Unit I - Module I Cost Estimating Basics Flashcards

Question

The three primary reasons for cost estimating are:

Answer 1

1. Budgeting: ICEs provide the basis for improving program budgets to give programs a chance for success and ensure effective utilization of valuable agency resources. If a program runs over budget, other programs' resources will be diverted to cover the additional costs, which can cause a detrimental ripple effect through other programs. Some programs that run far over budget will be terminated, leaving a gap in capabilities. Cost estimating's success in supporting the budgeting process should be measured by a track record showing how long each ICE-based budget proves adequate on a year-by-year and cumulative basis. The track record should determine what fiscal years relative to the ICE the program first ran a deficit and first incurred a debt (i.e., net cumulative shortfall). 2. Planning: After establishing the budget, planning lays the foundation for successful project execution. Estimating supports the development of Basis Of Estimate (BOE) documentation which establishes the integrated baseline. Earned Value Management (EVM) tracks cost and performance against this baseline as measured by performance indices. More information on Contracts and EVM is available in Modules 14 and 15, respectively. 3. Trade-offs: Trade-off studies use a baseline cost estimate to explore the relative cost of changing requirements. Trade-offs aim to achieve the proper balance of maximizing utility and minimizing cost. Often the cost impact of trades is cursory. Overall progress toward cost goals must be measured by periodic Life Cycle Cost Estimates (LCCEs), preferably based on a closed engineering design

Answer 2

unrealistically low budgets that result in immediate shortfalls, establish overly aggressive baselines that result in immediate performance deficiencies, and produce unrealistically optimistic trade-offs that result in faulty decisions. These mistakes will lead program managers to pursue unaffordable or impractical options.

Answer 3

make decisions on program viability, structure, and resource requirements; establish and defend budgets; conduct Analysis of Alternatives (AoA); create new business proposals and perform source selection; conduct in-process reviews of major projects; perform design trade-offs; assess technology changes; comply with public law; and satisfy oversight requirements.

Answer 4

For government projects, it may be a requirement of public law, and both the public and private sectors have oversight organizations whose requirements must be met.

Answer 5

make better decisions and, with the appropriate rigor, helps to defend those decisions to others outside the program.

Answer 6

for fiscal responsibility at a broader level including the Office of Management and Budget (OMB), the Government Accountability Office (GAO), and the United States Congress.

Answer 7

justify obtaining resources and to help allocate resources internally.

Answer 8

the costs/prices of goods and services budgeted, contracted, and purchased are reasonable, consistent, and well-negotiated.

Answer 9

and reduce them

Answer 10

Cost estimators require an understanding of economics, business, and accounting because cost estimating involves the application of economic ideas like inflation and obtains much of its data from cost accounting systems. Cost estimates are also used to justify the allocation of resources, which means estimators must understand the budgeting process Since cost estimating frequently seeks to optimize all the aspects of system development, estimators should have a familiarity with ideas from Operations Research (OR), the management sciences, and Industrial Engineering (IE). IE can also be applied to detailed production analysis in a manufacturing environment Furthermore, familiarity with the product system, software, process, etc., helps to identify cost drivers and understand the data needed to develop cost estimates Functional expertise, mechanical engineering, systems engineering, physics, software development, and logistics experience aid in the analysis and help analysts communicate with the engineers working on the project. A little bit of salesmanship helps defend the estimate on the merits of its methodology and documentation and ensure success with program leadership and external organizations. Finally, marketing insight helps develop price proposals that go after new work.

Answer 11

the context of when to estimate, the benefits of cost estimating and analysis, the qualities or characteristics of a good cost estimate, limitations of cost estimating and analysis, and concerns and issues that arise during the cost estimating process.

Answer 12

Analysts must estimate and plan for the consumption of finite resources like labor, capital, and equipment allocated to the program or job. Realistic estimates of the projected cost of an activity determine adequate resource allocation, which leads to a greater probability of a successful project

Answer 13

for white papers, analysis of budget cut impacts, responses to budget reductions, etc. Similar, though perhaps not as detailed, requirements exist to support the budgeting process within commercial organizations.

Answer 14

This mandate is similar to the scrutiny required to continue through a stage-gate development process in industry. As a program matures technically and schedules change, cost estimates should be periodically updated to account for these changes. Updating the estimate provides a level of management insight into the current program status that helps maintain effective control of the program and balance resources and the budget. As programs progress, the requirements for the program may change due to external pressures from customers and resource sponsors or due to internal systems engineering decisions. Cost estimating must manage changing requirements efficiently under tight constraints and quantify the resource impact of alternatives to support management decision making.

Answer 15

During the pre-systems acquisition phase, AoAs or trade studies are useful. AoAs are studies comparing technical, cost, and performance characteristics of multiple approaches and are used to select among alternatives before committing to a particular project. During systems acquisition, a source selection process is performed to compare competitors’ approaches to satisfying requirements. After system development, a cost study can then be performed before full-scale production. Sometimes multiple ICEs will be performed for budgeting purposes or program cost tracking.

