINING SLIDES
Cost
Element
Const.
Dollar
Cost
Infl.
Factor
Current- Dollar Calculation
Current-Dollar Cost
FY12
FY13
FY14
FY12
FY13
FY14
150,858
Civ per
145,000
2%
145,000
145,000
* 1.02
145 *
1.02^2
145,000
147,900
Contract
100,000
3%
100,000
100,000
* 1.03
100,000
* 1.02^2
100,000
103,000
Total cost
245,000
245,000
250,900
256,948
138
CBA Four-Day TRAINING SLIDES
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Cost Estimating Principles and Rules
139
CBA Four-Day TRAINING SLIDES
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Cost Estimating Principles and Rules
• Use authoritative data sources
• Ensure that cost estimates support “apples-to-apples”
comparison among COAs
• Ensure the cost estimate is well-documented, comprehensive,
accurate, and credible
• Constant vs. current dollars
– Use constant (uninflated) dollars for even comparison for COAs in CBAs
– Convert estimate to current (inflated) dollars to determine POM/budget
resourcing requirements
140
Cost Estimating Principles and Rules
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• The timeframe for the cost estimate is the life-cycle of the COAs.
For example:
– If the CBA seeks the best solution for housing Soldiers at a CONUS
installation, one of the COAs might call for constructing a barracks with a
50-year useful life. In this case, the life-cycle timeframe would be 50
years.
– If the CBA addresses a requirement that will exist for only three years, the
life-cycle timeframe would be three years.
– Must use the same timeframe for all COAs
• The timeframe for the POM/budget resourcing estimate is the
full POM/budget period* or the life-cycle timeframe, whichever
is shorter.
* The POM/budget period includes the year of execution (current year), the budget year (next year),
and the POM period (four or five years beyond the budget year).
141
Cost Estimating Principles and Rules
UNCLASSIFIED
• Timeframe example:
– Two weapons systems being compared in a CBA have different life-cycles.
The system in COA1 has a life-cycle of 5 years, while the one in COA2 has a
life-cycle of 7 years.
– The timeframe should be the same for both cost estimates—in addition, it
should include a whole number of life-cycles for both systems.
– The appropriate timeframe in this case is 35 years. This would allow for 7
complete life-cycles for COA1 and 5 complete life cycles for COA2.
CBA Four-Day TRAINING SLIDES
COA1
5
5
5
5
5
5
5
COA2
7
7
7
7
7
35 years
142
Include Supporting Documentation
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• After a CBA is submitted, the analyst who prepared the cost
estimate might not be immediately available to answer
questions.
• How supporting documentation is used:
– A CBA reviewer should be able to use the supporting documentation, with
no additional input, and arrive at a cost estimate identical to that in the
CBA.
– If an analyst must consult the estimate several months after it is finalized,
the supporting documentation will eliminate the need to reconstruct the
thought process, data sources, and calculations supporting the estimate.
– If the analyst is no longer available, subsequent analysts can use the
documentation to understand how the estimate was prepared so that
adjustments can be made if needed.
143
CBA Four-Day TRAINING SLIDES
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What to Include in Supporting Docs
• Identification of all data sources
• Rationale, assumptions, and the thought process that
produced the estimate
• Points of contact for all data.
144
CBA Four-Day TRAINING SLIDES
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Guidelines for Excel
• List cost elements in a
spreadsheet
• Include POCs for all
preparers/analysts
• Hyperlink websites
• Reference all data sources
• Use comments to document
and explain costing
methodology
• Cells that contain equations
should be free of constants—
link to other cells instead, so
that it is clear what data is
being used in the calculation.
145
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146
UNCLASSIFIED
CBA Four-Day TRAINING SLIDES
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Tools
147
Available Tools and Models for Cost Data
Data Sources
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Personnel
Facilities
Equipment
Modeled costs
AMCOS must be used for
military and civilian
personnel compensation
and benefits
Form 1391 – MILCON
construction costs
Unified Facilities
Criteria
Army Equipping
Enterprise System
Equipment costs by LIN
Facilities sustainment
costs estimation
FORCES
OPTEMPO, equipment, force structure,
transportation, CONOPS
Services, leases, and
equipment
Electronic Document Access
Contract data
148
Available Tools and Models for Cost Data
Some of the websites listed here require user accounts. In most cases, anyone with a dot mil address can
obtain an account. You are encouraged to scan these sites and request an account to any site that you think
will be useful to you. This will save time when you need to use any sites to support a CBA or other projects.
Tool/Model
URL
https://www.osmisweb.army.mil/forces/login.aspx
Suite of models that provides quick
and reasonable unit cost estimates to
a wide variety of users
https://www.osmisweb.army.mil/amcos/app/home.aspx
Personnel costs for military, civilian,
and/or contractor
ASA(FM&C) Website
http://asafm.army.mil/Documents/OfficeDocuments/CostEconomics/
rates/indices.xls
Inflation indices
Capabilities Knowledge
Base
http://asafm.army.mil/Documents/officedocuments/costeconomics/
guidances/ckb-ui.pdf
http://asafm.army.mil/offices/CE/Ckb.aspx?OfficeCode=1400
Research, development, and
acquisition costing for major
weapon/material systems
https://www.osmisweb.army.mil/osmisrdb/login.aspx
Operating and support information for
major weapon/material systems
UNCLASSIFIED
FORCES Cost Models
CBA Four-Day TRAINING SLIDES
Purpose
Army Military-Civilian Cost
System (AMCOS)
Operating and Support
Management Information
System (OSMIS)
Access links through the “Resources” tab in the CBA
Portal at https://cpp.army.mil
149
CBA Four-Day TRAINING SLIDES
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AMCOS
150
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AMCOS
AMCOS ApplicationsAMCOS lite
151
CBA Four-Day TRAINING SLIDES
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Capabilities Knowledge Base
152
CBA Four-Day TRAINING SLIDES
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Capabilities Knowledge Base
153
CBA Four-Day TRAINING SLIDES
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OSMIS
154
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OSMIS
155
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Cost Estimating Methods
156
Available Cost Estimating Methods
Available methods:
• Analogy
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• Parametric
• Engineering
• Actual Cost
• Expert Opinion
• Learning Curves
Most CBAs utilize all cost estimating
methods.
157
Cost Estimating Methods
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
The use of each method is based on the
information available to support it.
GROSS ESTIMATES
Parametric
DETAILED ESTIMATES
Actual Costs
Engineering
Analogy
Figure 1: A summary of the usual application of each technique.
Source - Acquisition 101 Lesson 8: Financial Management: Cost Estimation
158
Cost Estimating Methods: Analogy Method
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Analogy Method:
• Estimates the cost, based on historical data, of an analogous
system or subsystem
• Utilizes a current fielded system that is similarly designed to the
proposed system
• Adjusts historical cost of the current system to account for
differences
– Adjustments should be made through parameters/scaling factors based
on quantitative data

These adjustments should show validity of comparison
When is it used?
• When an analogous case (that can be applied to a subsystem or
component level) exists
159
CBA Four-Day TRAINING SLIDES
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Example - Analogy Method
Attribute
Old System
New System
Engine:
Thrust:
Cost:
F-100
12,000 lbs
$5.2M
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.
Warning 2: An adjusted analogy is,
by definition, estimating outside
the range of the data.
