Acquisition Cost Estimating
Introductory Course
Mort Anvari
Acquisition Costing Directorate
Mort.Anvari@us.army.mil
(703) 601-4200
19 July 2006
1
HQDA
SA
UNDER
ASA
(CW)
ASA(FM&C)
FO
RB
ASA
(I&E)
CSA
VCSA
ASA
(MR&A)
Budget
ASA
(ALT)
DASA-CE
2
Situation
• You have just been tasked to develop a cost
estimate, that is, a professional opinion
about the cost of an item, a service or a
thing.
• Let’s discuss a process for organizing and
developing this cost estimate.
3
Cost Estimating Process
• Definition & Planning
–
–
–
–
–
•
•
•
•
Purpose of the Estimate
Defining the System and Schedule
Ground rules & Assumptions
Estimating Approach
Estimating Team
Data Collection and Analysis
Estimate Formulation
Review and Presentation
Final Documentation
4
Definition and Planning
• Influences the success of the estimate
• Understanding the requirements and how
you approach the process will establish the
guidelines and procedures for the estimate.
• Ask lots of questions…They help you
understand the requirement.
5
Questions
• Why is this cost estimate needed?
• What decisions are pending on the results of this
estimate?
• Will the estimate be briefed and to whom?
• Will the results be incorporated into some
document?
• What does the recipient expect to have included or
excluded?
• What excursions or variations from the baseline
are anticipated?
6
Questions Continued
• What are the program and funding constraints
especially if the program is a Joint Program?
• What are the time constraints for this estimate?
• What is the acquisition phase of the program?
• Is the program definition mature?
• Does technology exist today to design, develop, test
and manufacture the system?
• What is the interrelationship with other systems?
• Are there previous contracts? How many? What type?
• How have the contractors performed to date?
7
Definition and Planning
Know Purpose of the Estimate
• Main purposes of estimates:
– Budget Formulation
– Comparative Studies
– Source Selection
8
Types of Cost Estimates
• Life Cycle Cost Estimate (LCCE): Cradle-to-grave estimate includes
R&D, production, operations/support, and disposal
• Independent Cost Estimate (ICE): LCCE of most likely cost
developed by an independent organization
• Budget Estimate: For inclusion in budget to support current activities
• Rough-Order-of-Magnitude (ROM): Pre design effort, with very little
specific information about the project
• Analysis of Alternatives (AoA): Evaluates costs, benefits, advantages
and disadvantages of different alternatives
• Activity Based Costing (ABC): Accounting methodology that assigns
resources and overhead costs to activities, products and services to
support making decisions about pricing, outsourcing, capital
expenditures and operational efficiency
There are many types of cost estimates, each with a different
purpose. Know the purpose of the cost estimate before you start
9
Purpose of Estimate
Budget Formulation Estimates
•
•
•
•
•
•
•
•
Program Office Estimate (POE)
Component Cost Analysis (CCA)
Independent Cost Estimate (ICE)
What-if exercises
Rough Order of Magnitude (ROM)
Cost Risk Analysis
Should Cost Estimates
CAIV
10
Purpose of Estimate
Comparative Studies Estimates
• Making cost & benefit comparisons between
alternatives
– Economic Analysis (EA)
– Analysis of Alternatives (AoA)
– Force Structure
– Trade-off Studies
– Source Selection
– Prioritization
11
Definition and Planning
Defining the System
• Adequate description of the technical and program
characteristics of the system
• What are the physical and performance
characteristics?
• What are the development, production, and
deployment schedules?
• How many systems are to be produced?
• How will the systems be supported: contract, inhouse, two or three levels of maintenance?