Answer 16

integrating the requirements and budgeting processes. Furthermore, most estimating documentation usually translates easily to budget documentation. For a government agency, accurate estimates assess the reasonableness of contractor proposals and program budgets and help the program office effectively defend budgets to oversight organizations such as OSD, OMB, and Congress. They also assist in quickly and accurately determining the impacts of budget cuts on program baselines and the program/system functionality

Answer 17

An organization’s success in completing projects within a reasonable budget directly links to future business opportunities. Accurate estimates of the cost of a system or program provide the framework for selling the system or program at a reasonable profit and avoid two potential situations: buying in and pricing out of the market. Buying in refers to advertising a cost significantly under the actual amount of effort for the purpose of winning a piece of work as the lowest bidder. As the system is developed, it becomes apparent the estimate was too low and to recover, either the customer or manufacturer is faced with paying for the overrun, which can lead to lost profitability or bankruptcy. Pricing out of the market refers to estimating too high, meaning the manufacturer can no longer remain competitive. Accurate estimating prevents the occurrence of these situations, ensuring a solid reputation which enhances future business potential.

Answer 18

These methods contribute to the credibility of an estimate. Accurate cost estimates help management avoid cost growth and schedule slips. Depending on the detail of the cost estimate, cost drivers can be easily identified for cost improvement initiatives. In program management, cost estimating facilitates managing schedule and technical risks by objectively quantifying the impact of these risks (see Module 9 Cost and Schedule Risk Analysis).

Answer 19

cost/benefit analysis or AoA. Comparative studies evaluate candidate solutions to a problem from a technical, performance, and cost standpoint before the decision maker has committed to a particular solution. These types of studies are discussed in Module 13 Economic Analysis.

Answer 20

In the former case, trade studies are conducted throughout the development of a system when multiple design solutions exist and cost is often a critical selection criterion. This approach is formalized in disciplines such as Cost As an Independent Variable (CAIV), Design To Cost (DTC), and target costing. Estimates can also evaluate the impact of new ways of doing business (e.g., in-sourcing vs. outsourcing, Commercial Off-The-Shelf (COTS) vs. custom software

Answer 21

Before a solution is decided upon, alternatives should be explored. For any solution, risks and potential problems should be identified so a realistic cost can be used for decisions. The result will be the best value that balances performance and cost. The estimate should yield a budget for planning out program expenditures by year, primarily for development. The outcome of all these benefits is a competitive advantage for industry or a successful, affordable mission for government agencies.

Answer 22

Accuracy: Estimates are unbiased, neither unrealistically low nor overly conservative, but based on an assessment of most likely costs. Underlying data have been normalized for technical baseline and for inflation using appropriate guidance. Cost Estimating Relationships (CERs) result from regression analyses with good curve fits and minimal error bands, making them valid predictors of cost. Time phasing of the estimate is logical and reliable. Comprehensiveness: The estimate uses a Work Breakdown Structure (WBS) at an appropriate level of detail to ensure those cost elements neither omit nor double-count elements. All cost-driving Ground Rules and Assumptions (GR&A) are detailed in the documentation of the cost estimate. Replicability: The estimate presents a WBS fully traceable to the system specification. The estimate thoroughly documents source data, significance, and goodness of fit statistics for CERs, detailed calculations and results, and explanations for why a particular method or reference was chosen. Auditability: A reviewer can follow the estimate process, repeat the calculations, and arrive at the same answer. Credibility: The estimate must be accurate, replicable, and auditable in order to be credible. Credibility is the single most important quality of a good cost estimate. Timeliness: Even a high-quality estimate cannot provide value if not delivered to decision makers on time.

Answer 23

Applying historical data in an estimate is always subject to interpretation. Because of future uncertainties, there are limitations in determining the degree to which reality varies from the plan.

Answer 24

conform to the situation/program; produce results of the same caliber as the input data; disregard political and non-cost impacts; utilize sound judgment, management, or control; and support but not dictate the final decisions.

Answer 25

difficulty in establishing CERs that are linked to the right design parameters, new technologies, or non-traditional approaches. Also, cost analysis cannot inherently exchange variables that cannot be directly related to cost. Such trade-offs require decision analysis techniques from operations research

Answer 26

Analysts may only have access to secondary data which have been adjusted one or more times from the original raw data. Inadequately documented estimates lose credibility and compromise preparedness for future estimates. Without good documentation, crucial information, data, experience, and estimating approaches may be lost along with the tacit knowledge of analysts who could retire or leave the organization.

Answer 27

the data collection and estimate validation processes may involve a lot of coordination requiring considerable time and resources.

Answer 28

An estimate should use consistent content and assumptions along with estimates of the program developed by other organizations (if these estimates are to be compared). Because two estimates may not directly compare in practice, analysts may need to develop techniques to map costs between different structures or to adjust costs based on differing assumptions. Inconsistent historical data between or within sources further creates barriers to consistency

Answer 29

Analysts usually resource constrain estimates, but this merits careful planning up front. The schedule must consider the availability and quality of data required for developing the estimate so that the quality of the estimate will not suffer. If an estimate is of lower quality, its utility to key decision makers will be limited. Time constraints may also impact quality, coordination, and consistency.