160
Analogy Method Estimating with Factors
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
𝑁𝑒𝑤 𝐶𝑜𝑠𝑡
= (𝑂𝑙𝑑 𝐶𝑜𝑠𝑡) ∗ (𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡 𝐹𝑎𝑐𝑡𝑜𝑟)
Element
Old Sys1
Old Sys2
Old Sys3
New Sys
Airframe
$500/lb
$250/lb
$750/lb
1.2 x Sys1
Engine
2M/Unit
3M/Unit
5M/Unit
.8 x Sys3
Avionics
$3K/lb
$2K/lb
$4K/lb
1.0 x Sys2
Payload
6M/Unit
8M/Unit
7M/Unit
.65 x Sys1
161
Cost Estimating Methods: Parametric Method
UNCLASSIFIED
Parametric Method:
• Uses regression or other statistical methods to develop a cost
estimating relationship based on observed patterns of how
specific parameters influence total cost.
• Utilizes:
• High-level Work Breakdown Structure (top down approach)
• A database from elements of one or more systems
CBA Four-Day TRAINING SLIDES
When is it used?
• Historical data is available but not detailed
• In earlier stages of the system or project life cycle
162
Example - Parametric Method
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
High Mobility Wheeled Vehicles Database
Vehicle
M274
M561
M656
M520
Cost of
First Unit
$ 9,585
50,002
93,262
147,889
Gross
Weight
1,770
8,363
24,785
36,590
Curb
Weight
970
5,363
14,785
10,500
Cubic Ft
Shipping
81.6
732.3
1,227
2,368
Net
Horsepower
12.5
93
183
176
Is ‘Cubic Ft Shipping’ a good predictor of cost?
163
Example - Parametric Method (Cont’d)
Cost of First Unit vs. Shipping Capacity
Cost of First Unit ($K)
UNCLASSIFIED
200000
150000
100000
50000
CBA Four-Day TRAINING SLIDES
0
0
500
1000
1500
Cubic Feet of Shipping
2000
2500
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐹𝑖𝑟𝑠𝑡 𝑈𝑛𝑖𝑡
= 60.992 ∗ 𝐶𝑢𝑏𝑖𝑐 𝑆ℎ𝑖𝑝𝑝𝑖𝑛𝑔 𝐹𝑒𝑒𝑡 + 7957.2
We can estimate the cost of any vehicle given the
shipping capacity using the above equation.
164
Cost Estimating Methods: Engineering Method
Engineering Method:
• Breaks down the system of interest into lower level
components, each of which is estimated separately
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
– Work Breakdown Structure
• Uses algebraic equations (bottom up approach)
– Most detailed of all techniques
• Requires extensive knowledge of a system’s characteristics and
the respective detailed data
• Is expensive and time consuming
When is it used?
• All potential costs can be assumed or estimated
Types of Army data sources (AMCOS Lite,
MILCON, SRM, historical ,execution, travel, etc.).
165
Developing the WBS
• What the WBS does:
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
– Ensures that all component elements are identified so that all costs are counted
once and only once
– Provides a systematic, standardized way to collect data.
• Decompose to as many levels as needed
• Example: The airplane cockpit can be decomposed into its subelements:
– Instrument panel
• Primary flight instruments
–
–
–
–
Directional gyro
Turn and bank indicator
Altimeter
Airspeed indicator
• Avionics controls
– Communications
– Navigation
– Radar
– Flight control systems
• Rudder pedals
• Steering yoke
• Trim tab controls
– Seats
• Seat and shoulder belts
• Cushions
• Head rest
… and so on
A well-decomposed process flowchart that defines/describes
the COA is a useful tool in developing the WBS
166
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
WBS – Another Example
167
Cost Estimating Methods: Actual Cost Method
UNCLASSIFIED
Actual Cost Method:
• If historical costs from experience or trends from prototypes,
engineering development models, and early production items
are available, they can be used to cost current goods or
services.
• Extracts costs that were actually incurred on same system
during an earlier period
CBA Four-Day TRAINING SLIDES
– Obtaining access to these actual costs may be difficult
When is it used?
• The actual data from the same system is present
168
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Example – Actual Cost Method
a. The development process is nearing completion.
b. The materials have all been procured at a cost of
$20M.
c. The labor cost to date is $30M.
d. According to earned value cost performance reports
(CPRs), the estimated cost at completion for the
remainder of the labor is another $20M.
Cost = $20M + $30M + $20M = $70M
169
Cost Estimating Methods: Expert Opinion Method
Expert Opinion Method:
• Obtains opinions from experienced individuals or group
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
– Document the sources of opinions
– List attributes of the sources
When is it used?
• When availability of data is limited.
Delphi Technique
1. Query expert opinion from group
2. Seek expert opinion from each group, and then summarize results to
send in reports
3. Gather another opinion and summarize those results
4. Continue process until experts reach a consensus
170
Example - Expert Opinion Method
Scenario: Three software engineers are
recognized experts in ERP software development.
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
1. You hold interviews to explain the Stakeholders’ Needs, sizing
level, and development process for your new system.
2. Each member of the group submits his/her opinion of the
final cost.
3. If all expert opinions converge to or hover around the same
figure, that may be taken as a good cost estimate.
171
Cost Estimating Exercises
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
1. The Army Corps of Engineers needs to estimate the cost of
constructing a special type of portable, aluminum bridge. Data
for past construction projects for an analogous type of bridge is
given in the following table.
Bridge 1
Bridge 2
Bridge 3
Bridge 4
Bridge 5
130
130
180
200
300
# of Cables 5
used
7
7
9
3
Total Cost
$281K
$381K
$427K
$609K
Length (ft)
$275K
Give a cost estimate for a bridge of length 450 ft built with 8
cables.
172
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Cost Estimating Exercises
2) A new type of MRE is being manufactured by a contractor, and the
Army is looking for its own cost estimate in order to compare price
quotes. A WBS reveals the following information: each MRE contains ¼
lb of dehydrated lobster, 1 lb of 90% lean beef jerky, ½ lb of pasta, ½ lb
of dehydrated carrots, and a self-heating pouch. Historical costs of the
heating pouch, pasta, and carrots are known: they are $1.50, $3/lb,
and $1/lb, respectively. You have consulted 3 fisheries experts, who
have given you estimates of $7.25, $6.80, and $7.05 for each pound of
dehydrated lobster. Costs of beef jerky and labor, by certain
parameters, are given below. Give an estimate of the production cost
per MRE packet.
Jerky 1
Jerky 2
Jerky 3
% lean
75
80
85
Cost/lb
$1.50
$1.60
$1.70
MRE 1
MRE 2
MRE 3
Edible
weight
1 lb
2 lbs
3 lbs
Labor
Cost/MRE
$0.50
$1.00
$1.50
173
CBA Four-Day TRAINING SLIDES
174
UNCLASSIFIED
CBA Four-Day TRAINING SLIDES
175
UNCLASSIFIED
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Summary and
Conclusion
176
Closing Thoughts
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• The cost estimate is a critical part of a CBA and is likely to
receive significant scrutiny
• A cost estimate that is clearly presented, logical, and welldocumented will help send a positive message to users of
the CBA
• A wide range of tools is available to support the analyst.
• Cost estimating requires logical thinking and a some
understanding of resource management concepts, but it’s
not rocket science. Most people should be able to acquire
the necessary skills and knowledge.