12
Defining the System
Integrated System Schedule
1993
ACTIVITY
1994
1995
1996
1997
TODAY
1998
LLTI PEO IPR
PROGRAM REVIEWS
ENGINEERING &
MANUFACTURING
DEVELOPMENT
LETHALITY
ENHANCEMENT
LRIP DECISION
MRRB
TECH SUPPORT
DEVELOPM ENT
QL
TEST & EVALUATION
UE
FT T
QUAL
IOTE
LIVE FIRE TEST
LUT
(3)(6)
LFT (A)
LFT
(26)
(B,C) (8,4)
LOG DEMO II
PVT
(25 MS L + 10 CLU)
ENHANCED
PRODUCIBILITY
PROGRAM
LOW RATE INITIAL
PRODUCTION
FY96
(28)
FY98
FY99
FIELDING
AWE
QL
FTT
UE
LUT
CA
MRRB
(9)
CA
MSLS - 698
CLUs 55
MSLS - 872
CLUs 97
MSLS - 1015
CLUs - 108
ARMY
M SLS - 1020
CLUs - 206
M SLS - 1080
CLUs - 270
M SLS - 3316
CLUs - 423
LEGEND
MSL CLU
LLTI
CA
LEAD TIME
PRODUCTION
LEAD TIME
CA
-
QUICK LOOK
FIELD TACTICAL TRAINER
USER EVALUATION
LIMITED USER TEST
CONTRACT AWARD
MATERIEL RELEASE
REVIEW BOARD
PRODUCTION
LEAD TIME
CA
MULTIYEAR I & II
(3 YR CONTRACT)
FY97
II, III, FLIGHT
I
LD
II
PROD VER TEST
FY95
2000
MILESTONE III
LITE I / WARHEAD / LOW
COST BST
FY94
1999
J A S O ND J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D
PRODUCTION
CA
USM C
141
48
194
140
741
133
LEAD TIME
PRODUCTION
CA M YII
CA
RANGER
82nd
COMPL FIELDING
BEGINS
HANDOFF FT. HOOD NTC
FUE
USA
82nd
COMPLETE
FUE
USMC
13
Defining the System
Work Breakdown Structure (WBS)
• WBS defined in MIL-HDBK-881 as:
– product-oriented breakdown of hardware,
software, services, data and facilities that define
the system.
• WBS breaks a total job down into manageable
pieces & portrays the way work is to be done.
• WBS displays a company’s reporting structure.
• Program managers may cite MIL-HDBK-881 “for
guidance only” in contract solicitations.
14
MIL-Handbook-881 (WBS)
15
Defining the System
COST ELEMENT STRUCTURE (CES)
1.0 Research Development Test & Evaluation
(RDT&E)
2.0 Production
3.0 Military Construction (MILCON)
4.0 Military Pay and Allowances (MPA)
5.0 Operating and Maintenance Army (OMA)
16
Defining the System
COST ELEMENT STRUCTURE – 1.0 RDT&E
CES#
ELEMENT:
1.01
1.02
1.03
1.04
1.05
1.06
1.07
1.08
1.09
1.10
1.11
DEV. ENG.
PEP
DEV. TOOL.
PROTO MFG.
SEPM
SYS T&E
TRAINING
DATA
SUPP EQUIP.
DEV. FACILITIES
OTHER
FY00C$M
$ 39.039M
0.408
0.457
110.421
78.266
11.112
1.989
3.439
4.897
0.0
0.968
TY$M
$38.260M
0.386
0.450
107.724
76.363
10.927
1.954
3.413
4.758
0.0
0.928
17
Defining the System
COST ELEMENT STRUCTURE – 2.0 PROCUREMENT
CES#
ELEMENT:
2.01
2.02
2.03
2.04
2.05
2.06
2.07
2.08
2.09
2.10
2.11
2.12
2.13
2.14
NON REC PROD.
REC. PROD
ENG. CHG
SEPM
SYS T&E
TRAINING
DATA
SUPP. EQUIP.
OPER./SITE/ACT.
FIELDING
TRAIN. AMMO/MSLS
WAR RESV.
MODS
OTHER
FY06C$M
$ 16.110M
1,169.348
0.0
116.637
12.564
28.880
2.073
146.460
0.0
89.525
59.001
0.0
236.619
51.739
TY$M
$
16.583M
1,312.377
0.0
132.258
14.437
31.499
2.300
158.304
0.0
101.635
79.482
0.0
280.729
64.129
18
Defining the System
COST ELEMENT STRUCTURE – 3.0 MILCON
CES#
3.01
3.02
3.03
3.04
ELEMENT:
DEVELOP. CONSTRUCTION
PRODUCT. CONSTRUCTION
OPERATION/SITE ACTIVATION
OTHER MILCON
FY06C$M
TY$M
19
Defining the System
COST ELEMENT STRUCTURE – 4.0
Military Pay&Allowances (MPA)
CES#
4.01
4.02
4.03
4.04
4.05
4.06
ELEMENT:
FY06C$M
CREW
MAINTENANCE
SYSTEM SPECIFIC SUPPORT
SEPM
REPLACEMENT PERSONNEL
OTHER MPA
TY$M
20
Defining the System
COST ELEMENT STRUCTURE – 5.0
Operating & Maintenance Army (OMA)
CES#
5.01
5.02
5.03
5.04
5.05
5.06
5.07
5.08
5.09
5.10
ELEMENT:
FY06C$M
FIELD MAINT., CIV LABOR
SYS. SPECIFIC BASE OPS
REPLENISHMENT DLRs
REPLEN. CONSUMMABLES
POL
END ITEM MAINTENANCE
TRANSPORTATION
SOFTWARE
SEPM
TRAINING
5.11
OTHER OMA
TY$M
21
Defining the System
Cost Analysis Requirements Description
(CARD)
• Source of a system’s description
• Describes important features
• Is provided to other groups preparing cost
estimates
• Helps ensure all groups are costing out the same
“program.”
