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Prof.%20Morteza%20Anvari

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Title: Prof.%20Morteza%20Anvari


1
Cost Analysis for Non-Costers
  • Prof. Morteza Anvari

2
Cost Analysis Requirement
MS 0
MS I
MS II
MS III

O L D
Program Definition Risk Reduction
Engineering Manufacturing Development (EMD)
Production, Fielding/ Deployment
Concept Exploration
Cost Estimates Needed
Concept Exploration
Component Advanced Development
System Integration
System Demo
Production Readiness LRIP
Rate Production Deployment
N E W

Support
Concept Technology Development
System Development Demonstration
Production Deployment
Pre-Systems Acquisition
Systems Acquisition (Engineering and
Manufacturing Development, Demonstration, LRIP
Production)
Sustainment
3
Cost Estimating Process
Final Document
Data Collect Normalize
Estimate Formulation
Definition Planning
Review/ Presentation
DOCUMENTATION
4
Cost Analysis Model
Data/CERs LCC Estimates Cost Drivers
Develop Cost EstimateStructure and WBS
EstablishGround Rules and Assumptions
Prepare Cost Estimatesfor Each Element
Test TotalSystem Estimate
Prepare Documentation
Start
CompileData Base/ CERs/Models
Engineering Analogy Parametrics Expert Opinion
Reasonableness SensitivityAnalysis Cost-RiskAsse
ssment
5
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.
  • Lets discuss a process for organizing and
    developing this estimate.

6
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 questionsThey help you understand
    the requirement.

7
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?

8
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?

9
Definition and PlanningKnow Purpose of the
Estimate
  • Main purposes of estimates
  • Budget Formulation
  • Comparative Studies
  • Source Selection

10
Purpose of EstimateBudget Formulation Estimates
  • Program Office Estimate (POE)
  • Component Cost Analysis (CCA)
  • Independent Cost Estimate (ICE)
  • What-if exercises
  • Rough Order of Magnitude (ROM)
  • Should Cost Estimates
  • CAIV

11
Purpose of EstimateComparative Studies Estimates
  • Making cost benefit comparisons between
    alternatives
  • Economic Analysis (EA)
  • Analysis of Alternatives (AoA)
  • Force Structure
  • Trade-off Studies
  • Source Selection
  • Prioritization

12
Definition and PlanningDefining 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,
    in-house, two or three levels of maintenance?

13
Defining the System Integrated System Schedule
14
Defining the System Work Breakdown Structure
(WBS)
  • WBS definition
  • 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 companys reporting structure.
  • Program managers may cite MIL-HDBK-881 for
    guidance only in contract solicitations.

15
WBS
16
Defining the System Cost Element Structure (CES)
  • 1.0 Research Development Test Evaluation
    (RDTE)
  • 2.0 Production
  • 3.0 Construction (CON)
  • 4.0 Pay and Allowances
  • 5.0 Operating and Maintenance Army (OM)

17
Defining the System COST ELEMENT STRUCTURE
1.0 RDTE
CES ELEMENT FY00CM
TYM 1.01 DEV. ENG.
1.02
PEP 1.03 DEV. TOOL.
1.04 PROTO MFG.
1.05 SEPM 1.06
SYS TE
1.07 TRAINING
1.08 DATA
1.09
SUPP EQUIP. 1.10 DEV. FACILITIES
1.11 OTHER
39.039M 38.260M 0.408
0.386 0.457 0.450
110.421 107.724 78.266
76.363 11.112 10.927
1.989 1.954 3.439
3.413 4.897
4.758 0.0 0.0 0.968
0.928
18
Defining the System COST ELEMENT STRUCTURE
2.0 PROCUREMENT
CES ELEMENT
FY00CM TYM 2.01 NON REC PROD.
2.02 REC. PROD
2.03 ENG. CHG 2.04
SEPM 2.05 SYS TE 2.06
TRAINING 2.07 DATA
2.08
SUPP. EQUIP. 2.09 OPER./SITE/ACT.
2.10
FIELDING
2.11 TRAIN. AMMO/MSLS
2.12 WAR
RESV. 2.13 MODS
2.14
OTHER
16.110M 16.583M 1,169.348
1,312.377 0.0
0.0 116.637 132.258
12.564 14.437 28.880
31.499 2.073 2.300
146.460 158.304 0.0
0.0 89.525
101.635 59.001
79.482 0.0
0.0 236.619 280.729 51.739
64.129
19
Defining the System COST ELEMENT STRUCTURE 3.0
CON
CES ELEMENT
FY00CM TYM 3.01
DEVELOP. CONSTRUCTION 3.02 PRODUCT.
CONSTRUCTION
3.03 OPERATION/SITE
ACTIVATION 3.04 OTHER N
20
Defining the System COST ELEMENT STRUCTURE 4.0
Pay Allowances
CES ELEMENT
FY00CM TYM 4.01 CREW 4.02
MAINTENANCE
4.03 SYSTEM SPECIFIC
SUPPORT 4.04 SEPM 4.05 REPLACEMENT
PERSONNEL 4.06 OTHER
21
Defining the System COST ELEMENT STRUCTURE 5.0
Operating Maintenance (OM)
CES ELEMENT
FY00CM TYM 5.01 FIELD MAINT.,
CIV LABOR 5.02 SYS. SPECIFIC BASE OPS
5.03 REPLENISHMENT DLRs 5.04
REPLEN. CONSUMMABLES 5.05 POL 5.06
END ITEM MAINTENANCE 5.07
TRANSPORTATION
5.08
SOFTWARE 5.09 SEPM
5.10 TRAINING

5.11 OTHER

22
Defining the System Cost Analysis Requirements
Description (CARD)
  • Source of a systems 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

23
Defining the System Cost Analysis Requirements
Description (CARD) Continued
24
Defining the System CARD Continued
25
Definition and PlanningGround 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
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

27
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.