Answer 30

Data may be considered proprietary or classified. Precautions to prevent misuse of data may slow the cost estimating process.

Answer 31

the technical and schedule baseline description, which gives us inputs to the cost estimating process; the cost estimate itself, in all its forms; the cost model used for the estimate; and the accompanying estimate documentation.

Answer 32

The technical and schedule baseline description collects, integrates, and coordinates all the technical, programmatic, and schedule information necessary to estimate the costs of a program. The engineers and technical team develop the various components of the technical and schedule baseline description, and the cost analyst uses the technical and schedule baseline description to ensure that cost projections are based on a common definition of the system and the acquisition program. With the basis of the estimates explicitly documented, analysts can easily update the estimate and provide a verifiable trace to a new cost baseline when key assumptions change during the course of the project lifetime. The credibility of the cost estimate suffers if the analyst cannot clearly explain the technical, programmatic, and schedule assumptions underlying each of the cost estimates.

Answer 33

CARD-like document should always be developed for an estimate for the reasons given above, regardless of whether it is for a government estimate or not. Other government agencies have similar CARD-like documents such as the Office of the Director of National Intelligence's (ODNI) Intelligence Capability Baseline Description (ICBD), National Aeronautics and Space Administration's (NASA) Cost Analysis Data Requirements (CADRe) and Department of Homeland Security’s Cost Estimating Baseline Document (CEBD). A well-done technical and schedule baseline description can bring benefits not only to cost estimating but to the entire program.

Answer 34

System technical description: This includes key performance characteristics, replaced system(s), the entity responsible for the system, the system user, descriptions of hardware and software components including interactions, technical protocols or standards used, system architecture and equipment configurations, Key Performance Parameters (KPPs), operational profile, reliability analysis, security requirements, and test and evaluation concepts/plans. WBS: The determination of how sufficient the WBS is for cost estimating purposes and whether the WBS accurately reflects the system baseline should be included with the WBS description. Description of predecessor systems: Provide the reasons for replacing the legacy system, a detailed description of the legacy system hardware and software components, all technical protocols or standards used, KPPs, a maintenance/logistics description, a training description, and a legacy phase-out plan. Manpower requirements: Include all requirements associated with the system, how these compare to any legacy system, applicable grade or salary levels, skill level requirements, and location of personnel. Technical/performance, schedule, and cost risk: The program manager should include an assessment of risk. Operational Concept: This includes program management details, how and where the system will be operated, and platforms it will be installed on. Deployment details: Provide information regarding the platform/site deployment schedule, special preparations required, user preparations/training, the roll-out plan or Initial Operating Capability (IOC) schedule, the standard platform/site configurations, and the transition plan between the legacy and current system. Logistics support details: Provide the maintenance and sparing plan and handling of upgrades. Training plan: This includes types of user training or certification, types of training or certification needed for system maintenance or administration personnel, training provider and location, seat requirements, and frequency of training. Contractor development and production costs. Acquisition schedule and milestones. Acquisition Strategy: Include stated objectives of the program, any secondary program goals, details of vendor support, and contracting details. System Test and Evaluation Plan: Provide the number of required tests, test schedule, testing entry/exit criteria, test bed locations and configuration, contingency plans. Environmental impacts: This should include a mitigation plan and disposal concept. Changes from the prior CARD: Ensure the versions are defined and summarized including change pages with track changes and margin bars so the reader can easily understand the differences without having to compare page by page.

Answer 35

There are various types of cost estimates; each should have an associated cost model and documentation. The quality of the documentation influences the quality of the estimate. Different types of cost estimates support different types of decisions. For example, a program in very early development would not need a 5-year budget look-ahead. Instead, decision makers need to evaluate the trade space to decide what technologies to use. Alternately, a nearly-complete program would have little use for a ballpark cost figure when only future costs are necessary. Estimates should become more detailed and accurate as the program progresses. A good understanding of the types of cost estimates available ensures the estimate remains relevant to the decision required. When developing a cost estimate, the analyst should consider past and current data relative to the system being estimated. The data and methods available dictate the approach to developing the estimate.

Answer 36

A LCCE is often confused with O&S cost estimates, but the LCCE actually covers all costs associated with the program for its complete duration. Analysts compile LCCEs as early in the life cycle as possible, even in pre-acquisition and proposal stages, since the opportunity to minimize the cost of ownership diminishes rapidly as the design and development of a system proceeds. Milestone decisions generally require LCCEs as supporting documentation. The estimate covers costs regardless of funding source, spanning all relevant organizations and appropriation types and is also known as a Total Ownership Cost (TOC) estimate, which is also discussed further in Module 16 Cost Management.