• Prepared by program office; approved by
DoD Component Program Executive Officer
22
Defining the System
Cost Analysis Requirements Description
(CARD)
Divided into a number of sections, each focusing on a
particular aspect of the program being assessed.
1.1.1 System Description
1.1.4 Government-Furnished Equipment and Property
1.2.1 Technical and Physical Description
1.2.1. x (..x..) Subsystem Description
1.2.1.x.3 Material, Processes, and Parts
1.2.2 Software Description.
23
Defining the System
Cost Analysis Requirements Description
(CARD) Continued
1.0 System Overview
1.1 System Characterization
1.1.1 System Description
1.1.2 System Funcitonal Relationships
1.1.3 System Configuration
1.1.4 Government Furnished Equipment/Information
1.2 System Characteristics
1.2.1 Technical/Physical Description
1.2.1.1 Subsystem Description
1.2.1.2 Functional and Performance Description
1.2.2 Software Description
1.3 System Quality Factors
1.3.1 Reliability
1.3.2 Maintainability
1.3.3 Availability
1.3.4 Portability and Transportability
1.3.5 Additional Quality Factors
1.4 Embedded Security
1.5 Predecessor/Reference System
2.0 Risk
24
Defining the System
CARD Continued
3.0 System Operational Concept
3.1 Organizational Structure
3.2 Basing and Deployment Description
3.3 Security
3.4 Logistics
4.0 Quantity Requirements
5.0 System Manpower Requirements
6.0 System Activity Rates
7.0 System Milestone Schedule
8.0 Acquisition Plan or Strategy
9.0 System Development Plan
10.0 Element Facilities Requirements
11.0 Track to Prior Card
12.0 Contractor Cost Data Reporting Plan
25
Definition and Planning
Ground Rules & Assumptions
• State the conditions which must take place
in order for the estimate to be valid
• Ground rules and assumptions must be
documented since changes in these areas
provide an audit trail for changes in the cost
estimate.
26
Definition and Planning
Select the Estimating Approach
• Techniques available
– Analogy
– Parametric
– Engineering
– Extrapolation
– Expert Opinion
Select the technique that is most applicable
to a specific WBS element
27
Definition and Planning
Estimating Methods
• Analogy
– Basic Comparison
– Factors
• Parametric
– Regression Analysis
• Engineering
– Detailed
• Expert Opinion
– Committee
– Delphi
28
Cost Estimating Methods
Analogy Method
• Based on direct comparison with historical
information of similar existing activities,
systems, or components.
• Compares new system with one or more
existing similar systems where there is
accurate cost and technical data.
• Analyst must show validity of comparison.
29
Cost Estimating Methods
Analogy Method
• Based on known costs of a similar program
• Adjustments for complexity, technical, physical
• Strengths
– Based on representative experience
– Less time consuming than others
– Can be used as a check on other techniques
• Weaknesses
– Small sample size
– Heavy reliance on judgment
– Sometimes difficult to identify analogy and
associated costs
30
Analogy Estimating with Factors
Cost(New) = Cost(Old) x Adjustment Factor
Element
Old
Old Sys1 Old Sys2
Sys3
New Sys
Airframe
$500/lb
1.25xS1
Engine
2M/Unit 3M/Unit 5M/Unit .8xS3
Avionics
$3K/lb
Payload
6M/Unit 8M/Unit 7M/Unit .65xS1
$250/lb
$2K/lb
$750/lb
$4K/lb
1.0S2
31
Cost Estimating Methods
Parametric Method
• Known as Statistical Method or Top Down
Method
• Relates cost to physical attributes or performance
characteristics
• Uses database of elements from similar systems
• Uses multiple systems
• Most beneficial in earlier stages of the system or
project life cycle
32
Cost Estimating Methods
Parametric Method
• Statistical relationships between cost and
physical or performance parameters of
past systems.
