Cost Estimating Basics

Unit I - Module 1 1Cost Prof

Cost Estimating Basics

Why cost estimating (and an overview of how)


Unit IndexUnit I – Cost Estimating

1. Cost Estimating Basics2. Costing Techniques3. Parametric Estimating

Unit II – Cost Analysis TechniquesUnit III – Analytical MethodsUnit IV – Specialized CostingUnit V – Management Applications


Outline• Introduction to Cost Estimating and

Analysis• Overview of Cost Estimating and

Analysis• Cost Estimating Products• Cost Estimating Process & Methods• Cost Estimating Certification• Summary• Resources


Introduction to Cost Estimating and Analysis

• Definition and Purpose

• Applications• Organizations• Skills


Cost Estimating• Cost Estimating:

– The process of collecting and analyzing historical data and applying quantitative models, techniques, tools, and databases to predict the future cost of an item, product, program or task

• Purpose of cost estimating– Translate system/functional requirements

associated with programs, projects, proposals, or processes into budget requirements

– Determine and communicate a realistic view of the likely cost outcome, which can form the basis of the plan for executing the work


Applications of Cost Estimating

• As part of a total systems analysis, cost estimating helps decision makers to:– Make decisions on program viability,

structure, and resource requirements– Establish and defend budgets– Assess technology changes– Conduct analysis of alternatives (AoA)– Create new business proposals and perform

source selection– Perform design trade-offs– Comply with public law– Satisfy oversight requirements

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Cost Estimating Organizations

• Cost oversight organizations• Program Offices and project teams• Budgeting, contracting, and

purchasing organizations• Manufacturers• Consultants

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Cost Estimating Skills• Cost estimating and analysis at its

best is an interdisciplinary mix of:– Mathematics, Probability, Statistics– Economics, Econometrics, Business,

Accounting, Budgeting– Operations Research, Management

Science, Industrial Engineering– Mechanical Engineering, Systems

Engineering, Physics, etc.– Sales and Marketing

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Cost Estimating 101, Naval Center for Cost Analysis (NCCA), http://www.ncca.navy.mil/about/101.cfm.

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Overview of CostEstimating and Analysis

• Requirements• Benefits and Qualities• Limitations and

Concerns• Types of Cost

Estimates• Government Entities


Requirements for Cost Estimating

• Must estimate and plan consumption of resources– Capture impacts of changing resources

• Validated cost estimate necessary to continue through milestone reviews– Estimates should be updated periodically as program

matures technically and schedules change

• Efficient management of changing requirements under tight constraints– Supports management decisions by quantifying the

resource impact of alternativesCost analysis is required whenever resources are

allocated

Cost analysis is required whenever resources are

allocated

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Benefits of Cost Estimating• Supports budgeting process by enabling you to:

– Integrate the requirements and budgeting processes – Assess reasonableness of program budgets– Effectively defend budgets to oversight organizations– Quickly/accurately determine impacts of budget cuts

on program baselines and associated functionality

• Enhances profitability and organization’s future business potential

• Uses established, repeatable methods• Enables identification of potential pitfalls such

as cost growth, schedule slips early in a program’s life

• Enables identification of future cost improvement initiatives

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Benefits of Cost Estimating• Provides for the identification and objective

quantification of the impact of program risks (technical and schedule risks)

• Provides basis for evaluating competing systems/initiatives (cost/benefit analyses and AoAs)

• Enables proposal pricing and evaluation of proposals for cost reasonableness

• Captures cost impacts of design decisions to facilitate tradeoffs in CAIV/DTC/Target Costing

• Facilitates evaluation of the impact of new ways of doing business (e.g., in-sourcing vs. outsourcing, COTS vs. custom software)

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Cost Estimate Qualities• The characteristics of high quality

cost estimates are:– Accuracy– Comprehensiveness– Replicability and Auditability– Traceability– Credibility– Timeliness

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Limitations of Cost Estimating

• Cost estimating cannot – Be applied with cookbook precision– Produce results that are better than

input data – Predict political impacts– Substitute for sound judgment,

management, or control– Make final decisions


Cost Estimating Concerns• Support Critical Decisions

– May be difficult to quantify cost impacts of alternatives– Cannot trade off non-cost variables