Answer 37

However, the ICE employs an estimating methodology different from the one used to develop the program or project estimate. It can be characterized as an objective assessment of what the program's most likely cost will be and provides an unbiased test of the reasonableness of the LCCE. The ICE provides an independent source to critically examine the LCCE and identify potential budgetary excesses and shortfalls. The ICE also identifies the cost risks associated with the project so that they may be addressed and provides supporting documentation at critical milestone reviews. Independence in cost estimating provides a critically important, unbiased look at a program

Answer 38

In theory, a budget quality estimate has a wider margin for error than other types of estimates. The fundamental purposes of budget estimates are: to ensure project feasibility and attainable performance levels; to develop a reliable project cost estimate consistent with realistic schedules; and to establish baseline project definitions, schedules, and costs. A budget estimate ideally includes a risk assessment; not all organizations require it, though it is a GAO best practice.

Answer 39

The design effort for the program or system has not begun, and the estimate is often based on ratios or factored historical information. A ROM is primarily used for feasibility studies and selection from among alternatives

Answer 40

It typically relies on the techniques of EVM, which is the subject of Module 15. EACs have become more important in recent years because of the need to certify programs to satisfy the requirements of Nunn-McCurdy Act of 2010 and Weapon Systems Acquisition Reform Act (WSRA) of 2009. Links to these acts can be found in References.

Answer 41

(usually from the contractor or program office) and incorporates adjustments based on a more objective view of the program. These assessments may fall anywhere in the spectrum from a full-blown ICE to a cursory sufficiency review

Answer 42

An EA is a framework for systematically investigating problems of choice. The EA examines and compares the costs and benefits associated with each alternative course of action. It is also known as cost-benefit analysis or Business Case Analysis (BCA). Module 13 Economic Analysis is devoted to this topic.

Answer 43

AoAs aid and document decision-making by showing the advantages and disadvantages of the alternatives being considered. Whereas an EA is more of a BCA where benefits can be quantified monetarily, an AoA usually involves performance characteristics as well. These types of analysis are discussed in Module 13 Economic Analysis.

Answer 44

A LCCE would determine a full program cost including all development, production, and maintenance of the craft. For example, automation of tasks can have a high development effort but significantly reduce the cost to build and maintain the system. Therefore, a good understanding of life cycle costs informs decision making. It includes aircraft R&D, acquisition, maintenance, spare parts, and disposal. An ICE would assess a program office estimate for bias. Program risks may understate costs if the original estimating party is not detached from advocacy. Headquarters may want to do an objective estimate to make sure all program risks are captured. An ICA would evaluate the wing manufacturer’s estimate for bias and feasibility. Reviewing the prime contractor's estimate for reasonableness and impartiality will determine if a sole-source contract is the best option. A budget estimate would ensure the affordability of the portfolio. If another project is draining resources, the cost and schedule of this project could be impacted. Earlier stages of a program are sometimes given a certain amount of money to develop a technology or proof of concept. As the program moves towards Authority To Proceed (ATP), more emphasis is placed on generating a firm budget for future development and production. ROM estimates would determine whether the cost of this next-generation plane is in the right ballpark. It can only really be compared to other ROM estimates, since a quick-look estimate is not as accurate as a full-scale estimate. An AoA would help down-select from early trades with cost and requirement impacts of solutions. The analyst might explore various designs: blimp, jet, and propeller. For short flights, the propeller could probably meet mission requirements at a much lower cost, while the jet is only effective at long ranges. Blimps could even be in the trade space, but the amount of money necessary to invest might make them stack up poorly against the other options. An EAC would be useful when the jet design is already being built. A good assessment of spend rates and progress could identify serious problems. The jet has high-risk engines, and the best way to evaluate that impact is a good unbiased look at the program. An EA would provide a business analysis of different solutions to the problem. Is there a market for building a high-altitude near-supersonic plane? What should the passenger capacity be?

Answer 45

the level of detail of technical/programmatic definition of the future system, the level of detail of relevant existing cost estimating methodologies, and the level of detail of historical data available to develop new cost estimating methodologies.

Answer 46

Audited or negotiated direct and indirect rates are usually applied. A variety of factors affect rates, from union demands to manufacturing shifts from one plant to another. Analysts should collaborate with their rate development team.

Answer 47

Analysts may build custom models, use commercially available software, or both. The model should apply some combination of accepted estimating techniques such as parametric, analogy, and engineering build-up

Answer 48

Indicating which costs are to be incurred in which years, and escalated, representing either the year that dollars are spent, a base year, or a budget year. The estimate should include risk analysis to provide a range of possible outcomes to assist management in decision-making.

Answer 49

The scope of the cost estimate identifies phases (e.g., development, production, operations and support), specific time periods covered by the estimate, and systems and processes encompassed by the estimate. The scope also indicates specific areas not addressed by the estimate and reasons why. The ground rules and assumptions list all technical and programmatic conditions that formed the basis for the estimate to assist management in understanding these conditions. When conditions are dictated to the estimating team, they become the ground rules by which the estimate will be conducted. In the absence of a dictated ground rule, the estimator establishes assumptions which allow the estimate to proceed. In exercising this privilege, the estimator must avoid arbitrary assumptions by utilizing expert judgments rendered by experienced program and technical personnel. The program background and system description characterizes significant program and system aspects and status in terms of work accomplished to date, current position, work remaining, detailed technical and programmatic descriptions, major components, performance parameters, support concepts, contract types, acquisition strategy, and any other information that will assist the reader in fully understanding the system. The program schedule includes the master schedule for development, production and deployment, and a detailed delivery schedule. Finally, the cost estimating methodology describes the estimation methods. Reviewers use the cost estimating methodology to follow the logic from assumptions to the conclusion and to replicate or update the estimate at a later time. Specifically, BOE documentation for proposals must support government reviews and audits.