177
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Cost Analysis is NOT Magic
Cost Analysis is not magic!
An effective cost analysis is well documented,
comprehensive, accurate, and credible.
178
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Review Exercise: Henry Ford
• In a rented garage at 58 Bagley Street in Detroit, Henry Ford
completed his first gas-powered car on the morning of June 4,
1896. He had spent $250 FY1896 dollars on equipment to build
the car, and $100 on labor. The garage cost $15 per month to
rent. After the car was assembled, it was clear that it would not
be able to fit through the door of the rented garage. The car was
to be used as a model for the two-year long test-driving phase of
his R&D process, with the final goal of arriving at a model for
mass production and sale. After negotiating with the landlord, it
was agreed that the garage door could be widened for a onetime payment of $25.
179
Review Exercise: Henry Ford
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Provide a cost estimate for each of the following COAs:
– COA1 (Status Quo): Leave the car in the garage, do nothing else.
– COA2: Disassemble the car and reassemble it outside the garage.
– COA3: Widen the garage door.
180
Mini-case Exercise #4
or “how much can I spend again?”
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
•
U.S. Army Special Operations Command has scheduled the procurement of seven
“Longbow Apache 2” helicopters with a preliminary delivery date of 15 May 2013 (with
95% certainty). Normal procurement cost per Apache is $35M. Each of the new
Apaches has been ordered with a classified modification to suit the customized
mission requirements of USASOC, at an additional cost of $7M over the normal
procurement cost for each Apache. All seven customized Apaches are necessary for
mission effectiveness. It is known that to achieve the delivery date of 15 May 2013 at
the given degree of certainty, the required production rate must far exceed normal
capacity, and that this contributes as a cost factor. An analysis of past production
performance has determined that the relation between cost and risk can be
approximated by r = 0.09c2 – 1.24c + 4.32 (for values of c between 3.64 and 10) where
r is the risk (expressed as a decimal between 0 and 1) that delivery will miss the
deadline, and c is the cost in millions of dollars over the normal procurement cost per
Apache. After setting the delivery date at 15 May 2013, USASOC receives an order
from SECARMY restricting total procurement costs for the Apache procurement
program to $280M. USASOC now needs to determine the optimal value of c. Perform
all 8 CBA steps to determine alternatives and recommend a course of action.
181
Mini-case Exercise #4
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
or “Apache Part II: who should I listen to?”
• Due to a last minute change in mission requirements, the original
modification has been scrapped in favor of one with a wider range of
alternatives. As in part (a), a maximum of $5M per helicopter may be spent on
the new modification. The modification can be customized according to two
dimensions: survivability and lethality, each scored on a scale between 0 and
1 (1 being the best possible). The associated costs are $5M per point for
survivability, and $10M per point for lethality. Suppose that the benefit score
may be calculated as LxSy, where L is the score for lethality, S is the score for
survivability, x is the weight (as a decimal) placed on lethality, and y is the
weight given to survivability. To determine the relative importance of these
two dimensions to the mission, you have conducted a survey within three
separate populations: infantry, Apache pilots, and USASOC commanders.
Among infantry, the consensus is that x = 0.8 and y = 0.2. Among pilots, the
consensus is that x = 0.3 y = 0.7. Commanders believe x = 0.6 and y = 0.4. State
the problem, objective, constraints, and determine alternatives and the
recommended course of action.
182
AMERICA’S ARMY: THE STRENGTH OF THE NATION
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Cost-Benefit Analysis (CBA)
Four-Day Training Briefing
Step 5: Benefits
Version 3.0 (Draft)
Last Updated: 10 November 2011
Visit our CBA Website for more information regarding locations,
signing up, upcoming training sessions, and more
https://cpp.army.mil
183
Key Learning Objectives
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Objectives:
• Understand the nature of benefits
• Understand the types of benefits
• Quantitative vs. non-quantitative
• Objective vs. subjective
• Recognize what constitutes a well-crafted benefit
184
Step 5: Benefits
1. Define Problem/Opportunity and Objective
2. Define Scope; Formulate Facts and
Assumptions
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
3. Define Alternatives
4. Develop Cost Estimate for Each Alternative
5. Identify Benefits
6. Define Alternative
Selection Criteria
7. Compare Alternatives
8. Report Results and Recommendations
185
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Definition: Benefit
• “Benefits of a chosen alternative are results expected in return
for costs incurred. They are the quantitative and qualitative
results expected or resulting from the implementation of a
project/initiative (which may include but are not limited to the
following: equipment, facilities, hardware, systems, etc.).”
(CBA guide, “Step 5”)
186
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Primary Benefits
• In the CBA, the most important benefits to include for each COA
are the primary benefits: the benefits most relevant to the
objective being sought.
• Primary benefits should answer the question, “How does this
COA serve as a solution to the stated problem?”
Problem Statement
COA description
Primary benefit of COA
Product manufacturing
time exceeds the limit
specified by mission
requirement by 15%
Expand manufacturing
facility and personnel by
20%
Product manufacturing
time expected to be
reduced to 10% under
mission requirement limit
Current residential
facilities insufficient to
accommodate influx of
400 new soldiers due to
upcoming BRAC
Move 400 civilians
currently living in
temporary on-base
quarters to off-base
housing.
COA will vacate living
quarters for the 400 new
soldiers expected on base.
187
Secondary Benefits
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• When most or all of the COAs under consideration have nearly
identical primary benefits then it will be necessary to consider
and include Secondary benefits. Secondary benefits answer the
question, “How well does the COA solve the problem?”
– Secondary benefits can include: reliability, feasibility, amount of training
required, ease of acquisition, time required for implementation, and other
“perks” like resale or reuse value.
• Secondary benefits receive less weight than primary benefits, but
they may be used to distinguish between COAs that provide
similar primary benefits.
188
Identifying Benefits
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
When identifying benefits, consider the following:
1. The CBA problem statement (from Step 1) usually states or
implies a desired benefit (the primary benefit). Ask the
question: How well does this COA achieve the benefit implied in
the problem statement?
• CBA problem statement: Identify the optimum process to achieve timely,
error-free submission of personnel performance appraisals.
– The clearly stated benefits or metrics are (a) timely submission and (b)
error-free submission.
2. If a COA appears to deliver relevant benefits that are not
encompassed by the problem statement, perhaps analysis
should be modified.
3. Are the benefits objective, and can they be quantified?
189
Types of Benefits
• Quantifiable vs. difficult to quantify
– Quantifiable benefits can be measured
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Objective vs. subjective
– Objective benefits are matters of fact
– Subjective benefits are matters of opinion
• Note that difficult to quantify is not the same as
subjective.
– Some subjective benefits can be quantified
190
Types of Benefits (cont’d)
• The table indicates the possible array of benefits, with examples
in each cell
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Quantifiable
Difficult to Quantify
Subjective
Customer satisfaction
Morality
Flexibility
Adherence to policy
Life, safety, health
Objective
Order-ship time
Cycle time
Error rate
Vehicle speed
Weapon survivability
N/A – All objective
benefits can be
measured, usually with a
number or sometimes
with a yes/no indicator.