• Timeliness– Schedule constraints on estimate delivery

• Estimate quality suffers with fast turnaround requirements– Quick and easy access to historical data may not be possible– Lower quality estimate limits utility to key decision makers

• Quality– Definition of “good data”– Adjustments to raw data may be made several times– Inadequate documentation– Undocumented or tacit knowledge

• Coordination– Large number of organizations may be involved

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Cost Estimating Concerns• Consistency

– Estimates must track over time– Estimates developed by other organizations

must be based on same content and assumptions

– Historical data is not consistent between differing cost element or work breakdown structures

• Security/access– Company-proprietary data– Data classification/security– Possible misuse of data


Types of Cost Estimates – Budget

• Budget Estimate– Estimate prepared for inclusion in budget to

support acquisition programs– Ensures project feasibility and attainable

performance levels– A reliable project cost estimate consistent

with realistic schedules– Used to establish baseline project

definitions, schedules, and costs– May or may not include risk

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Types of Cost Estimates – LCCE

• Life Cycle Cost Estimate (LCCE)– “Cradle to grave" estimate – Includes research and development (R&D),

production, operations and support (O&S), and disposal

• Commercial definitions are similar• Life cycle is often confused with O&S but actually

includes all of the above

– Should be performed as early in the life cycle as possible

– Estimate costs regardless of funding source– AKA Total Ownership Cost (TOC) estimate

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Types of Cost Estimates – ICE• Independent Cost Estimate (ICE)

– LCCE developed by an independent organization

– “True facts" assessment of what the program's most likely cost will be

– Provides an unbiased test of the reasonableness of the Program LCCE (PLCCE)

– Identifies potential budgetary excesses and shortfalls

– Reduces the cost risks associated with the project


Types of Cost Estimates – ROM & EA

• Rough-Order-of-Magnitude (ROM)– Very little specific information is known about the

project – The design effort has not begun– Estimate uses ratios or factored historical information – Used for feasibility studies and selection from among

alternatives– AKA “Quick Look”

• Economic Analysis (EA)– Describes specific mission requirement(s) and lists

specific alternative courses of action– Framework for systematically investigating problems of

choice– Compares the costs and benefits associated with each

alternative course of action

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Types of Cost Estimates – AoA & ABC

• Analysis of Alternatives (AoA) – Evaluates the costs and benefits of different

alternatives– Shows advantages and disadvantages of the

alternatives being considered

• Activity Based Costing (ABC)– Accounting methodology that assigns all

costs to activities– Enables resources and overhead costs to be

accurately assigned to products and services– Assists in making decisions about pricing,

outsourcing, capital expenditures and operational efficiency.

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Government EntitiesResponsible for Cost Estimating

• OSD Cost Analysis Improvement Group (CAIG)– Milestone review authority, has oversight of DoD service cost

centers• Intelligence Community CAIG (IC CAIG)

– Provides independent cost assessments to the Director of Central Intelligence (DCI) for selected IC programs

• Naval Center for Cost Analysis (NCCA) – Prepares and briefs the Component Cost Analysis (CCA) to the CAIG– Holds a reconciliation meeting prior to the formal CAIG meeting

• US Army Cost and Economic Analysis Center (CEAC)– CEAC prepares CCA and briefs results to the CAIG– Army Cost Review Board works with the Assistant Secretary of the

Army (Financial Management) to develop the Army cost position briefed to the CAIG

• Air Force Cost Analysis Agency (AFCAA)– Air Force Cost Directorate, SAF/FMCC, prepares the AF cost

position, after reconciliation between the System Program Office estimate and the AFCAA’s CCA


Cost Products• Cost Analysis

Requirements Description (CARD)

• Cost Estimate• Estimate

Documentation


Cost AnalysisRequirements Description (CARD)• Cost Analysis Requirements Description

(CARD) – Detailed technical, programmatic, and schedule

description

• Purpose of CARD– Collect, integrate and coordinate technical,

programmatic, and schedule information necessary to estimate the costs of a program