Answer 50

any data used, its source, and normalization procedures (see Module 4 Data Collection and Normalization); the basis, development, and/or source of all CERs and factors used, including a description of how they were applied, their relevance to the program being estimated, and any regression statistics (see Module 3 Parametric Estimating); how the labor hours were developed, and direct and indirect labor rates as industry averages or organization-specific; the methodology used to develop cost improvement curves (if applicable) and descriptions of the curves in terms of slope, source, and relevance to the cost elements and the program being estimated including unique aspects of curve analysis (see Module 7 Learning Curve Analysis); all hardware and materials required and the basis of their costs (e.g., vendor quotes, catalog prices, etc.); all pre-existing cost models used and their relevance to the estimate, along with complete details regarding any parametric inputs and outputs and any calibration performed; the specific inflation indices and computations used as well as the approach used to time-phase the estimate (see Module 5 Inflation and Index Numbers); the logic and rationale that led to specific conclusions (i.e., expert judgments); the risk analysis conducted and details on how confidence was established (see Module 9 Cost and Schedule Risk Analysis); a conclusion expressing the cost estimating team’s determination regarding the reasonableness of the program office estimate; appendices containing any other information pertinent to the cost estimate; and a reference list.

Answer 51

Develop a Work Breakdown Structure (WBS) Develop a program/system baseline Collect data Analyze data Develop cost estimating methodology for each cost element/work package Build and validate the cost model Generate results and other required output, such as reports Specific process steps vary between different organizations and may also include risk and uncertainty analysis, but general guidelines apply. The estimate should include a clear baseline and a framework for how to estimate costs. Data needs to be gathered, analyzed, and methods derived. Finally, the analyst should generate results and reports for the decision-maker.

Answer 52

display and define the program/system being developed or produced using a product-oriented family tree, describe program components at the level necessary to capture all elements of cost, and relate the elements of work to each other and the end product.

Answer 53

system engineering, specific builds, integration, fielding, and support of the system throughout its life cycle until it is removed from the inventory. The technical and schedule baseline description or similar documentation provides this program plan. The WBS does not have to be the same across systems or program phases but should be consistent. A WBS can be tailored for each system or program for the purpose of capturing idiosyncrasies. Even when elements of the WBS vary by phase, it is advantageous to establish the master WBS for the life cycle of the program, including each phase WBS, as early on as possible The WBS is sometimes referred to as the Cost Element Structure (CES). While often interchanged, the term WBS typically relates to a program/system from an engineering standpoint while the term CES specifically refers to the cost estimating process. A properly developed CES should encompass all the elements of the WBS

Answer 54

a WBS is the result of project/program planning that establishes the physical work packages or elements and the activities within those packages that completely define a project. It organizes the physical work packages into levels that can be rolled up into control accounts. Module 15 Earned Value Management has more about the WBS from the perspective of planning work packages and tracking project cost and schedule performance. The WBS used for EVM, however, may not capture engineering effort performed by government system engineering or system integration personnel. Since the WBS divides the program/system into work packages, it can also interrelate the schedule and costs. It separates elements of the program/system into component parts, making the relationships of the parts clear and the relationship of the tasks to be completed - to each other and to the end product - clear. The work packages or their activities can also be used as schedule activities enabling resource loading of a schedule, resource budgeting against time, and the development of a variety of cost budgets plotted against time.

Answer 55

assists in tracking the resource allocations, cost estimates, expenditures, the status of efforts, and cost and technical performance; forms the basis for communication throughout the acquisition process and unifies the planning, scheduling, cost estimating, budgeting, contracting, configuration management, and performance reporting disciplines; permits managers to evaluate progress in terms of contract performance; summarizes data for successive levels of management and provides the appropriate information on the actual costs, current status, and projected performance of the elements for which they are responsible; and keeps program status constantly visible so that the program manager, in cooperation with the contractor, can identify and implement changes necessary to assure desired performance.

Answer 56

to the design requirements and functional architecture of the program/system before the physical architecture is able to be defined. It is not until later phases that the system is described by its specifications. The WBS evolves with the program through an iterative analysis of the program objectives, functional design criteria, program scope, technical performance requirements, proposed methods of performance (including acquisition strategy, drawings, process flow charts), and other technical documentation. As development progresses, analysts define the detailed technical objectives and assign specific work tasks to each element, including the resources, materials, and processes required to attain the objectives. The linkage between the specification requirements, the WBS, the statement of work, and the schedule provides specific insights into the relationship between cost, schedule, and performance. This relationship allows all related items to be tracked to the same WBS element. Therefore, the levels of the WBS should map to these requirements and conform to its product-oriented family tree

Answer 57

As the program/system matures, engineering efforts focus on system level performance requirements, specifically validating critical technologies and processes and developing top-level specifications. Through this process, the work breakdown structure better defines the system in terms of its specifications and the configuration items that comprise the system. Once the system concept is determined, then major subsystems and configuration items can be identified and lower level functions defined. Detailed design activities are ongoing until the total system definition is complete. The levels of the WBS are directly linked with the detailed configuration of the system.