• Strengths
– Captures major portion of cost
– Quick what if type estimates
• Weaknesses
– Less detailed
– Getting accurate data
33
Cost Estimating Methods
Parametric Method
(Extrapolation)
• Use historical values to establish a trend for the
future.
• Example problem: Given the actual productivity
and labor rates in the given table. How much will it
take to complete a 3-year software development project
of 10K lines of code, if 50% is completed in the second
year and 25% is completed in first and third years?
34
Learning Curve Theory
As the quantity of a product
produced doubles, the man-hoursper-unit expended to produce the
product decreases at a fixed rate or
constant percentage (usually 10% to
20%).
35
Learning Curve Theory
Factors Contributing to Efficiency
• Job familiarization by both production workers and supervisory
personnel.
• Changes in product design which do not materially affect the product,
but result in increased ease and speed of production.
• Changes in tooling, machinery, and equipment which simplify or
speed up the production process.
• Improved production planning and scheduling, and improvements in
production techniques and operational methods.
• Improvements in shop organization, engineering coordination and
liaison.
• Improvements in the handling and flow of materials, and in the
materials and parts supply systems
36
Learning Curve Theory
The table is based on the assumption that the first unit required 100
person-hours to produce. The table indicates a constant rate of
reduction of 20% for each doubling of the unit number; the value of
the second and each succeeding item in the table is 80% of the value
of the preceding item.
TABLE FOR FIGURES
F-1-1 and F-1-2
Unit No.
1
2
4
8
16
32
64
Unit Person-hours
100.00
80.00
64.00
51.20
40.96
32.77
26.21
37
Learning Curve Theory
80% Unit Curve on Arithmetic Paper
38
Learning Curve Theory
1000
Unit
Cost
(LOG)
100
90%
85%
80%
10
70%
1
1
10
100
Production Unit Number
(LOG)
1000
10000
39
Learning Curve Theory
Uses
– Evaluating contract production costs.
– Assessing impact of production interruptions,
product changes and production rate change.
– Rate of improvement experienced by a particular
contractor on a prior product may be indicative of
rate of improvement expected on new product of
similar size, complexity, and construction.
– Improvement curve pattern experienced in the
production of past item can be extended to calculate
costs of future items.
40
Cost Estimating Methods
Engineering Method
• Known as bottom up method
• Requires extensive knowledge of system
characteristics
• Divide into segments; estimate costs for each
segment
• Combine segments plus integration cost
• Uses a combination of cost estimating methods
• Detailed knowledge of new technologies may not
be available.
41
Cost Estimating Methods
Engineering Method
• Strengths
– Detailed
• Best when long stable production process
• Weaknesses
– Requires a lot of time
– Cost
– Cannot be used until system well defined
42
Cost Estimating Methods
Expert Opinion Method
• Subjective judgment of an experienced
individual or group
• Use if time does not permit a more thorough
analysis
• Document source(s) of opinion of experts
• List attributes of the source(s)
Example: Delphi Technique
43
Cost Estimating Methods
Expert Opinion Method
• Consulting with one or more experts who
use their knowledge and experience to
arrive at an estimate
• Group techniques include
– Consensus (Committee)
– Delphi
• Strengths and weaknesses
44
Expert Opinion Method
Delphi Technique
•
•
•
•
•
Query expert opinion from group
Seek information from each expert
Summarize the results
Send report to each expert
Gather second opinion after each individual
reviews report
• Summarize results
• Iterative process continues until the experts reach
a consensus, or near-consensus.