– Ensures that cost projections developed by the analyst are based on a common definition of the system and the acquisition programCARD is a DoD requirement for major programs but a CARD-like document should be developed for any estimate, government or private industry

CARD is a DoD requirement for major programs but a CARD-like document should be developed for any estimate, government or private industry

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CARD Contents• CARD includes:

– System Technical Description

– Work Breakdown Structure (WBS)

– Predecessor System Description

– Manpower Requirements

– Risk– Operational

Concept– Deployment

– Logistics Support Concept

– Training– Acquisition

Schedule– Acquisition

Strategy– System Test and

Evaluation (ST&E)– Environmental

Impact Analysis– Track to Prior CARD


Cost Estimate• Definition of a cost estimate

– Cost estimate is an analysis of individual cost elements using established methodologies to project from data to estimated costs

– Various types of estimates can be developed• Budget Estimate, LCCE, ICE, ROM Estimate, EA, AoA,

ABC, etc.

• Developed using one or more estimating techniques

• Analyst should consider past and current actual data

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Cost Estimate Characteristics• Input rates

– Labor, materials, tooling, scrap, etc.– Application of audited or negotiated direct

and indirect rates

• Model structure– Estimate developed to a varying level of

detail depending on system and schedule – Estimate is inflated and time phased

• Model execution– Applies COTS or custom model – May include sensitivity/risk analysis 9


Estimate Documentation• Why document the estimate?

– Provides reviewers with:• Purpose of cost estimate• Program background and system

description• Program Schedule• Scope of cost estimate• Ground rules and assumptions

– Robust and detailed documentation permits reviewers to follow estimate logic from assumptions to resultsDocument not only for an external audience but for

yourself!Document not only for an external audience but for

yourself!


Estimate Documentation• What should be documented?

– The data, data sources, and normalization procedures

– Labor rates and hours, content, and how they were developed

– Material requirements and subcontracts

– Methodology for any applicable cost improvement curves

– Details regarding the factors and cost estimating relationships (CERs) applied

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Estimate Documentation• What should be documented?

– Details regarding the applied cost models including

• Relevance to the system/program• Inputs/outputs• Calibrations performed

– Inflation indices used and time phasing details

– Detailed description of judgments applied by estimator(s)

– Any details of risk and confidence analysis– The conclusion(s) resulting from the estimate– Appendices and appropriate references

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Cost Estimating Process• Work Breakdown Structure

(WBS) Development• Program/System Baseline

Development• Data Collection and Analysis • Cost Element Methodology• Estimate Development and

Validation• Results and Report

Generation

WBS

Baseline

Data Collectio

nData

Analysis

Methodology

Validation

Reports

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Work Breakdown Structure (WBS)

• What is a WBS?– Common frame of reference for relating job tasks

to each other and relating project costs at the summary level of detail

– Framework for specifying the objectives, labor, materials, and contracts of the system/program

• Structure defining the total program/system • Detailed definitions of individual elements required

• WBS varies by program and project phase• WBS Cost Element Structure (CES)• MIL-STD-881B previously the DoD standard

– Now MIL-HDBK-881B is guidance– Excellent resource for WBS components/content

WBS

Baseline

Data Collectio

nData

Analysis

Methodology

Validation

Reports

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Purpose of a WBS• Displays and defines the system/program to

be developed as a product-oriented family tree– Includes hardware, software, support, and/or

service elements– WBS should encompass complete life cycle of the

system/program• CARD (or similar type of document) is the source for

this program plan

• Establishes the physical work packages or elements and the activities within those packages that completely define a project– Organizes the physical work packages into levels

that can be developed into a summary

WBS

Baseline

Data Collectio

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Analysis

Methodology

Validation

Reports


Purpose of a WBS• Relates the work scope elements to

each other and to the end product(s)– Makes the relationships of the

components clear and the relationship of the tasks to be completed (to each other and to the end product) clear

• Key to developing/tracking costs– Provides financial reporting framework – Assists in tracking the status of efforts,

resource allocations, cost estimates, expenditures, and cost and technical performance

WBS

Baseline

Data Collectio

nData

Analysis

Methodology

Validation

Reports

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Work BreakdownStructure (WBS) Early Development

