Transcript No Slide Title

COST ESTIMATION
CONFERENCE
Session 16 – Cost Methodology Framework
Presenter – Mick Doherty
Defending Australia and its National Interests
Outline
– Cost Methodology Framework
•
•
•
•
•
Generic Cost Estimating Process;
Cost Estimating Techniques;
Which Technique to Use & When
Costing Exemplars ; and
Measures of Cost Estimate Quality.
Generic Cost Estimation Process
Analyse, Adjust &
Maintain the
Estimate
Define Project
Scope
Define key
Assumptions
No
Develop WBS &
Cost Elements
Investigate &
Obtain Cost Data
Develop
Workforce Plan
Prepare Cost
Estimate for each
Cost Element
Techniques
* Analogy
* Parametric
* Engineering
* Actual Costs
* Price Data
* Expert Opinion
* Reasonableness
* Sensitivity Analysis
* Cost Benefit Analysis
* Cost Risk Analysis
Review Cost
Model & Compare
Against DCP
Provision
Measures of Quality
* Accuracy
* Repeatability
* Traceability
* Comprehensiveness
Yes
Publish, Present &
Use the Estimate
Generic Cost Estimation Process
Step 1 – Define the Project Scope
Step 2 – Define Key Assumptions
• Document key assumptions in the scoping
directive & Basis of Estimate
The quality of an estimate is only as a good as the
maturity of the project definition and the
appropriateness of the assumptions made
Generic Cost Estimation Process
Step 3 – Develop WBS & Cost Elements
• Developed off a skeleton WBS
• A dynamic process
• WBS & Cost Elements will develop and expand over time.
Step 4 – Investigate and Obtain Cost Data
• Where to find cost data?
–
–
–
–
From Contractors
From other projects
Defence Library, Janes, Forecast International etc
US President’s Budgets
Step 5 – Develop the Workforce Plan
• Understand the Govt workforce to:
– Undertake Capability Development
– Acquire the Capability & setup the Support Systems
– Crew and Maintain the Capability
• Needs to be balanced against the White Paper Provisions
Estimating Principles - cont
Step 6 - For each cost element:
– Use best available cost data.
– Seek input from Subject Matter Experts, to assist you in
obtaining the cost data.
– Use as many costing sources and techniques as possible to
validate and test the range of estimates.
– Record your assumptions and document the basis of the
estimate.
– Regularly review the estimate
Step 7
– Review Cost Model
– Compare against the DCP Provision
Hint: If possible, obtain an Independent Cost Estimate
(ICE) and compare the ICE against the cost model
for completeness and accuracy.
Estimating Principles - cont
Step 8 - Test the Model
–
–
–
–
Reasonableness
Sensitivity Analysis
Cost Benefit Analysis
Cost Risk Analysis
Step 9 - Analyse, Adjust and Maintain the Estimate
Step 10 - Publish, Present and Use the Estimate
This is an Iterative Process and these steps will be
repeated on a regular and frequent basis as the project is
further defined and the cost model develops.
Generic Cost Estimation Process
Analyse, Adjust &
Maintain the
Estimate
Define Project
Scope
Define key
Assumptions
No
Develop WBS &
Cost Elements
Investigate &
Obtain Cost Data
Develop
Workforce Plan
Prepare Cost
Estimate for each
Cost Element
Techniques
* Analogy
* Parametric
* Engineering
* Actual Costs
* Price Data
* Expert Opinion
* Reasonableness
* Sensitivity Analysis
* Cost Benefit Analysis
* Cost Risk Analysis
Review Cost
Model & Compare
Against DCP
Provision
Measures of Quality
* Accuracy
* Repeatability
* Traceability
* Comprehensiveness
Yes
Publish, Present &
Use the Estimate
Estimating Techniques
Analogy
Parametric
Engineering
Bottom up
Cost Estimation
Methods
Extrapolation
from Actuals
Price Data
Expert
Option
Why include ‘Price Data’?
• In the Australian context, we place a high reliance
on ‘tender quality’ costs for projects seeking 2nd
Pass Approval.
• Rather than obtaining ‘costs’ from tenderers, we
are in fact being quoted the ‘price’ we are
expected to pay for the goods or service.
• Price Data varies in quality, from ROM quotes to
tender quality.
Cost Estimating Techniques
Analogy
• direct comparison with historical data for similar item,
eg Weight Based Analogy
Parametric
• Relates cost to some physical attributes or performance
characteristics in a cost-estimating relationship (CER)
Engineering (Bottom up)
• Examination of separate work segments in detail and a
synthesis of many detailed estimates into a total.
Which Technique to use, when
Determine
Defence
Needs
Capability
Requirements
Definition
Acquisition
Parametric
In-Service
Actuals
1st Pass Approval
DCP Entry
Analogy
2nd Pass Approval
Price Data
Engineering
Cost Estimation Technique and Project Maturity
Which Technique to use, when
Costing
Methodology
DCP Entry
DCP Update
1st Pass
Approval
2nd Pass
Real Cost
Approval
Increase
(RCI)
Analogy