Answer 58

lists and defines the work breakdown structure elements, shows the hierarchical relationship of the elements, describes each work breakdown structure element and the resources and processes required to produce it, and provides a link to the detailed technical definition documents. The analyst should revise the WBS dictionary often to incorporate changes so that the dictionary always reflects the current status of the program. Document all changes for future reference. See the Resources section for an example of a WBS dictionary.

Answer 59

It enables the translation of program requirements into a reliable and defensible program cost estimate. It also describes the system’s important features including required resources (such as hardware and personnel), program quantities, operational concepts, and milestones. The program/system baseline corresponds to the EVM baseline. At the beginning of each cost estimate, estimators determine the programmatic and technical scope. The programmatic scope indicates the window of time covered by the estimate, and whether it includes the entire life cycle or a specific period. The estimator also identifies the phases (R&D, production, O&S, disposal) covered by the estimate. The technical scope includes all requirements for the program including a detailed description of work to be performed, out-of-scope work, deliverables, any constraints or special conditions, sequences of events and any interdependencies, and milestones. The baseline should include key performance characteristics, hardware/software components, architecture, configurations, reliability and security requirements, etc.

Answer 60

analogous systems' technical details, the reason for replacing legacy hardware/software, and phase-out plan; technical/performance, schedule, and risk as determined by management and/or engineers (they relate to the technological maturity or Technology Readiness Levels (TRLs) discussed in Advanced Topics); manpower requirements including skills, salaries, and location; operational concept including program management details, operation specifics, and platforms; and deployment details including sites, schedules, special preparations, site configurations, and transition plans.

Answer 61

logistics support including maintenance, sparing, upgrade plans, and any ancillary costs; framework for reporting actual costs and software counts, training plan detailing types of training/certification, providers, locations, and frequency; the system test and evaluation plan which includes the test schedule, number of tests, criteria, locations, subsystem tests, and subcontractor test review; environmental impacts such as mitigation plans, disposal concept, environmentally acceptable alternatives, environmental conditions expected to be encountered, hazardous materials that may be encountered or generated during the subsystem’s development, and the quantities of each hazardous material used or generated over the subsystem’s lifetime. The program/system baseline needs to include the information previously discussed as part of the technical and schedule baseline description. In addition to the current WBS, it should include any previously developed WBS.

Answer 62

Develop an understanding of the total picture of the estimating task Establish a cost element/work breakdown structure and boundaries around the estimate Understand the estimating techniques to be employed and their associated data collection needs Develop a data collection plan

Answer 63

by cost units; by sizing units; by special groupings such as mission application, by platform operating environment, and by recurring/non-recurring costs; by development state; and of end terms for homogeneity.

Answer 64

The analogy costing technique compares the cost of an item to be estimated to a similar item. A parametric estimate costing technique is a mathematical relationship based on historical data that relates cost to one or more technical, performance, cost, or programmatic parameters. Engineering build-up costing technique involves estimating costs at the lowest definable level, frequently making use of IE techniques such as time standards. These three primary methods can be used at any level desired, as long as data is available at that level. The estimator must determine the most appropriate technique for the task at hand based on the available data and phase of the program/system. Multiple techniques may be employed in an estimate, but each technique has strengths and weaknesses. Applicability of any one technique varies during a program’s life cycle and for different levels of fidelity required for an estimate.

Answer 65

Analogy Scale a historical program's cost to the current cost estimate by a similar parameter. The Model X100 jet engines have only been used once before, so we cannot easily estimate the cost. However, we can scale based on comparing parameters of the new system versus the analogy. Since the analogy is a similar program (same X-series), we will look at a weight-based scale. The weight of the new engine is double the old engine, therefore we can double the cost Parametric Use past programs to find a relationship of the cost to a parameter (e.g., weight). Then estimate the cost using anticipated parameters. In figure 1.6, we plotted the cost versus variable 1 for several comparable programs. We ran a trend line through the results to use as a prediction tool. Engineering build-up We know an Air Conditioning (AC) system costs on a plane because we received quotes from a Heating, Ventilation and Air Conditioning (HVAC) vendor for all ductwork and an AC blower off the shelf. Add up all sub-system costs at the lowest discernible level. All costs, from nuts and bolts to top-level, must be accounted for. For an HVAC system, we need the costs of ductwork and blower separately. We would also need any other parts necessary: maybe 10,000 rivets to secure ductwork or even all the necessary switches to control operation. Other methods or costing techniques include expert opinion and extrapolation from actuals. Expert opinion utilizes the subjective opinion of Subject Matter Experts (SMEs) to corroborate or adjust cost estimates. On the other end of the spectrum, extrapolation from actuals uses data from prototypes or complete or incomplete units to project the cost of future units. When using different methods for different cost elements, make sure not to double count. A high-level CER may already capture detail in a lower-level build-up.