45
Expert Opinion Method Example
Labor type
Hours
Needed
% of Total
Hourly Rate
Hrs
%*rate
Senior
Engineer
1000
$13
10.5
$1.37
Design
Engineer
3000
$11
31.6
$3.48
Tool & Die
500
$11
5.3
$.58
5000
$9
52.6
$4.73
Machinist
Totals
9500
$10.16
46
Cost Estimating Methods
Laying Out the Estimating Approach
Aircraft System – sum of level II elements (cross-check with analogy)
Air Vehicle – sum of level III elements
Airframe – CERs
Air Vehicle Software – Expert Opinion
Propulsion – CERs
Avionics – Analogy
Armament – Catalog Price
System Eng/Program Mgt – Factor of Air Vehicle
System Test & Evaluation – Factor of Air Vehicle
Training – Factor of Air Vehicle
Data – Factor of Air Vehicle
Peculiar Support Equipment – Factor of Air Vehicle
Initial Spares – Factor of Air Vehicle
47
Data Collection and Analysis
• The direction we take in collecting historical data will
be determined by our choice of estimating
methodologies.
• This step may also dictate a change in estimating
approach due to the availability or non-availability of
certain data.
• Data collection is not limited to cost data. We must
also collect technical and program data if we want the
total picture of the historical systems. This will help us
ensure the comparability of the systems that we are
collecting data on with the system we are estimating.
48
Data Collection and Analysis
Most Difficult Task in Cost Estimating
• Data Sources
– Data Types: Cost/Resource, Technical, Program
– Categories: Primary, Secondary
• Data Problems
– Wrong Format – Matching up – Definition
– Temporal Factors - comparability
• Normalization
• Data Location
49
Data Collection and Analysis
• Collection and analysis represent a significant
amount of the overall estimating task in terms of
time. The analysis will include decisions on what
programs to include in the data set to whether to
truncate lot data on a program for which you are
calculating a learning curve.
• Document data in your analysis, and any
assumptions you make
50
Estimate Formulation
• We have defined our tasks, planned the estimate,
assigned cost responsibilities, and performed data
collection and analysis.
• Here we apply our estimating methodologies and
tools: develop the factors, analogies, CERs, and
learning curves.
• We will aggregate the various cost elements into
development, production, and O&S estimates,
fiscally spread the costs, and apply inflation.
51
Estimate Formulation
Life Cycle Cost (LCC)
Total cost to the Government of a system over its
entire life. LCC:
• Serves as cost input for decisions whether
or not to continue, modify, or terminate
development, production, and fielding
• Provides basis for budget requests to
Congress
52
Total Ownership Cost (TOC)
Total Ownership Cost Includes All Costs
Associated With the Research, Development,
Procurement, Operation, Logistical Support
and Disposal of an Individual Weapon System
Including the Total Supporting Infrastructure
That Plans, Manages and Executes That
Weapon System Program Over Its Full Life.
And: "The Cost of Requirements for Common
Support Items and Systems That Are Incurred
Because of Introduction of That Weapon
System."
But: "Excludes Indirect "Non-linked"
Infrastructure Costs That Are Not Affected by
Individual Weapon Systems' Development,
Introduction, Deployment or Operations.“
Generally, TOC Is Synonymous With Life Cycle
53
Costs.
Army Tools for
Total Ownership Cost Estimating
Life Cycle Cost Management Tools
APPN
ACEIT PRICE SEER ACDB AMCOS OSMIS SBC/ISR CO$TAT
RDT&E
X
X
X
X
X
X
PROC
X
X
X
X
X
X
MILCON
X
X
X
X
X
MILPERS
X
X
X
X
X
O&M
X
X
X
X
X
X
X
54
Automated Cost Estimator (ACE)
• Automated Cost Estimator (Ace)—is a Model-building Tool. Part
Spreadsheet, Part Database, It Incorporates Enough Structure to Eliminate
Most of the Automation Tasks You Would Have to Perform If You Used a
Spreadsheet, Yet It’s Flexible Enough to Perform Nearly Any Kind of Analysis.
The Analyst’s Productivity Is Increased Through Built-in Inflation, Learning,
Time Phasing, Documentation, Sensitivity/what-if, and Other Analysis
Capabilities.
55
Automated Cost Data Base (ACDB)
ACDB Is ACEIT’s Automated Cost Database. Just As ACE Is a Modelbuilding Tool, ACDB Is a Database- Building Tool. It Contains Powerful
Database Entry and Administration Tools to Enable Any Site/office to Create
Its Own Tailored Database. When You Populate It, ACDB Lets You Search
and Retrieve Cost, Schedule, Technical, and Programmatic Data.