• WBS development should start early in the conceptual stages of the program– Provides structure to the design

requirements and functional architecture

• WBS evolves as system/program evolves– Evolves through iterative analysis of the

development strategy, objectives and requirements

– Define detailed technical objectives and specify work tasks for each WBS element

WBS

Baseline

Data Collectio

nData

Analysis

Methodology

Validation

Reports


Work BreakdownStructure (WBS) Continued

Development• As the program/system matures– Engineering efforts focus on system-level

performance requirements and top-level specifications

– Major subsystems and configuration items are identified

– WBS continues to be defined at lower levels– Eventually the total system definition is complete

• During production, maintain and update the WBS

• WBS Dictionary– Develop WBS dictionary while developing WBS– Should be routinely revised to incorporate changes

and current status of the program throughout the program's life

WBS

Baseline

Data Collectio

nData

Analysis

Methodology

Validation

ReportsTip: Dictionaries are often

overlooked and are critical to use of a WBS


Program/System Baseline Definition

• Program/system baseline definition encompasses all the information of a CARD

• Process for defining program/system baseline– Determine the programmatic scope of

estimate• Period to be estimated• Phases estimated

– Determine the technical scope of estimate• Program requirements• Work not included• Deliverables

WBS

Baseline

Data Collectio

nData

Analysis

Methodology

Validation

Reports



• Process for defining program/system baseline – Develop detailed system technical

description• Include key performance characteristics,

hardware/software components, architecture, configurations, reliability and security requirements, etc.

– Include previously developed WBS– Develop detailed description of

predecessor systems, if any• Include technical details, reason for replacing,

legacy hardware/software, phase-out plan, etc.

WBS

Baseline

Data Collectio

nData

Analysis

Methodology

Validation

Reports



• Process for defining program/system baseline – Determine manpower requirements

• Include skills, salaries, location, etc.

– Incorporate technical/performance, schedule, and cost risk

• Determined by management and/or engineers

– Define the operational concept• Include program management details,

operation specifics, platforms

– Determine deployment details• Include sites, schedules, special preparations,

site configurations, transition plans, etc.

WBS

Baseline

Data Collectio

nData

Analysis

Methodology

Validation

Reports



• Process for defining program/system baseline – Detail logistics support

• Include maintenance, sparing, and upgrade plans

– Define the training plan• Include types of training/certification,

providers, locations, frequency, etc.

– Establish the acquisition schedules• Include milestones, strategy,

contracting details, etc.

WBS

Baseline

Data Collectio

nData

Analysis

Methodology

Validation

Reports

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• Process for defining program/system baseline – Detail the system test and evaluation

plan• Include schedule, number of tests,

criteria, locations, etc.

– Describe any environmental impacts• Include disposal concept, mitigation

plans, conditions, materials, etc.

– Maintain track to the original baseline• As programs mature, define changes

WBS

Baseline

Data Collectio

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Analysis

Methodology

Validation

Reports


Data Collection and Analysis

• Data Collection– Obtaining data– Normalizing data

• Data Analysis– Methods and process

4WBS

Baseline

Data Collectio

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Analysis

Methodology

Validation

Reports

Tip: These two steps of the process go hand in hand and

are somewhat iterative.

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Data Collection• Understand total picture of

estimating task– Intended use of the estimate– Scope of the estimate

• Establish cost element structure– Based on WBS

• Understand estimating techniques and data collection needs– Identify proposed estimating

technique(s)– Identify potential data sources

WBS

Baseline

Data Collectio

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Analysis

Methodology

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Data Collection• Develop data collection plan

– Ensure sources identified for all needed cost elements

– Identify alternative/backup data sources– Identify sources for cross-checks– Establish a timeline/schedule

• Collect the data• Normalize the data

– Make data consistent and comparable– Types of normalization include Cost

Units, Sizing Units, Key Groupings, State-Of-Development Variables, and End Terms for Homogeneity

WBS

Baseline

Data Collectio

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Analysis

Methodology

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Data Analysis• Scatter plot the data