191
Desired Characteristics of Benefits
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Benefits should be
–
–
–
–
–
Relevant
Reasonable
Specific
Logical
Clear
• Try to identify benefits driving the decision
 Objective benefits facilitate the
decision-making process, because
they help to remove opinions and
emotion from the discussion.
They build the strongest case for
the preferred COA.
 Overstatement of benefits is the
primary source of bias in CBAs. It
is difficult to overstate objective
benefits.
192
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Well-Crafted Benefits
193
Benefits Best Practices
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Problem Statement: “We need a more
user-friendly IT ARFORGEN tracking
system.”
Benefits should be CLEAR.
• Bad:
– COA 1 improves ARFORGEN greatly (or color code green).
• Good:
– The improved system in COA 1 has 20% fewer required user inputs, an
easier to read interface, and reduces the expected
training/orientation time by 2 hours per user.
194
Benefits Best Practices (Cont’d)
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Problem Statement: “We need to achieve
satisfactory levels of proficiency in job
related tasks.”
Benefits should be SPECIFIC.
• Bad:
–
Alternative 1 increases Doctrinal Currency, Soldiers trained and
current in their duties.
• Good:
–
Alternative 1 provides a trainer-student ratio of 1:10. This will
enable trainers to spend more time with each student and help
them achieve the desired degree of proficiency.
195
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Benefits Best Practices (Cont’d)
Problem Statement: “We need an extremely
mobile weapon platform that can provide
indirect fire support to assist in ground
operations.”
Benefits should be RELEVANT.
• Bad:
–
COA1 provides clear communications between infantry and armor
units.
• Good:
–
The addition of an auto-loading 120 mm mortar in COA1 allows the
Main Battle Tank to fire beyond the line of sight, increasing the
current range by 5,000 feet. This will enable an armor company to
provide the indirect fire capability comparable to 3 infantry heavy
mortar platoons, and with no measurable reduction in mobility.
196
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Summary
• In identifying benefits, address one COA at a time … comparison
comes later.
• Benefits can be financial or operational / functional.
• Objective benefits remove emotion and bias from the decisionmaking process.
• Develop benefits that are
–
–
–
–
–
Relevant
Reasonable
Specific
Logical
Clear
197
Exercises
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Problem Statement: “Need to transport 4,000
lbs. of medical supplies from one bank of the
Amazon River to another within 96 hours to
support an Army humanitarian mission in Brazil.”
For the following COAs, what metrics would enable a good
comparison of benefits and/or risks?:
1. Build a permanent steel bridge across the Amazon.
2. Build a collapsible aluminum bridge across the Amazon.
3. Ford the river.
4. Use makeshift rafts to float supplies across.
5. Turn around and head back to Sao Paulo, and charter a plane
across the Amazon.
198
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Review Exercise: Henry Ford
• In a rented garage at 58 Bagley Street in Detroit, Henry Ford
completed his first gas-powered car on the morning of June 4,
1896. He had spent $250 FY1896 dollars on equipment to build
the car, and $100 on labor. The garage cost $15 per month to
rent. After the car was assembled, it was clear that it would not
be able to fit through the door of the rented garage. The car was
to be used as a model for the two-year long test-driving phase of
his R&D process, with the final goal of arriving at a model for
mass production and sale.
199
Review Exercise: Henry Ford
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Identify primary and secondary benefits for each of the following
Courses of Action:
– COA1 (Status Quo): Leave the car in the garage, do nothing else.
– COA2: Disassemble the car and reassemble it outside the garage.
– COA3: Obtain permission of garage landlord to widen the garage door.
200
Mini-case Exercise #5
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
or “how many can I get for $1.2B?”
• The Chief of Staff, Army has apportioned $1.2B for the
procurement of customized “Longbow Apache 2”
helicopters and “Abrams 2” tanks in support of the
troop surge in Iraq. Each customized Apache helicopter
may be purchased at a flat rate of $60M each. Due to
increasing marginal costs of production, the price for
the Abrams tank is semi-variable. The first 24 tanks
produced can be purchased at a rate of $10M each; the
next 40 tanks can be procured at a rate of $12M each;
every subsequent tank purchased beyond these first 64
will cost $15M each. [Note: Fictional]
201
Mini-case Exercise #6
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
or “where do the lines cross?”
• U.S. Army Central Command has secured $118M for the
procurement of two different models of the “HIMARS
2” multiple rocket launcher—class X and class Y—for
deployment to Afghanistan. The class Y HIMARS 2 costs
$5M each and weighs 27,000 pounds. The class X
HIMARS 2 costs $7M and weighs 12,000 pounds. The
class X model is produced using a rare metal: no more
than 14 may be procured. After procurement, all the
HIMARS 2 will be transported to Afghanistan by a fleet
of ten C-130 Hercules aircraft. The total weight
constraint is 405,000 pounds.
202
AMERICA’S ARMY: THE STRENGTH OF THE NATION
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Cost-Benefit Analysis (CBA)
Four-Day Training Briefing
Step 6: Alternative Selection Criteria
Version 3.0 (Draft)
Last Updated: 10 November 2011
Visit our CBA Website for more information regarding locations,
signing up, upcoming training sessions, and more
https://cpp.army.mil
203
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Day 3 Agenda
• 0830 – 0930: “Step 6: Define Alternative Selection
Criteria”
• 0940 – 1110: “Step 7/8: Compare Alternatives and
Report Results and Recommendations”
• 1120 – 1200: Mini-case Exercise #7
• 1200 – 1300: Lunch
• 1300 – 1330: Mini-case Exercise #8
• 1345 – 1430: Mini-case Exercise #9
• 1445 – 1530: Mini-case Exercise #10
• 1530 – 1700 : Capstone Case Study Working Groups
204
Key Learning Objectives
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
This segment analyzes these seven topics:
•
•
•
•
Define alternative selection criteria
Comparing costs with benefits
Risk assessment
Decision support tools and methods (bringing the CBA
together)
• Sensitivity analysis
• Billpayers
• Developing a report for leadership
205
Step 6: Define Alternative Selection Criteria
1. Define the Problem/Opportunity and
Objective
2. Define the Scope; Formulate Facts and
Assumptions
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
3. Define Alternatives
4. Develop Cost Estimate for each Alternative
5. Identify Quantifiable and
Non- Quantifiable Benefits
Step 6 discusses four topics:
• Alternative selection criteria
overview
• How to develop selection criteria
• Examples of selection criteria
• Selection criteria exercise
6. Define Alternative
Selection Criteria
Transition to Step 7:
7. Compare Alternatives
8. Report Results and Recommendations
The analysis and calculations developed in
this step will be used with the comparison
of alternatives in Step 7.
206
Alternative Selection Criteria Overview
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Alternative Selection Criteria:
• The standards used to rank the alternatives and make a decision
• Reflect cost and the most significant benefits (quantitative and
qualitative)—how well and how efficiently the course of action
achieves the stated objective
• Cover both financial and non-financial aspects
– Financial results are essential to building a persuasive CBA
207
How to Develop Selection Criteria
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
In order to select the strongest value
proposition, use stakeholder needs and
objectives to help develop criteria.
• Criteria may include:
–
–
–
–
–
–
Quality (performance)
Cost (resources)
Speed of delivery (schedule)
Safety/risk
Stewardship
Resource management
• Decision makers use criteria to:
– Examine the most important information
– Evaluate the impact of the alternatives on the mission/objective
208
How to Develop Selection Criteria (Cont’d)
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Steps to create candidate selection criteria:
1. Consider the problem statement and objective. The selection
criteria must reflect how well and how cost-effectively the
objective is to be accomplished.