Answer 66

Remember that when developing the cost model, more than one cost estimating technique may be used. For example, if a system involves a key piece of state-of-the-art equipment which has never been built before, a detailed engineering cost estimate would not be possible since the system description is minimal and historical data does not exist. Therefore, an analogy would be applied in the cost estimates when historical cost data exist for one or more items that are similar to those proposed. Parametric cost estimates can be applied when relationships between cost and system characteristics can be authenticated.

Answer 67

Testing the estimate ensures reasonableness and completeness. The analyst should test key cost elements for sensitivity to the cost-estimating techniques used and to key ground rules and assumptions. Testing should include crosschecking the results with historical data from similar programs/systems, applying a different estimating methodology, and/or applying a different cost model (proprietary models versus custom model, e.g., in Excel). The estimate can also be compared to industry benchmarks. These must be based on publicly available data since proprietary data from another company may not be used. Finally, the analyst should conduct a cost risk assessment. Documenting the cost estimate during development lends efficiency to its preparation and quality to its content. It is extremely difficult to recapture the rationale and judgments applied to the cost estimate after the fact.

Answer 68

crisp and complete; easily and quickly comprehended by audiences unfamiliar with the estimate; thorough enough to address the important details of the estimate; and demonstrative of the competence that underlies the estimate results.

Answer 69

CAIV entails setting aggressive yet realistic cost objectives when defining operational requirements and acquiring systems and managing achievement of these objectives. Essentially, a program is made up of three parameters: schedule, performance, and cost adjusted for risks present in all three parameters. In a simplistic view, two of these variables must depend on the third. CAIV makes performance and schedules a function of available resources, namely cost. CAIV will be covered in greater detail in Module 16 Cost Management. Sensitivity analysis assesses the cost of changing significant input parameters. Sensitivity analysis identifies key assumptions and variables within the estimate and determines how changing them effects costs. Its value lies in the additional information and understanding it brings to bear on the decision. For decision makers facing an investment decision, sensitivity analysis helps determine how changes in costs or benefits (e.g., due to forecast errors) affect the estimate. Risk analysis normally increases the cost estimate. The impact of risk is added to the initial point estimate resulting in a range or distribution of costs. Today’s systems possess increasing technical complexity. This increased technical risk increases the risk of schedule delays and cost overruns. Other areas of risk and uncertainty to explore after developing a cost estimate include pending negotiations, schedule risk, uncertain performance requirements, appropriateness of analogies, level of knowledge about support concepts, and critical assumptions. This is discussed in further detail in Module 9 Cost Risk Analysis.

Answer 70

Understand the definition and application of cost estimating Recognize the benefits of cost estimating Understand the challenges of cost estimating Know the differences between various types of cost estimating products Know the process and methods of cost estimat

Answer 71

Non Testable. Cost Estimating Organizations Cost Estimating in the Budget Process Cost Estimating the Acquisition Process Cost Estimating Disciplines Personality Traits of Cost Estimators Resources (Regulatory, Agencies, etc.) Advanced Topics

Answer 72

Cost estimating is the process of collecting and analyzing historical data and applying quantitative models, techniques, tools, and databases to predict the future dollar amount of an item, product, program or task to facilitate the successful completion of a program, project, or process Estimates that are divorced from historical experience lose their credibility It begins during the proposal phase (contractors) or development of the ICE (gov’t) Cost estimating helps the project team make better decisions and, with the appropriate rigor, helps to defend those decisions to others outside the program.

Answer 73

1.Budgeting: ICEs provide the basis for improving program budgets to give programs a chance for success and ensure effective utilization of valuable agency resources. If a program runs over budget, other programs' resources will be diverted to cover the additional costs, which can cause a detrimental ripple effect through other programs. Some programs that run far over budget will be terminated, leaving a gap in capabilities. Cost estimating's success in supporting the budgeting process should be measured by a track record showing how long each ICE-based budget proves adequate on a year-by-year and cumulative basis. The track record should determine what fiscal years relative to the ICE the program first ran a deficit and first incurred a debt (i.e., net cumulative shortfall). 2.Planning: After establishing the budget, planning lays the foundation for successful project execution. Estimating supports the development of Basis Of Estimate (BOE) documentation which establishes the integrated baseline. Earned Value Management (EVM) tracks cost and performance against this baseline as measured by performance indices. More information on Contracts and EVM is available in Modules 14 and 15, respectively. 3.Trade-offs: Trade-off studies use a baseline cost estimate to explore the relative cost of changing requirements. Trade-offs aim to achieve the proper balance of maximizing utility and minimizing cost. Often the cost impact of trades is cursory. Overall progress toward cost goals must be measured by periodic Life Cycle Cost Estimates (LCCEs), preferably based on a closed engineering design. Risk assessment plays a big part in budgeting, planning, and trade-offs. Without assessing risks, programs will likely develop unrealistically low budgets that result in immediate shortfalls, establish overly aggressive baselines that result in immediate performance deficiencies, and produce unrealistically optimistic trade-offs that result in faulty decisions. These mistakes will lead program

Answer 74

higher levels of government are less involved in the direct formulation of estimates, and estimates at higher levels are broader in scope.