56
Operating Support (O&S) Costing
Installation Cost
(Base Operations /
Real Property
Maintenance)
Operating & Support
Management
Information System
(OSMIS)
Force Cost
Model(s)
57
58
Force Costing / Models
FORCES: Unit Operations & Support
• Updated Annually
• Provides Input to 5 Defense Models
• Supports 9 Separate Study Groups
• Avg 25 Major Estimates Per Year
59
OSMIS
U.S. Army
Cost & Economic
Analysis Center
OSMIS
Operating & Support
Management
Information System
•
•
•
•
•
•
Parts (NSN Level) & Fuel
Ammunition
Intermediate Maintenance
Depot Maintenance
Activity Data (miles/Hours)
Year of Manufacture
Database
60
Review and Presentation
• We want to ensure that the estimate is
reasonable, realistic, and complete.
• Reasonableness addresses areas such as:
using appropriate and acceptable
methodologies; presenting methodologies
systematically; the use of relevant data; and
ensuring that assumptions are valid and
clearly stated.
61
Review and Presentation
(Continued)
• The realism test checks to see if the
assumptions and ground rules are consistent
with the statement of work and if the costs
are in line with historical data.
• We evaluate completeness by determining
whether the estimate includes all the work
stated in the request for proposal and
whether the costs are traceable and
reconcilable.
62
Final Documentation
• Provide the means for other analysts to get the
same results that we have in our cost estimate.
• Providing good directions and a clear trail to
follow are essential in having an estimate that can
be replicated.
• Provide step-by-step documentation of the
methodologies, supporting data, ground rules, and
assumptions, equations, examples, etc.,
• Ability to interpret or evaluate someone else’s cost
documentation is as important as ability to prepare
good cost documentation.
63
Cost Estimating Process
Definition Data Collect
Planning
Normalize
Estimate
Formulation
Review/
Presentation
Final
Document
DOCUMENTATION
64
Cost Estimating Process
Questions
• We have talked about a process for
estimating the project as well as various
techniques for estimating specific cost
elements.
• Questions?
• Let’s talk about the current scenario of cost
estimating for SMART.
65
Cost Review Board (CRB) Process
Overview
PM - develops
Program Office
Estimate (POE)
Cost Review Board is a quality assurance built in the
Cost Analysis Process in support of decisions and PPBES
CRBWG Reconciles &
Recommends
ACP to CRB
CEAC - develops
Independent
Cost Estimate
Recommended
ACP Briefed to
CRB Principles
ASA(FM&C)
Approves
Army
Cost Position
• ASARC
• OSD
• PPBES
• APB
• CAIV
• AOA
• OSD CAIG develops ICE for ACAT ID programs as
part of the DAB process
• CEAC develop ICE for ACAT IC programs
66
Cost Analysis Requirement
MS I
MS 0
O
L
D
Concept
Exploration
MS II
MS III
Program Definition
&
Risk Reduction
Engineering &
Manufacturing
Development
(EMD)
Production,
Fielding/
Deployment
Cost Estimates
Needed
A
N
E
W
C
B
Concept
Exploration
Component
Advanced
Development
Review
Concept & Technology
Development
Pre-Systems
Acquisition
System
Integration
System
Demo
Production
Readiness & LRIP
Review
System Development&
Demonstration
Rate Production &
Deployment
Review
Support
Production & Deployment
Systems Acquisition
(Engineering and Manufacturing
Development, Demonstration, LRIP &
Production)
Sustainment
67
Cost Analysis Domain
Inputs (Descriptions)
Requirements
Acquisition Assumptions
Design Parameters
Risk Assessment
Process (Models)
Outputs (Costs)
ASARC
CAIG, DAB
APB
PPBES
AOA
Cost Analysis Process
Databases, Tools, & Models
Types of Cost Studies
Current
Capability
Needed
Capability
Studies
Should be Known
Unknown
Class
Cost Estimating
Descriptions, Models
Costs
Analysis
CER Development
Description, Historical
Costs
Models
Synthesis
CAIV
Cost Goals, Models
Descriptions ( Design and
Performance Parameters)
Control
Performance Based and Design Based Cost Models Currently do not Exist
68
Army Cost & Economic Analysis Center’s M&S Architecture
Top Level Tool Requirement Models
1. Cost tools to communicate with engineering
and requirements models.
2. Component level to assist engineers and
designers with cost capability.