2. Comply with guidance provided by higher command, based on
leadership priorities like cost efficiency, level of product quality,
etc. (See Step 2)
3. Identify relevant cost issues (See Step 4) and benefits (See Step 5)
Then
• Prioritize selection criteria
• Determine weights, if appropriate
209
How to Develop Selection Criteria (Cont’d)
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Selection criteria should:
•
•
•
•
•
•
•
Reflect the costs and benefits listed in the analysis
Be concise and non-redundant
Provide a standard against which to compare alternatives
Expose uncertainty, risk, and/or tradeoffs
Not be unrealistically biased in favor of one alternative
Include enough information to make an informed decision
Be aligned with the goals of senior leadership
210
Examples - Selection Criteria
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Selection criteria might include:
•
•
•
•
•
•
•
•
•
•
Contribution to ARFORGEN
Contribution to combat effectiveness (readiness)
Compliance with laws, policies, and/or strategic planning documents
Items produced
Accuracy rates
Compatibility with current systems
Maintainability
Political considerations
Risk mitigation
Cost, cost avoidance, savings, revenue generation, cash flow/outlay,
etc.
211
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Financial Methodologies
Financial Methodologies are only applicable in very
specific cases where costs and/or benefits are precisely
quantified. However, the principles and thought processes
supporting these methodologies should be emulated in
any CBA. Examples of such methodologies include:
•
•
•
•
Normalization
Discounting
Net Present Value (NPV)
Break-Even Point (payback period)
212
Normalization of Value
Normalization:
• The values of alternatives can easily be compared
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
–
–
–
Costs of today with costs of tomorrow
Present with future benefits
Costs with benefits
• Appropriate method must be chosen from many choices
• Costs and benefits may have to be recalculated based upon chosen method
• Common methods:
–
–
Discounting
Constant (base) year
26
Discounting
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Discounting:
• The process of calculating the present
value of future amounts
• The opposite of compounding
• Method of accounting for risk
– Puts more emphasis on present costs rather
than future costs
3 Methods:
• Base Year analysis
• Present value analysis
• Net present value analysis
27
Net Present Value
Net Present Value (NPV):
• The difference between the present value of cash inflows and
the present value of cash outflows
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
– Used to analyze the profitability of an investment
• This works only if values, costs (outflows), and benefits (inflows)
are quantified into monetary terms
215
Net Present Value Formula
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Net Present Value (NPV):
• The amount of dollars that would have to be invested during the
base year at the assumed discount (interest) rate to cover the
costs, match the revenues, or match the savings at a specific
point in the future
𝑁𝑃𝑉 = 𝑃𝑉(𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠) − 𝑃𝑉(𝑐𝑜𝑠𝑡𝑠)
216
Present Value Merits
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Pros
• Most fundamental
analysis
• Very easy to compare
results
• Incorporates discount
rate, which can
represent risk
Cons
• Limited use in the Army
• Benefits are purely
monetary
• Applying a discount rate
can be difficult
217
Example - Present Value
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
The alternative with the
lowest present value is
preferred.
Alternative B is the
most efficient (from a
time value of money
perspective).
This example was adopted from DA PAM 415-3 Economic
Analysis: Description and Methods dated 10 August 1992.
218
Exercise - Present Value
UNCLASSIFIED
1. Which costs more?
2. Present costs in base year 2000 dollars.
3. Present costs in discounted present value.
Alternative 1
CBA Four-Day TRAINING SLIDES
Alternative 2
2000
(85)
(150)
2001
(21)
(10)
2002
(21)
(11)
2003
(22)
(11)
2004
(23)
(11)
Current/Then year $MM
2005
(23)
(12)
2006
(24)
(12)
Inflation:
Discount Rate:
TOTAL
(218)
(217)
3%
5%
219
Answer Key - Present Value
Which costs more?
UNCLASSIFIED
Alternative 1
Alternative 2
2001
(21)
(10)
2002
(21)
(11)
2003
(22)
(11)
2004
(23)
(11)
2005
(23)
(12)
2006
(24)
(12)
TOTAL
(219)
(217)
2005
(20)
(10)
2006
(20)
(10)
TOTAL
(205)
(210)
2005
(18)
(9)
2006
(18)
(9)
TOTAL
(197)
(206)
Current/Then year $MM
Alternative 1
Alternative 2
CBA Four-Day TRAINING SLIDES
2000
(85)
(150)
2000
(85)
(150)
2001
(20)
(10)
2002
(20)
(10)
2003
(20)
(10)
2004
(20)
(10)
Constant/Base year $MM
Alternative 1
Alternative 2
2000
(85)
(150)
2001
(20)
(10)
2002
(19)
(10)
2003
(19)
(9)
2004
(19)
(9)
PV $MM discounted at 5% rate
220
Break-Even Point
(Cost Reduction) = (Upfront Investment)
Break-Even Point:
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
•
Used when a given alternative has a significant investment cost
but is expected to experience cost reduction in future years
This is also where (in current dollars):
(savings) = (investment)
222
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Example - Break-Even Point
Summary of Break-Even Point:
- It’s the year where the savings become positive.
- Using inflation indices, constant dollars are converted into current dollars.
- Savings are the difference between cumulative costs.
223
Exercise: Defining Selection Criteria
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Given the following problem statements, suggest possible
Selection Criteria:
– “Need to transport 4,000 lbs. of medical supplies from one bank of the
Amazon River to another within 96 hours to support an Army
humanitarian mission in Brazil.”
– “We need an extremely mobile weapon platform that can provide indirect
fire support to assist in ground operations.”
– “Current residential facilities insufficient to accommodate influx of 400
new soldiers due to upcoming BRAC.”
– “Product manufacturing time exceeds the limit specified by mission
requirement by 15%.”
224
AMERICA’S ARMY: THE STRENGTH OF THE NATION
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Cost-Benefit Analysis (CBA)
Four-Day Training Briefing
Step 7: Compare Alternatives
Step 8: Report Results and Recommendations
Version 3.0 (Draft)
Last Updated: 10 November 2011
Visit our CBA Website for more information regarding locations,
signing up, upcoming training sessions, and more
https://cpp.army.mil
225
Step 7: Compare Alternatives
1. Define the Problem/Opportunity and
Objective
2. Define the Scope; Formulate Facts and
Assumptions
UNCLASSIFIED
3. Define Alternatives
4. Develop Cost Estimate for each Alternative
5. Identify Quantifiable and
Non- Quantifiable Benefits
CBA Four-Day TRAINING SLIDES
6. Define Alternative
Selection Criteria
7. Compare Alternatives
7a.
Compare alternatives using the selection criteria
to identify the preferred alternative.
7b. Identify the billpayer if there is a bill associated
with the recommended alternative.
7c.
Identify the positive and negative impacts of the
2nd and 3rd order effects. What must be done to
manage the negative impacts?
7d. Determine the robustness of the conclusions.
–
If anything changes (i.e., assumptions, costs, benefits)
would the recommendation change?
7e. Identify the high-risk aspects of the
recommended alternative and define
appropriate risk mitigation measures.