Parametric





Engineering





Actual Costs





Price Data





Expert Opinion





Legend
 - Primary
 - Secondary
 - Not recommended
Applicability of Cost Estimating Technique
Which Technique to use, when
Principles
• Each cost element should be costed using the most
appropriate method
• Use as many techniques as possible to validate the
estimate before settling on the most appropriate
method and the level of risk
• Document results from other methods in the basis of
estimate
• Early on, when information is scarce, the primary
techniques are:
– Analogy
– Parametric Estimation
Estimating at DCP Entry
Costing Exemplars
• Make assumptions about systems that might fill
the capability gap and choose an “exemplar”
system to cost
– Something, that if brought today, would meet the
capability
– Must be technically feasible
– Doesn’t mean this is what will be delivered
• Develop cost estimates based on the Exemplar
Costing Exemplars
Cost to Circumnavigate the Moon
• In his 1865 novel "From the Earth to the Moon" Jules Verne
described as his exemplar a "moon gun" located in Florida.
• 2.74m bore Gun poured into a 274 m deep well.
• First 61m of barrel filled with 122 tons of guncotton.
• When fired, a 2.74 m diameter shell was propelled to a
velocity of 16.5 km/second.
• After deceleration through the earth's atmosphere, the shell
would have a residual velocity of 11 km/second, sufficient to
reach the moon.
• Estimated the cost to be US$5,446,675 in 1865 prices.
Cost to Circumnavigate the Moon
• In 1969, Apollo 8 circumnavigated the moon.
• Up to the Apollo 8 mission, the cost of the Apollo program was
US$14.4 billion in then year dollars.
• Recall Jules Verne’s estimate of US $5,446,675 in 1865 prices
which equates to US$12.1 billion in 1969 prices.
• Within 15%
Not bad for an estimate made 104 years earlier!!!
Estimation at DCP Entry
Outline Approach
• Define mission system & obtain indicative costs
• Make adjustments to mission system for:
– Cost growth & cost escalation
– Procurement & integration of additional equipment
• Communications equipment
• Electronic Warfare & mission support systems
• Carried Equipment, (helos, weapons, UAVs etc)
– Adjust for Quantity (learning curve, LRIP v Full Rate)
• Apply metrics to
–
–
–
–
–
–
Capability Development
Mission System Development
Support System
Contractor Support System
Productions Support
DMO Project Support
Estimation at DCP Entry
Metrics - Rules of Thumb
Cost Element
Metric
1st to 2nd Pass Activities
0.5%
to
1.5%
Detailed Design Activities
3.0%
to
5.0%
ILS & Support
20.0%
to
50.0%
Project Management
2.0%
to
5.0%
Contingency
20.0%
to
50.0%
Mission System
As a percentage of Mission System Cost
Estimation at DCP Entry
Metrics - Rules of Thumb
Cost Element
Metric
Comments
PM, SE& ILS Management
10%
to
15%
Test & Evaluation
2%
to
5%
Depends upon many factors
7.5%
to
15%
Depends on ROE, BOP, system
Data & Documentation
2%
to
5%
IP, language, MIL-SPEC vs COTs.
Facilities
2%
to
5%
Training
2%
to
5%
Support Equipment
1%
to
3%
PHS&T
1%
to
3%
DMO PO
5%
to
15%
FMS
2.5%
to
5%
Australian Prime
10%
to
15%
Initial Spares
Depends on delivery point
NPOC
Hardware Maintenance
5%
of acquisition cost per annum
Software Maintenance
15%
of acquisition cost per annum