– Develop visual depiction of the relationships in the data

• Calculate descriptive statistics– For example, the means and CVs

• Look for outliers– Points far from the center of the

data• Compare to history

– Standard factors, rules of thumb, other historical data

6WBS

Baseline

Data Collectio

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Analysis

Methodology

Validation

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Cost Element Methodology• Select estimating methodology that

most reliably estimates program costs

• Primary cost estimating techniques or methodologies– Analogy– Parametric– Engineering build-up

• Other methods – Expert opinion– Extrapolation from actuals

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WBS

Baseline

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Estimate Development and Validation

• Develop estimate with appropriate costing techniques

• Validate estimate– Crosscheck with historical data for

similar programs, another estimating methodology, or another model

– Compare estimate with industry “rules of thumb”

– Crosscheck proprietary models with Excel backups

• Document estimate while developing

WBS

Baseline

Data Collectio

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Analysis

Methodology

Validation

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Results and Report Generation• Document the estimate

– Written justification of the estimate– Well-documented estimate withstands

scrutiny and increases credibility– Provide sufficient information to replicate

the estimate

• Develop results and report at appropriate level of detail– Crisp and complete– Easy to comprehend– Address important details– Convey competence

WBS

Baseline

Data Collectio

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Analysis

Methodology

Validation

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Results and Report Generation• Conduct other analysis

– Cost As an Independent Variable (CAIV)• Making performance and schedule a function

of available resources

– Sensitivity analysis• Tool for determining effect of changes for

decision-making

– Risk analysis• Analyzing technical, schedule, performance

and other risks• Used to adjust cost estimate

• Final result is defendable cost estimate for decision making

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WBS

Baseline

Data Collectio

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Analysis

Methodology

Validation

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Cost Estimating Certification• So you want to be a cost analyst…

– Society of Cost Estimating and Analysis (SCEA) offers the important professional certification Certified Cost Estimator/Analyst (CCE/A)

– Combination of educational and job experience requirements (minimum 2 years)

– CCE/A exam ($85)– More details on SCEA website (

http://www.sceaonline.net) under Certification


Summary• Rigorous and systematic estimating leads to a

better understanding of the problem• Quality and accuracy depend on the expertise

of the estimator– Estimator must understand complexity, technology,

and programmatic issues

• Don’t lose sight of the forest for the trees– Leaving out components– Double-counting components– Forgetting integration costs

• Ability to reproduce the estimate• Estimator must understand all estimating

methods applied


Resources• Cost Estimating Handbook, 2nd ed.,

Rodney D. Stewart, Wiley, 1991• Engineering Cost Estimating, 3rd

ed., Phillip F. Ostwald, Prentice-Hall, 1991

• DoD MIL-HDBK-881 “Work Breakdown Structure,” 02 Jan 1998


Resources – Agencies• Oversight agencies

– NCCA, http://www.ncca.navy.mil– CEAC, http://www.ceac.army.mil– AFCAA, http://www.saffm.hq.af.mil/afcaa

• NCCA Cost Analysis 101– http://www.ncca.navy.mil/about/101.cfm

• Budget/financial organizations– GAO, http://www.gao.gov– OMB, http://www.whitehouse.gov/omb– USD(C), http://www.dtic.mil/comptroller– DCAA, http://www.dcaa.mil


Resources – Regulatory• Title 10, United States Code,

Section 2434– Independent Cost Estimates;

Operational Manpower Requirements

• Clinger-Cohen Act of 1996


Resources – Policy• DoDD 5000.1, DoDI 5000.2 “Defense Acquisition

System,” 23 October 2000 (incl Change 1, 4 Jan 2001)

• DoD 5000.2-R “Mandatory Procedures for MDAPs and MAIS Acquisition Programs,” 11 Jun 2001– http://www.acq.osd.mil/ar/library.htm#directives

• DoDD 5000.4 “OSD Cost Analysis Improvement Group (CAIG)”

• DoD 5000.4-M “Cost Analysis Guidance and Procedures,” 11 Dec 1992– http://www.dtic.mil/whs/directives/corres/html/50004m.

htm

• DoDI 7041.3– Economic Analysis and Program Evaluation for Resource

Management

Cost Estimating Basics

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