8. Report Results and Recommendations
226
Step 7: Compare Alternatives
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Compare alternatives by:
•
•
•
•
Concepts
Comparisons of costs with benefits
Decision support tools and methods (bringing the CBA together)
Sensitivity analysis and Risk assessment
227
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Concepts for Comparing Costs with Benefits
• The CBA process is essentially comparing the costs with the
benefits between all alternatives
• The preferred alternative provides the greatest amount of value
• Risk and second- and third-order effects should be included in
the comparison of alternatives
Value = Benefit – Costs
228
Aid for Completing - Step 7a
Costs
Benefits
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Unequal
Equal
Equal
Unequal
Selection Criteria
Alternative that provides greatest benefits for given
cost
Subjective reasoning and a fortiori analysis
Alternatives ranked in order (based on benefit/cost
ratio, net present value, or other relevant criterion)
Unequal
Equal
Most likely CBA
Scenario
Least costly alternative
CBA may not be
appropriate
229
Comparative Methods
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Method
Description
When Used
Net Present Value
(NPV)
Converts future cash flows into present equivalent values
and then adds them together
When alternatives have the same economic life
Benefit/cost ratio
(BCR)
Compares present value (PV) of benefits with present value
of costs
When competing alternatives have unequal costs
and unequal benefits
Break-even Point
Identifies point at which cumulative cost of two alternatives
equal the cumulative benefits
When projects are high-risk, to show when
investment costs need to be recovered quickly
Subjective reasoning
Applies professional judgment as a complement to, or to
the exclusion of, quantitative data.
When professional judgment is considered to be
more important
Point System
Applies objective values to subjective criteria.
When decision makers wish to narrow the list of
alternative solutions to the few that are most
suitable
Decision Matrix
Allows for multiple criteria to be used to compare
alternatives
It is a very flexible tool that can be used under
many circumstances. It can even account for
other decision support methods described in this
table.
A Fortiori Analysis
Determines whether a strongly favored alternative is still the
best choice even when assumptions are formulated that put
that alternative at a disadvantage.
When generally accepted intuitive judgment
strongly favors one alternative
230
Best Practices
Practices:
• Compare the incremental costs with the incremental benefits
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Compare the one or two most relevant benefits with the costs
• Find the “knee in the curve” or optimal value solution
231
Common Mistakes
• “Over-averaging” for sake of simplification:
– Example:
 “Fort Hood data is representative of all bases.”
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Assuming away cost:
These are examples of
flawed assumptions that
should have been
rejected in step 2.
– Examples:




“Year-end funds will be available,” when that’s not the case
“Higher headquarters will pay for it.”
“Other organizations will pay for it.”
“Military personnel are free.”
• Assuming away the problem:
– Example:
 “Unused office space is available.”
 “Chief of Staff said we need this.”
 Adding a layer of oversight will increase process efficiency
232
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Common Mistakes: Over Simplification
Cost ($M)
Benefit
Status Quo
30
Good
Added capability
(Alternative 1)
45
Very Good
Greatly added capability
(Alternative 2)
55
Excellent
Which alternative has the best value?
233
The Cost of a Green Chiclet
UNCLASSIFIED
• “Green (fill in blank, i.e., funding, status…) for
$55M is the preferred alternative” is the value
statement.
CBA Four-Day TRAINING SLIDES
This should help in making a decision.
Cost ($M)
Benefit
Alternative 1
55
Good
Alternative 2
45
Average
Alternative 3
30
Critical
234
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
“Cost Free” Analysis
• In some cases, new programs or requirements will be supported
entirely by resources that are already funded. This could be
described as “cost free” in the sense that there no additional costs
in terms of the budget.
• Nonetheless, a “cost free” analysis must still consider cost in terms
of opportunity cost: what the already-funded resource could have
been used for if it had not been applied to the new requirement.
235
“ Cost Free” Analysis
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Example: the Organization of the Joint Chiefs of Staff is
planning a holiday party for itself. The Chairman of the
JCS must assign three current employees to serve on
the Holiday Party Planning Committee, which requires
a commitment of 16 hours of work per member. CJCS
is presented with two courses of action:
– COA1: Appoint the Chief of Naval Operations, the Chief
of Staff, Army, and the Chief of Staff, Air Force, to the
Holiday Party Planning Committee.
– COA2: Appoint Intern #1, Intern #2, and Intern #3—
three GS-05 recent college graduates—to the Holiday
Party Planning Committee.
• The additional budgetary cost of this new Holiday
party requirement is equal for both COAs: it is “cost
free” because the salaries of current employees will
be paid regardless of whether the Holiday party gets
planned. Determine which COA has the lower
opportunity cost.
236
Common Mistakes: Assuming Away the Problem
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
All COAs proposed within a CBA must be solutions to
the problem/opportunity statement. Assumptions
should not solve the problem.
237
Non-Quantitative Methods
Subjective Reasoning
• Uses informal criteria to rank alternatives
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
A Fortiori Analysis
• Used when intuitive judgment strongly favors an alternative
– Assumptions are the basis in choosing which alternatives are preferred
238
Decision Matrix
Decision Matrix:
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• A tool that compares benefits with costs to produce a single
value score
One of the best ways to elucidate the
resource-informed decision to senior
leadership is to include a Decision Matrix
in the Decision Brief.
239
Decision Matrix Merits
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Pros
• Easy to use
• Normalizes costs and
benefits
• Is a familiar tool
• Flexible
Cons
• Error prone
• Highly judgmental
• Loss of information via
normalization
• Results not definitive
• Scoring is subjective
240
Example - Decision Matrix
Cost $M in BY-2011
COA-1
COA-2
COA-3
$20
$16
$12
Cost = $ quantifiable cost – $ quantifiable benefit or saving
Rating or Ranking
Decision Matrix
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Benefit Criteria
Weight
COA-1
COA-2
COA-3
Lethality
30%
9
6
2
Safety
45%
4
6
6
Survivability
25%
6
5
3
Score :
6.0
5.8
4.1
Rating: 1 (worst)
to 9 (best)
Benefit = $ non-quantifiable benefit and $ non-quantifiable risk
Cost per Benefit
COA-1 highest benefit
COA-1
COA-2
COA-3
$3.33
$2.78
$2.96
COA-2 best value
COA-3 lowest cost
241
Decision Matrix
Note: If calculating Cost-Benefit index, the benefits criteria for each COA should
be rated, not ranked.
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Otherwise, the Cost-Benefit index calculated would be meaningless.
242
Questions for Steps 7c and 7d
1. How sensitive is the recommendation to possible changes in
costs, benefits, assumptions, etc.?
•
If the recommendation is highly sensitive, can deeper analysis be done?
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
2. Which elements of the CBA require sensitivity analysis?
• Only test elements with significant uncertainty or risk.
–
Elements may include assumptions, constraints, costs, benefits, weighting of selection
criteria, etc.
3. Address sensitivity from one or both perspectives:
• What is the impact of a change of such and such magnitude?
• How large a change can occur before the recommendation changes?
4. Have all probable risks and their respective impacts been
identified?
•
•
Can the risks decrease future benefits?
Can the risks increase future costs?
243
Risk Assessment and Mitigation
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
The goal of risk assessment is to answer questions like:
•
•
•
•
•
What risks may occur?
What is the likelihood that risks will occur?