Estimation at DCP Entry
Price Data Example
• Replenishment Ship based on Berlin Class
– Cost US$141.3m 1998
(0.74 exchange rate)
– 1.42 Inflator to 2010/11 prices
– Current Price = A$271m 2011 prices
Metric
Total
Cont
Total
0.50%
$1.89
$0.50
$2.39
$271.10
$81.33
$352.43
$81.33
$24.40
$105.73
Weapons (Self Protection)
$15.00
$4.50
$19.50
Communication Equip
$10.00
$3.00
$13.00
$377.43
$113.23
$490.66
30.00%
$113.23
$33.97
$118.10
5.00%
$18.87
$5.66
$19.70
$511.42
$153.36
$630.85
1st to 2nd Pass Activities
Acquisition
Mission System
Premium to build in Australia
30.00%
Sub Total
ILS & Support
Project Management
Total Acquisition Cost
Estimation at DCP Entry
Outline Approach
• Progressively replace “metric estimate” with
detailed estimate that takes account of:
– Engineering Development & Non Recurring Engineering
– Support System
• incl training and simulation
• Global Supply Chain?
– Facilities & Infrastructure
– Ordnance – initial load out & warstock
– Production Systems if equipment to be manufactured or
assembled in Australia
Estimation at DCP Entry
Weight Based Analogy
• Process
– Obtain cost & technical data for reference system
• Eg: Displacement, Gross Weight
– Estimate scaling factor for new system, Displacement
– Prorata
• CostNew = CostOld * DispNew / DispOld
• Advantages
– Easy to use
– Scaleable
• Disadvantages
–
–
–
–
First order approximation only
Scaling factor may not be constant
Error Band unknown
Needs to be confirmed by other costing methods
Weight Based Analogy
Joint Light Tactical Vehicle
How to Estimate the Cost of the
New Vehicle?
Estimate off HMMWV & M-ATV
using a Weight Based Analogy
HMMWV
M-ATV
Joint Light Tactical Vehicle
Weight Based Analogy
Joint Light Tactical Vehicle
Capability
Gross vehicle weight
M-ATV
HMMWV
JLTV
32,500
12,100
19,950
(GVW) (pounds)
Estimated base price per system
23,950
$445,000
$186,000
(without GFE and other costs)
Calculation
Cost per GVW ($/pound)
????
????
$445/32.5
$186/12.1
$13.69
$15.37
Estimated Cost Range
$13.69*19.95
$273,000
Based on M-ATV
$13.69*23.95
$328,000
Estimated Cost Range
$15.37*19.95
$307,000
based on HMMWV
$15.37*23.95
$368,000
Note: US Army Estimate $306,000 to $332,000
Weight Based Analogy
Joint Light Tactical Vehicle
• Do you think the estimate is reasonable?
Weight Based Analogy
Joint Light Tactical Vehicle
Capability
M-ATV
HMMWV
JLTV
54
25
25
4,000
1,800 -
3,500 -
3,950
5,100
12,100 -
19,95 -
14,800
23,950
65
63.8
70
Minimum range (miles)
300
250
400
Reliability (mean miles between
600
800 -
4,500 -
2,250
5,170
80%
90%
95%
12.7/0
1.2/0
20/10
$445,000
$186,000
$306,000 -
Turning radius (feet)
Payload (pounds)
Gross vehicle weight
32,500
(GVW) (pounds)
Maximum speed at GVW
(miles per hour)
operational mission failure)
Operational availability
Power generation
-on-board/exportable (kilowatt)
Estimated base price per system
(without GFE and other costs)
$332,000
Weight Based Analogy
Joint Light Tactical Vehicle
• Now, do you think the estimate is reasonable?
• Potential problems with scaling include:
– Increased reliability (doubling of mean miles between
failure)
– Increased Operational Availability (from 90% to 95%)
– Increased power generation
– Faster 65mph to 70mph
– No allowance for cost growth
• Where might cost growth occur?
