Defending Australia and its National Interests Session 16 – Cost Methodology Framework Presenter...

Defending Australia and its National Interests

Session 16 – Cost Methodology Framework

Presenter – Mick Doherty

COST ESTIMATION CONFERENCE

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

Define Project Scope

Define key Assumptions

Analyse, Adjust & Maintain the

Estimate

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

Review Cost Model & Compare

Against DCP Provision

Measures of Quality* Accuracy* Repeatability* Traceability* Comprehensiveness

Publish, Present & Use the Estimate

* Reasonableness* Sensitivity Analysis* Cost Benefit Analysis* Cost Risk Analysis

No Yes


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


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.


Define Project Scope

Define key Assumptions

Analyse, Adjust & Maintain the

Estimate

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

Review Cost Model & Compare

Against DCP Provision

Measures of Quality* Accuracy* Repeatability* Traceability* Comprehensiveness

Publish, Present & Use the Estimate

* Reasonableness* Sensitivity Analysis* Cost Benefit Analysis* Cost Risk Analysis

No Yes

Estimating Techniques

AnalogyParametric Engineering

Bottom up

Price Data

ExpertOption

Extrapolationfrom Actuals

Cost Estimation Methods

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

Parametric Price Data Engineering

Actuals

Analogy

DC

P E

ntr

y

1st P

ass

App

rova

l

2nd P

ass

App

rova

l

In-ServiceDetermineDefence Needs

Capability Requirements

DefinitionAcquisition

Cost Estimation Technique and Project Maturity

Which Technique to use, when

Costing Methodology

DCP Entry DCP Update 1st Pass Approval

2nd Pass Approval

Real Cost 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, whenPrinciples

• 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 EntryCosting 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 ExemplarsCost 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 EntryOutline 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 EntryMetrics - Rules of Thumb

Cost Element Metric

1st to 2nd Pass Activities 0.5% to 1.5%

Detailed Design Activities 3.0% to 5.0%

Mission System

ILS & Support 20.0% to 50.0%

Project Management 2.0% to 5.0%

Contingency 20.0% to 50.0%

As a percentage of Mission System Cost

Estimation at DCP EntryMetrics - Rules of Thumb

Cost Element Metric Comments

PM, SE& ILS Management 10% to 15%

Test & Evaluation 2% to 5% Depends upon many factors

Initial Spares 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% Depends on delivery point

DMO PO 5% to 15%

FMS 2.5% to 5%

Australian Prime 10% to 15%

NPOC

Hardware Maintenance 5% of acquisition cost per annum

Software Maintenance 15% of acquisition cost per annum

Estimation at DCP EntryPrice 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

1st to 2nd Pass Activities 0.50% $1.89 $0.50 $2.39

Acquisition

Mission System $271.10 $81.33 $352.43

Premium to build in Australia 30.00% $81.33 $24.40 $105.73

Weapons (Self Protection) $15.00 $4.50 $19.50

Communication Equip $10.00 $3.00 $13.00

Sub Total $377.43 $113.23 $490.66

ILS & Support 30.00% $113.23 $33.97 $118.10

Project Management 5.00% $18.87 $5.66 $19.70

Total Acquisition Cost $511.42 $153.36 $630.85

Estimation at DCP EntryOutline 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 EntryWeight 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

M-ATV Joint Light Tactical Vehicle

HMMWV

How to Estimate the Cost of the New Vehicle?

Estimate off HMMWV & M-ATV using a Weight Based Analogy


Capability M-ATV HMMWV JLTV

Gross vehicle weight (GVW) (pounds)

32,500 12,100 19,950

23,950

Estimated base price per system (without GFE and other costs)

$445,000 $186,000 ????

????

Calculation $445/32.5 $186/12.1

Cost per GVW ($/pound) $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


• Do you think the estimate is reasonable?

Capability M-ATV HMMWV JLTV

Turning radius (feet) 54 25 25

Payload (pounds) 4,000 1,800 - 3,500 -

3,950 5,100

Gross vehicle weight (GVW) (pounds)

32,500 12,100 - 19,95 -

14,800 23,950

Maximum speed at GVW (miles per hour)

65 63.8 70

Minimum range (miles) 300 250 400

Reliability (mean miles between operational mission failure)

600 800 - 4,500 -

2,250 5,170

Operational availability 80% 90% 95%

Power generation-on-board/exportable (kilowatt)

12.7/0 1.2/0 20/10

Estimated base price per system (without GFE and other costs)

$445,000 $186,000 $306,000 -

$332,000



• 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 EntryOutline 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 CostsExemplar 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?


Operating Costs

STEAMING DAY RATES $

Class Sea

days

Rations Fuel Weapons DMO Stores

DMO Refit Suppliers

FFG 93 $3,347 $54,516 $12,688 $59,596 $245,637 $4,506

FFH 122 $2,591 $31,904 $6,916 $86,382 $150,452 $5,285

ACPB 215 $241 $5,492 $210 $461 $8,878 $148

SML 122 $194 $2,505 $19 $6,315 $9,727 $136

AGS 173 $718 $7,374 $169 $16,242 $42,502 $577

MHC 118 $630 $4,372 $833 $17,678 $61,044 $732

• Step 1 – Obtain daily steaming day rates for exemplar vessels

What next?


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)


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 ?? ?? ?? ?? ?? ?? ??


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)


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)

• 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.

Cost Quality Standards

Questions

?

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