Unit I - Module 2 Cost Estimating Techniques Flashcards

Question

The idea of precision and accuracy manifests in cost estimating as uncertainty and risk.

Answer 1

Uncertainty captures the range of possible outcomes of the estimate which characterizes its precision. This is best done as a probability distribution, usually an empirical one resulting from a Monte Carlo simulation which can then be summarized with a confidence interval (e.g., one million dollars, plus or minus 15 percent). Risk refers to the upward shift applied to the cost estimate range to account for the fact that unadjusted estimates tend to be systematically low. This adjustment is intended to eliminate what appears to be an inherent bias in estimates and improves the estimate's accuracy. For instance, if costs come in on average 20% higher than the estimates, cost estimators may want to add 20% to the estimate. At first, this seems like a high percentage, but it is not atypical of historical cost growth on some programs. The proper treatment of uncertainty and risk is difficult because each involves some probability and statistics, but developing a best attempt is essential to produce meaningful and useful estimates.

Answer 2

Same systems or units are not built repeatedly so that the range of costs can be observed. The system or unit is built once and one possible value is determined, which includes random or unknown elements, causing it to be above or below average. Even when building multiple units, as in a production run, each individual unit has its own random or unknown elements that produce variation around what should be a smooth learning curve.

Answer 3

Cost estimating is sometimes referred to as both a science and an art. In exploring costing techniques, cost estimators strive for the curiosity, creativity, and quest for truth found in both the arts and the sciences while maintaining a firmly analytical mindset. In this context, "creativity" means being versatile in applying various established techniques. The Analogy technique uses an estimate for an existing item to develop an estimate for a similar item. The parametric technique uses an established pattern based on known variables to provide an estimate for an item. By developing a statistical relationship or a cost estimating relationship (CER) between known variables, the analyst can infer the cost value for an item using these known variables. The Build-up technique is based on the concept that an item is the sum of its constituent parts. In this technique, the sum of each constituent element adds up to provide the cost for an item.

Answer 4

A cost estimating analogy is an attempt to estimate costs by drawing a comparison between the item in question and a similar (or analogous) item. Cost estimators develop analogies at the system, subsystem, or component level, and may use multiple analogies at the lower WBS levels to create to a higher level estimate. Generally, some adjustments must be made to the costs of the older item to estimate the new item. These adjustments include those based on programmatic information (e.g., quantity or schedule), physical characteristics (e.g., weight or materials), performance characteristics (e.g., power or pointing accuracy), government or commercial practices, or contract type (e.g., fixed price or cost plus). Economic adjustments for inflation (e.g., converting from constant dollars to then year dollars) are normally considered part of data normalization. For additional information, refer to Module 5 Index Numbers/Inflation. Objectivity is important when making an adjustment. Identify key cost drivers and then determine how the old item relates to the new and how that cost driver affects the costs. Remember that all estimates should be reasonable. The source of the analogy and any adjustments must be logical, credible, and acceptable to an informed

Answer 5

there are many similarities between the old and new systems, adjustments are quantitative, not qualitative, and subjective adjustments are minimized or avoided altogether. An analogy is useful as a cross-check for other methods even when using other more detailed costing techniques. In this case, the estimates should have the same order of magnitude

Answer 6

One advantage is that it can be used before detailed program requirements are known. The more similar the systems, the stronger the analogy and the easier it is to stand up to review. The analogy is also an easy technique to use if a sufficient database exists on an analogous system.

Answer 7

One disadvantage is that there is a tendency to be too subjective in making an analogy. For analogies that require too many subjective adjustments, this technique is not appropriate. An assessment that a new component is 20% more complex without specifying a rationale is not acceptable. Associate the complexity to something less subjective. An appropriate adjustment would be that the new component has 20% more integrated circuits or weighs 20% more than the old component. However, it is often difficult to find sufficient cost, technical, and programmatic data for drawing these types of analogies.

Answer 8

but instead of basing the slope on a number of data points, it is essentially a guess. One point does not determine a line, so the assumption is that the line goes through the origin. Since the analogy is a single data point, it represents a point of departure and any estimate using adjusted analogy constitutes estimating outside the range of the data.

Answer 9

For estimates based on an analogy, there will be uncertainty in both the point of departure and the slope of the adjustment. The point of departure is the analogous system. There is uncertainty in whether or not the chosen point of departure is truly analogous to the new system. An estimate based on an analogy assumes a linear relationship between the old and the new system. The unknown nature of the underlying relationship between the two systems creates uncertainty. If data exists to understand the underlying relationship between the two systems, use the parametric estimating technique.

Answer 10

This means that the new system may have risks that would not have been captured in the costs associated with the old system. Examples include risks associated with new technologies, risks associated with economic conditions (e.g., inflation), and risks associated with the labor environment. There may also be risk characterized by historical growth in the scaling quantity. As a system or project progresses in the program life cycle and the design matures, the scaling quantity used in the analogy may change. Insight into the historical growth of the scaling quantity allows cost estimators to capture the potential for growth as risk. Examples may include size, power, weight, or lines of code. For additional information about quantifying these risks and incorporating them into your cost estimate, refer to Module 9 Cost and Schedule Risk Analysis.

Answer 11

The independent variables are known as cost drivers and could be physical characteristics, performance or operational parameters, programmatic variables, or even other costs. Developing a parametric relationship uses multiple systems to cover a broader range than an analogy. A parametric relationship also allows statistical inferences to be made. These statistical relationships will be able to tell you how well your parametric equation works. When developing a parametric equation, the underlying assumption is that the historical framework on which the parametric relationship is based will remain the same for the new system (e.g., the technology, manufacturing processes, etc., are not drastically changing). A parametric relationship could range in complexity from a simple rule of thumb (e.g., dollars per pound ($/lb)) to a complex regression equation (e.g., Effort = 0.0114 * New SLOC + [0.04 * Reused SLOC]^0.9766). Parametric relationships are commonly referred to as CERs which include rates, factors, and ratios. For additional details on parametric relationships, refer to Module 3 Parametric Estimating. For details on statistically based techniques for developing parametric equations, refer to Module 8 Regression Analysis. Develop CERs using regression whenever possible to enable the statistical inferences previously discussed. Note, however, that many rates, factors, and ratios in use may not be statistically based.

Unit I - Module 2 Cost Estimating Techniques Flashcards

(36 cards)