Answer 75

Benefits  Helps formulate budgets  Helps defend budgets to oversight organizations  Maximize productivity and profitability  Accurate estimates deter cost growth and schedule delays Challenges  Limitations in determining how much estimate varies from reality  Some variables do not inherently translate to cost  Quality of estimate relies on quality and availability of data  Lots of coordination  Consistency throughout lifecycle  Resource/Schedule constraints  Access to data

Answer 76

Accuracy: Estimates are unbiased, neither unrealistically low nor overly conservative, but based on an assessment of most likely costs. Underlying data have been normalized for technical baseline and for inflation using appropriate guidance. Cost Estimating Relationships (CERs) result from regression analyses with good curve fits and minimal error bands, making them valid predictors of cost. Time phasing of the estimate is logical and reliable. *Comprehensiveness: The estimate uses a Work Breakdown Structure (WBS) at an appropriate level of detail to ensure those cost elements neither omit nor double-count elements. All cost-driving Ground Rules and Assumptions (GR&A) are detailed in the documentation of the cost estimate. *Replicability: The estimate presents a WBS fully traceable to the system specification. The estimate thoroughly documents source data, significance, and goodness of fit statistics for CERs, detailed calculations and results, and explanations for why a particular method or reference was chosen. *Auditability: A reviewer can follow the estimate process, repeat the calculations, and arrive at the same answer. *Credibility: The estimate must be accurate, replicable, and auditable in order to be credible. Credibility is the single most important quality of a good cost estimate. *Timeliness: Even a high-quality estimate cannot provide value if not delivered to decision makers on time.

Answer 77

The technical and schedule baseline description provides a detailed technical and schedule description of a program/system to be estimated. The details facilitate identification of any area or issue that could have a significant cost impact and which therefore must be addressed by the cost estimator. It also accommodates the use of various estimating methodologies. A Cost Analysis Requirements Description (CARD) is a specific case of a technical and schedule baseline description required by major DoD programs The cost estimate uses established methodologies to incorporate the analysis of individual cost elements in order to develop project estimated costs of a program or system from data and experience together with the corresponding documentation. A cost model is the collection of cost estimating methodologies associated with a cost element or work breakdown structure that best reflects the cost of a future system given three important considerations: *the level of detail of technical/programmatic definition of the future system, *the level of detail of relevant existing cost estimating methodologies, and *the level of detail of historical data available to develop new cost estimating methodologies. The estimate documentation details the primary data, techniques, and rationale for each element of the cost estimate

Answer 78

A Budget Estimate refers to estimates developed strictly to obtain authorization for funding. In theory, a budget quality estimate has a wider margin for error than other types of estimates. The fundamental purposes of budget estimates are: *to ensure project feasibility and attainable performance levels; *to develop a reliable project cost estimate consistent with realistic schedules; and *to establish baseline project definitions, schedules, and costs. A budget estimate ideally includes a risk assessment; not all organizations require it, though it is a GAO best practice. A Rough Order of Magnitude (ROM) estimate is used when very little specific information is known about the project. The design effort for the program or system has not begun, and the estimate is often based on ratios or factored historical information. A ROM is primarily used for feasibility studies and selection from among alternatives. An Estimate At Completion (EAC) is used for in-process programs and for ICEs when there is sufficient cost history. It typically relies on the techniques of EVM, which is the subject of Module 15. EACs have become more important in recent years because of the need to certify programs to satisfy the requirements of Nunn-McCurdy Act of 2010 and Weapon Systems Acquisition Reform Act (WSRA) of 2009. Links to these acts can be found in References. An Independent Cost Assessment (ICA) is an independent estimate with risk incorporated that started with an external estimate (usually from the contractor or program office) and incorporates adjustments based on a more objective view of the program. These assessments may fall anywhere in the spectrum from a full-blown ICE to a cursory sufficiency review. An Economic Analysis (EA) describes a specific mission requirement and lists specific alternative courses of action that will satisfy the requirement. An EA is a framework for systematically investigating problems of choice. The EA examines and compares the costs and benefits associated with each alternative course of action. It is also known as cost-benefit analysis or Business Case Analysis (BCA). Module 13 Economic Analysis is devoted to this topic. The Analysis of Alternatives (AoA) evaluates the costs and benefits (i.e., operational effectiveness or utility) of different courses of action to meet recognized needs. AoAs aid and document decision- making by showing the advantages and disadvantages of the alternatives being considered. Whereas an EA is more of a BCA where benefits can be quantified monetarily, an AoA usually

Answer 79

1. Develop a Work Breakdown Structure (WBS) 2. Develop a program/system baseline 3. Collect Data 4. Analyze Data 5. Develop cost estimating methodology for each cost element/work package 6. Build and validate cost model 7. Generate results and required outputs

Unit I - Module I Cost Estimating Basics Flashcards

(104 cards)