Estimation at DCP Entry
Outline Approach - NPOC
• Understand the operating profile:
–
–
–
–
Level of preparedness
Rate of Effort
Basis of Provisioning
Ratio of crew to equipment
• Scale off existing equipment using a “weight
based analogy”
Weight Based Analogy
SEA 1180 – Multirole Vessel
Operating Costs
Exemplar HMNZS Otago
• Length overall – 85m
• Beam – 14.0m
• Draught – 3.6m
• Disp – 1626 tonnes
• How can we determine operating for the new ship?
What about extrapolating using a weight based analogy
from RAN Streaming Day Rates for similar ships?
Weight Based Analogy
SEA 1180 – Multirole Vessel
Operating Costs
• Step 1 – Obtain daily steaming day rates for exemplar
vessels
STEAMING DAY RATES $
Class
Sea
days
Rations
Fuel
Weapons
FFG
93
$3,347
$54,516
$12,688
FFH
122
$2,591
$31,904
ACPB
215
$241
SML
122
AGS
MHC
DMO Refit
Suppliers
$59,596
$245,637
$4,506
$6,916
$86,382
$150,452
$5,285
$5,492
$210
$461
$8,878
$148
$194
$2,505
$19
$6,315
$9,727
$136
173
$718
$7,374
$169
$16,242
$42,502
$577
118
$630
$4,372
$833
$17,678
$61,044
$732
What next?
DMO
Stores
Weight Based Analogy
SEA 1180 – Multirole Vessel
Operating Costs
• Step 2 – Annualise steaming day rates
• Annual Cost = Seadays x $daily_rate
• Step 3 – Obtain full load displacement for each ship
Annual Cost $m
Class
Disp
(tonnes)
Rations
Fuel
Weapons
DMO
Stores
DMO Refit
Suppliers
Total
FFG
4,267
$0.31
$5.06
$1.18
$5.54
$22.82
$0.42
$35.33
FFH
3,759
$0.32
$3.91
$0.85
$10.58
$18.43
$0.65
$34.73
ACPB
300
$0.05
$1.18
$0.05
$0.10
$1.91
$0.03
$3.32
SML
325
$0.02
$0.31
$0.00
$0.77
$1.19
$0.02
$2.30
AGS
2,205
$0.12
$1.28
$0.03
$2.81
$7.36
$0.10
$11.70
MHC
732
$0.07
$0.51
$0.10
$2.08
$7.19
$0.09
$10.05
??
??
??
??
??
??
??
Sea 1180
1,626
Weight Based Analogy
SEA 1180 – Multirole Vessel
Operating Costs
• Step 4 – Determine scaling factor
• Disp_Ratio = Dispnew / Dispold
• Step 5 – Multiply annual cost by Displacement Ratio
Annual Cost $m
Class
Disp
(tonnes)
Rations
Fuel
Weapons
DMO
Stores
DMO Refit
Suppliers
Total
FFG
0.38
$0.12
$1.93
$0.45
$2.11
$8.70
$0.16
$13.46
FFH
0.43
$0.14
$1.69
$0.37
$4.58
$7.97
$0.28
$15.02
ACPB
5.42
$0.28
$6.40
$0.24
$0.54
$10.35
$0.17
$17.99
SML
5.00
$0.12
$1.53
$0.01
$3.85
$5.93
$0.08
$11.52
AGS
0.74
$0.09
$0.94
$0.02
$2.07
$5.43
$0.07
$8.63
MHC
2.22
$0.16
$1.14
$0.22
$4.63
$15.97
$0.19
$22.31
Sea 1180
1.00
$0.15
$2.27
$0.22
$2.96
$9.06
$0.16
$14.82
Scaling up or down on the basis of the Displacement Ratio
suggests an annual cost of around $15m pa
What are the Expected
Cost Quality Standards?
• Cost estimates are expected at each and every
stage of the process and for key approvals
from DCP Entry to 2nd Pass Approval.
• 1st Pass Cost Estimates
– Can be budgetary quotes, market surveys, info from
Allies etc for implementation costs (for FMS cases
P&A data)
– However, funds to be expended during CapDev (or
1st to 2nd Pass activities) are to be of tender quality
• 2nd Pass Cost Estimates
– Tender Quality Costs is the aim (for FMS cases draft
LOA)
Cost Quality Standards
• DCP Entry – more then one data point for big
ticket items.
• First Pass – Survey the market and ask the right
questions (non competitive).
• Second Pass – Tender data (lowest possible
price).
• Vigilantly document the assumptions and
calibrations at every level.
Questions