28
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

29
Tools for Total Ownership Cost Estimating
Life Cycle Cost Management Tools
30
Definition and PlanningSelect the Estimating
Approach
  • Techniques available
  • Analogy
  • Parametric
  • Engineering
  • Extrapolation
  • Expert Opinion
  • Select the technique that is most applicable to a
    specific WBS element

31
Definition and PlanningEstimating Methods
  • Analogy
  • Basic Comparison
  • Factors
  • Parametric
  • Regression Analysis
  • Engineering
  • Detailed
  • Expert Opinion
  • Committee
  • Delphi

32
Life Cycle Cost Estimates
  • Cost estimates based on confidence intervals
  • Parametric analysis based on similar systems and
    similar attributes (regression)
  • Engineering data based on reliability projections
    used for bottoms-up estimate
  • Actual system costs used to extrapolate future
    system costs
  • Cost estimate revised every two years after
    production
  • Weights associated with non-actuals decrease as
    system matures
  • MS B is a true hard stop for systems

33
Cost Estimating MethodsAnalogy 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.

34
Cost Estimating MethodsAnalogy 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

35
Analogy Estimating with Factors
Cost(New) Cost(Old) x Adjustment Factor
Element Old Sys1 Old Sys2 Old Sys3 New Sys
Airframe 500/lb 250/lb 750/lb 1.25S1
Engine 2M/Unit 3M/Unit 5M/Unit .8S3
Avionics 3K/lb 2K/lb 4K/lb 1.0S2
Payload 6M/Unit 8M/Unit 7M/Unit .65S1
36
Cost Estimating MethodsParametric 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

37
Cost Estimating MethodsParametric 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

38
Cost Estimating MethodsParametric
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?

39
Cost Estimating MethodsEngineering 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.

40
Cost Estimating MethodsEngineering Method
  • Strengths
  • Detailed
  • Best when long stable production process
  • Weaknesses
  • Requires a lot of time
  • Cost
  • Cannot be used until system well defined

41
Cost Estimating MethodsExpert 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

42
Cost Estimating MethodsExpert 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

43
Expert Opinion MethodDelphi 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.

44
Expert Opinion Method Example
Labor type Hours Needed Hourly Rate of Total 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
Machinist 5000 9 52.6 4.73
Totals 9500 10.16
45
Learning Curve Theory
As the quantity of a product produced doubles,
the man-hours- per-unit expended to produce the
product decreases at a fixed rate or constant
percentage (usually 10 to 15).
46
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

47
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.
48
Learning Curve Theory
80 Unit Curve on Arithmetic Paper
                                                  
              
49
Learning Curve Theory
50
Learning Curve TheoryUses
  • 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.

51
Estimate Formulation
  • We have defined our tasks, planned the estimate,
    assigned cost responsibilities, and performed
    data collection and analysis.
  • Here we apply our estimating methodologies and
    tools develop the factors, analogies, CERs, and
    learning curves.
  • We will aggregate the various cost elements into
    development, production, and OS estimates,
    fiscally spread the costs, and apply inflation.

52
Cost Estimating MethodsLaying 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

53
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.

54
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.

55
Risk and Uncertainty Analysis
  • Risk Analysis Approaches
  • Detailed Network Stochastic
  • Discrete Technical, Schedule, and Estimating
    Risks
  • Detailed Monte Carlo Simulation (each WBS)

Effort
  • Bottom Line Monte Carlo Simulation
  • Add a Risk Factor/Percentage

Detail
56
Risk and Uncertainty Analysis
  • Probability Distributions

WBS Cost Distribution
Total Cost
57
Risk and Uncertainty Analysis
  • Probability Density Function

58
Risk and Uncertainty Analysis
  • Cumulative Distribution Functions

59
Reasons for Risk
60
Cost Schedule Curve
Fixed Cost Technology Outdate
Parallel Effort More ECP Less Mature Design
Life Cycle Cost
Typical
Min
Optimal
Development Schedule
61
Development Schedule
Mean Cycle Time to IOC
DoD Pre-1992 Starts 132 months (11
years) Post-1992 Starts 89 months (7.4
years) on-going F-22
216 months (18 years) IOC 2004 Comanche
264 months (22 years) IOC
2006 Commercial Boeing 777 54
months (4.5 Years)
62
Schedule Goals
  • Commercial Drivers
  • Technology Drives Schedule
  • Constraint Schedule
  • Goal is ROI Maximization

Defense
Cost
  • DoD Drivers
  • Funding Drives Schedule
  • Unconstrained Schedule
  • Goal is Cost Reduction

Commercial
Development Schedule
63
DoD Program Schedule Drivers
Funding Allocation
Cost
Acquisition Process
Program Execution
Cycle Time Reduction Goal
Development Schedule
64
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 elses
    cost documentation is as important as ability to
    prepare good cost documentation.

65
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 OS costs for
fielded systems
66
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.

67
Cost Analysis Domain
Types of Cost Studies
Performance Based and Design Based Cost Models
Currently do not Exist
68
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 OS costs for
fielded systems.
69
The Coster's Challenge
Cost Analysis Art or Science?
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