Are the source of these risks internal or external?
What causes these risks?
What are the consequences if the risks go unresolved?
– What assets, operations, activities, functions, etc. will be affected as a
result?
• How much risk is tolerable?
• What should be done to anticipate and limit risks?
Always measure the risk by the potential
adverse impacts on alternatives.
244
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Types of Risks
Business/Programmatic Risk:
• Affect the budget and viability of a program
Operational Risk:
• Affect the ability to perform a mission
Process Risk:
• Associated with failing to meet standards and performance benchmarks in a newly
established process
Technical Risk:
• Associated with failing to develop or implement technology
Schedule Risk:
• Associated with allocating time to perform and manage tasks
Organizational Risk:
• Associated with management changes
All risks need to be reflected in Costs and/or Benefits of COAs
Risks must factor into the decision-making process
245
Ways to Measure/Address Risk
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Methods of measuring and/or addressing risk in a CBA
include, but are not limited to:
– Effective Mean
– Cost of Risk Mitigation
– Sensitivity Analysis
246
Effective Mean (Expected Value)
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• The effective mean, or expected value, of a measurable quantity
is the sum of all possible outcomes multiplied by their
corresponding probabilities.
• Example: if the cost of a new ground combat vehicle is judged to
be $1.4M with 50% probability, $2M with 25% probability, and
$1.2M with 25% probability, then the effective mean (expected
cost) is $1.4M x 0.5 + $2M x 0.25 + $1.2M x 0.25 = $1.5M.
• Example: if inter-theater transit time for a sustainment brigade is
projected to be 5 days with 90% probability and 4 days with 10%
probability, then the expected transit time is 5 x 0.9 + 4 x 0.1 =
4.9 days.
247
Cost of Risk Mitigation
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
If a cost can be associated
with reducing risk, then
risk can be measured by
that monetary value.
Example: If for $22K extra,
the risk of a schedule
over-run can be reduced
from 15% to 3%, then
$22K can be a measure
for the difference in risk.
248
Sensitivity Analysis
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Sensitivity Analysis:
• Done mainly on the most important and least certain selection
criteria, assumptions, and cost estimates
• Addresses the impacts of risks comprehensively
• Identifies the impact on a recommendation when elements of
the analysis change, such as:
–
–
–
–
–
–
–
Assumptions
Costs
Benefits
Constraints
Scope
Weighing of selection criteria
Risk probabilities
249
Suggested Steps to Conduct Sensitivity Analysis
1. Divide analysis into two groups of factors:
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
– Those outside an agency’s control (i.e., assumptions)
– Those agencies that have a degree of influence or control
2. Choose several elements (costs, assumptions, benefits, etc.)
that have greatest impact and are most likely to change
– Vary each element over a reasonable set of values while holding the
other variables constant relative to each other
3. Determine the impact of these changes on:
– Total cost
– Total benefit
– Ranking of alternatives
250
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Example: Sensitivity Analysis
• Crystal Ball software
may be used to perform
sensitivity analyses.
• In the example to the
right, “Cost of Revenues
%” has the greatest
effect on Net Present
Value, while “Year 4
Units Sold” is the least
sensitive.
251
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Exercise: Sensitivity Analysis
• Perform a
sensitivity analysis
on the weight of
Lethality in this
Decision matrix.
Test for weights of
–
–
–
–
16%
44%
58%
86%
Determine if the
recommended
COA changes.
Cost $M in BY-2011
COA-1
COA-2
COA-3
$20
$16
$12
Cost = $ quantifiable cost – $ quantifiable benefit or saving
Rating or Ranking
Decision Matrix
Benefit Criteria
Weight
COA-1
COA-2
COA-3
Lethality
30%
9
6
2
Safety
45%
4
6
6
Survivability
25%
6
5
3
Score :
6.0
5.8
4.1
Benefit = $ non-quantifiable benefit and $ non-quantifiable risk
Cost per Benefit
COA-1 highest benefit
COA-1
COA-2
COA-3
$3.33
$2.78
$2.96
COA-2 best value
COA-3 lowest cost
252
Paying for Alternatives
Identify billpayers to fund alternatives!
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Defense funding is a zero-sum game: every dollar awarded to one
program comes at the expense of another competing program that
will not be funded.
• The CBA team rarely will have the authority to identify a bill-payer. This is a
task for the organization’s comptroller/resource manager (the G-3 for most
organizations)
• Don’t offer a “gold watch” as a bill-payer … a program that is so important to
the Army that it’s certain higher headquarters will reject it.
• Alternatives will compete with other developments for funding if no
billpayers are identified
Note: This does not guarantee funding.
253
Quick Review
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Comparing the costs with benefits of each alternative is a
required part of the CBA methodology.
• Sensitivity analysis is a technique that analyzes whether
changes in assumptions, quantitative values, or priorities will
affect the recommendation.
• Billpayers are the sources that will fund the costs of
alternatives.
254
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
Review Exercise: Henry Ford
• In a rented garage at 58 Bagley Street in Detroit, Henry Ford
completed his first gas-powered car on the morning of June 4,
1896. He had spent $250 FY1896 dollars on equipment to build
the car, and $100 on labor. The garage cost $15 per month to
rent. After the car was assembled, it was clear that it would not
be able to fit through the door of the rented garage. The car was
to be used as a model for the two-year long test-driving phase of
his R&D process, with the final goal of arriving at a model for
mass production and sale.
255
Review Exercise: Henry Ford
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Identify selection criteria and compare each of the following
Courses of Action:
– COA1 (Status Quo): Leave the car in the garage, do nothing else.
– COA2: Disassemble the car and reassemble it outside the garage.
– COA3: Obtain permission of garage landlord to widen the garage door.
256
Step 8: Report Results and Recommendations
1. Define the Problem/Opportunity and
Objective
2. Define the Scope; Formulate Facts and
Assumptions
UNCLASSIFIED
3. Define Alternatives
CBA Decision Package:
•
•
•
Results and Recommendations:
•
•
Summarizes the analysis
Makes conclusive statements about each of the alternatives
–
4. Develop Cost Estimate for each Alternative
•
5. Identify Quantifiable and
Non- Quantifiable Benefits
Preferred format is a narrative or PowerPoint
Accompany with a decision briefing
Write it in such a way that a layman can understand the topic
•
Results address how the alternatives were ranked using the
criteria developed in Step 6
Document all data and information used in Steps 1-8
CBA Four-Day TRAINING SLIDES
–
6. Define Alternative
Selection Criteria
7. Compare Alternatives
8. Report Results and
Recommendations
The recommended alternative should follow
Provide supporting information so reviewers can understand how
Steps 1-8 were developed
Questions for the Reviewer:
- Does the package contain all key elements that are accompanied
with supporting documentation?
- Does the recommended alternative address the problem, and is it
consistent with the assumptions and constraints?
- Does the analysis explain how the recommended alternative is the
best one to satisfy the selection criteria?
257
Key Elements for Documentation
The CBA’s quality and comprehensiveness may be
enhanced by the following supplementary content:
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Glossary
– Defines unfamiliar abbreviations, acronyms, and terms used in the
CBA
• Timeline
– Displays key dates and actions associated with the CBA in terms of its
development and/or implementation
• Coordination Sheet
– Identifies who will need/have to review the CBA
258
Briefing the Results of the CBA
Briefing Format:
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• This is a suggested but not required format.