3. Integrated Performance-Based Cost Model
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Top Level Tool Requirement Models
Cost Tools
ACEIT
Interface
Protocols
ACDB
Engineering Tools
Interface Protocols
SEER
Pro-E
PRICE
CAD
CAI*
Auto-CAD
Databases
Others
*Composite Affordability Initiative
Others
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Cost As An Independent Variable
(CAIV)
• Best time to reduce cost is early in the
process.
• Involves the stakeholders in the process.
• Cost tradeoffs must be addressed early in
the acquisition process and embedded in
program requirement documents, Request
For Proposals (RFPs), contract provisions,
and source selection process.
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CAIV Process
• Set realistic but aggressive cost objectives
early in acquisition program
• Manage risks
• Track progress using appropriate metrics
• Motivate Government and industry
managers to achieve program objectives
• Incorporate incentives to reduce O&S costs
for fielded systems
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Analysis of Alternatives
• Set realistic, aggressive cost objectives early
in development
• Manage risks
• Track progress with appropriate metrics
• Motivate government/industry managers
to achieve program objectives
• Incorporate incentives to reduce O&S costs
for fielded systems.
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Reduce Total Ownership Cost
(TOC) with M&S
• Link Cost/Performance Models to
Engineering Design Models to reduce TOC
& Sustainment
• Optimize performance/cost of system by
addressing in early design phase
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Cost Terminology
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Recurring vs Nonrecurring costs
Direct Costs vs Indirect Costs
Fixed Costs vs Variable Costs
Overhead Costs
Sunk Costs
Opportunity Costs
Life Cycle Costs
Cost is not a uniquely defined term
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Cost Terminology
• Recurring Costs are those costs that are repetitive and occur
when a company produces similar goods or services on a
continuing basis. A fixed cost that is paid on a repeatable basis
is a recurring cost (i.e., rent). For example, for a company that
provides architectural services, office space rental - which is a
fixed cost - is also a recurring cost. Can be tied to Quantity
Produced.
• Nonrecurring Costs are those costs that are not repetitive, even
though the total expenditure may be cumulative over a
relatively short period of time. Nonrecurring costs typically
involve developing or establishing a capacity to operate. For
example, the cost of purchasing real estate upon which a plant
will be built is a nonrecurring cost, as the cost of constructing
the plant itself. Cannot be tied to Quantity.
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Cost Terminology
• Direct Costs are those costs that can be reasonably measured
and allocated to a specific output/product or work activity
– Typical direct costs include the labor and material costs
directly associated with a product, service, or construction
activity
• Indirect Costs are those costs that are difficult to attribute or
allocate to a specific output or work activity. Costs that
involve too much effort to allocate directly to a specific output;
instead, they are allocated through a selected formula (i.e.,
proportional to direct labor hours or direct material dollars).
Cannot be tied to a specific product.
– Typical indirect costs include the costs of common tools,
general supplies, equipment maintenance
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Cost Terminology
• Fixed Costs are those costs which are unaffected by changes in
output quantity over a feasible range of operations for the
available production capability
– Typical fixed costs include insurance and taxes on facilities,
general management and administrative salaries, and
interest costs on borrowed capital. These are Non-Recurring
Costs.
• Variable Costs are those costs associated with production that
vary with quantity of output. Variable costs are the primary
costs that should be considered when making an economic
analysis of a proposed change to an existing operation.
– Typical variable costs include material and labor; these are
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Recurring Costs
Cost Terminology
• Overhead Costs consist of plant operating costs that are not
direct labor or direct material costs. (Indirect costs, overhead,
and burden are terms that are sometimes used interchangeably)
– Typical overhead costs include electricity, general repairs,
property taxes, supervision
– Various methods are used to allocate overhead costs among
products, services, or activities
• Most commonly used methods involve allocation in
proportion to direct labor costs, direct labor hours, direct
materials costs, the sum of direct labor and material
costs, or machine hours (refer to example)
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Cost Terminology
• Sunk Costs are those costs that have occurred in the past and
have no relevance to estimates of future costs and revenues for
alternative course of action
– Common to all alternatives, not part of prospective cash
flows in the future
– Not used in cost analysis but required in OMB-300
• Opportunity Costs are those costs incurred because of the use
of a limited resource. The opportunity to use that same
resource to monetary advantage in an alternative use is
foregone.
– The cost of the best rejected or foregone opportunity
– Often hidden or implied
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