– This is just a suggestion. The actual briefing for a CBA (or any briefing,
for that matter) should be determined based on the briefer’s style, the
known preferences of the individual being briefed, and the subject
matter.
– An example has been provided in the CBA guide
• It is not a substitute for a well documented CBA in narrative
form.
– The CBA coordinator, the decision makers, and stakeholders
should collaborate to determine the content and format of the
CBA decision brief as they will have differing preferences.
259
CBA Workflow Automation Tool
CBA
Registration,
Development and
Submission
Start
(Capability Gap)
UNCLASSIFIED
• Proponent
organizations:
• Register CBA online
• Develop and submit
CBAs online with
value proposition
linked to command’s
strategic priorities
• Proponent
leadership endorses
submission online
Requirements
Approval
CBA Validation
• Requirement
approval
forums use
CBA to:
• Make
resourceinformed
decisions
• Validate and
approve
requirements
• Organization
validates the CBA
methodology
• Accuracy and
completeness
Resource
Approval
• Resource
approval
forums use
CBAs to make
resourceinformed
decisions
• Identify
tradeoffs and
billpayers
• Decide funding
approval
decision
CBA Four-Day TRAINING SLIDES
End
https://cpp.army.mil/
Register and submit your CBA online
Draft
Submitted
Lead Analyst
Review
CBARB
Review
Final
Review
Completed
260
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
https://cpp.army.mil/
261
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
CBA Workflow Tool
262
Quick Review
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
• Document the CBA narrative and share the results with
stakeholders for approval.
• CBA templates are optional tools that can be used to
brief the results of the CBA.
• Include all documentation and calculations in back up.
• Ensure that the CBA clearly describes the value
proposition, and highlight how the benefits outweigh
the cost, risks, and trade offs.
263
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
FOUR DAYS
FOUR
264
Mini-case Exercise #7
or “can you hear me now?” or “what’s the expected value?”
CBA Four-Day TRAINING SLIDES
UNCLASSIFIED
•
•
U.S. Army Special Operations Command maintains a specialized communications link
between the Commander, USASOC, the Chief of Staff and Vice Chief of Staff, Army, and
Team Leaders in the field during highly sensitive counter-terrorism missions. The link
provides video and voice transmissions that are typically delayed by 30 seconds.
Currently, $2M per month is spent on operating and maintaining the communications
link: mostly consisting of payments to the National Security Agency for “satellite
bandwidth.” The NSA has recently launched into orbit a new satellite that promises
shorter transmission delays: typically 10 seconds, but with a 20% risk of 20 second
delays. The satellite takes advantage of recently developed technology: costs to the
Army for the first month are set at $10M, and are projected to decrease based on an
85% learning curve ($10M for the first month, 0.85 x $10M per month for the next two
months, 0.85 x 0.85 x $10M per month for the next four months, 0.85^3 x $10M per
month for the next eight months, 0.85^4 x $10M per month for the next sixteen
months, etc.), though there is a 40% risk that costs will only decrease according to a
90% learning curve.
Because time delay is the overwhelming factor in communications for counterterrorism operations, Army planners have assigned a 100% benefit weight to signal
delay time. The benefit score will be determined by the function , where t is the
expected time delay in seconds.
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or “to insource or not to insource, that is the question”
• Currently, a contractor provides 12 translators to
a SIGINT battalion, each contracted for 1885
hours annually, on a government contract
costing $1.2M per year. The battalion
commander would like to evaluate the option of
insourcing the labor to Army civilians. The total
burdened cost per civilian is $85,209 and the
estimated annual productivity is estimated at
1740 hours each. Determine whether insourcing
would be more cost effective than the status
quo.
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Mini-case Exercise #9
• OA22 has invited a contracting team to the Pentagon to inspect its centralized
HVAC system. Following the inspection, the contractor reported minor
damage to the HVAC system, and offers to replace it. Despite the damage, the
HVAC system continues to function at the same capacity, although with risk of
damage to the building. You assess that in any one year, there is a 15% chance
of damage being done. In the event that there is damage, you assess that the
average amount of damage will be $200K if occurring within the first year,
$300K if occurring during the second year, $400K if occurring during the third
year, etc. (increasing by $100K each year). If you decide to replace the HVAC
system, the contractor has offered a payment program of $256K for the first
year of ownership, $128K for the second year, $64K for the third year, etc.
(reduce by 50% each year). The expected life cycle of this HVAC system is 6
years. Alternatively, you may buy the same HVAC system from a separate
contractor at a cost of $100K for the first year, and $90K for every subsequent
year. Under this special program, the contractor will replace the HVAC system
at the end of its life cycle without any additional material cost (operations &
maintenance, replacement costs not included). All costs are given in constant
FY12 dollars. Perform all steps of the CBA process to support a course of
action.
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Mini-case Exercise #10
• The Captain of the Pequod has ordered a costbenefit analysis to determine the optimal
number of rowboats to deploy to pursue a whale
sighting. As defined by the Commander, the
selection criteria are manpower, stealth, and
ease of sustainment, with weights of 0.5, 0.3,
and 0.2, respectively. You have been told as a
rule of thumb that the total mission cost can be
estimated at $2200 for each rowboat involved in
the hunt. Each rowboat can transport 15
fishermen.
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AMERICA’S ARMY: THE STRENGTH OF THE NATION
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Cost-Benefit Analysis (CBA)
Four-Day Training Briefing
Day 4
CBA Capstone Case Presentations
25 June 2012
Visit our CBA Website for more information regarding locations,
signing up, upcoming training sessions, and more
https://cpp.army.mil
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Instructions
• 6 groups of 3-4 students each
• Groups A (3 people), B (3), and C (3) will be
assigned to Case 1
• Groups X (4 people), Y (4), and Z (4) will be
assigned to Case 2
• Each group will present once and serve as
CBARB reviewer twice. Groups will receive
grades for their performance in their
presentations as well as their reviews.
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Instructions for Presenters
• Prior to presentation, upload PowerPoint file
and all supporting documents to the classroom
share folder.
• Each member of the group must participate in
the presentation.
• Questions will be fielded throughout and after
the presentation.
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Instructions for Reviewers
• Questions may be raised throughout the
presentation.
• At the conclusion of the presentation and Q&A
session, each reviewing group convenes to write
a CBARB memo which should address
– Whether or not the CBA is sufficient to support
decision making.
– Comments on the accuracy of cost estimates
– Descriptions of benefit comparison among the COAs
– Other considerations that could affect the CBA, and
to what degree of sensitivity.
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Instructions for Reviewers
• When a reviewing group has completed both of
its reviews, it will assign a final evaluation to
each presentation: high pass, low pass, or fail.
Each reviewing group can only give one high
pass and only one low pass, and there are no
limits on the number of fails.
• After all groups have presented, each group
submits a total ranking of every other group.
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Schedule of Presentation
Time
Presenter
Reviewer 1
Reviewer 2
0900 - 1000
Group A
Group B
Group Z
1010 – 1110
Group X
Group A
Group Y
1120 - 1220
Group B
Group C
Group X
1330 - 1430
Group Y
Group B
Group Z
1440 - 1540
Group C
Group A
Group Y
1550 - 1650
Group Z
Group C
Group X
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