AMERICA’S ARMY: THE STRENGTH OF THE NATION CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Cost-Benefit Analysis (CBA) Four-Day Training Briefing Step 4: Develop Cost Estimates for Each Alternative Visit our CBA Website for more information regarding locations, Version 3.0 (Draft) signing up, upcoming training sessions, and more Last Updated: 10 November 2011 https://cpp.army.mil Key Learning Objectives Objectives: CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • Obtain an introduction to cost estimating • Understand cost fundamentals • Understand the cost estimating process – – – – – – – Prepare for the cost estimate Establish a framework for the estimate Establish the timeframe for the estimate Identify data sources and collect data Develop the estimate Identify cost of second- and third-order effects Prepare supporting documentation Define the Problem/Opportunity and Objective Define the Scope; Formulate Facts and Assumptions CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Define Alternatives Develop Cost Estimates for Each Alternative Identify Quantifiable and Non-Quantifiable Benefits Define Alternative Selection Criteria Step 4: Deve Cost Estimate: • Captures the total cost of each alternative lop over its relevant life cycle Cost Estim ates for Each Cost estimate requires robust documentation to Alter facilitate review and validation of the CBA nativ e Compare Alternatives Report Results and Recommendations CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Outline • • • • • • Introduction and overview Cost fundamentals – a brief primer Principles and rules Tools Cost Estimating Methods Summary and conclusion CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Introduction and Overview Cost and Cost Estimating Definition Cost: • The monetary representation of resources used, sacrificed, or liabilities incurred to achieve an objective CBA 4-DAY TRAINING SLIDES UNCLASSIFIED – Example:  The resources expended in acquiring or producing a good  The resources expended in performing an activity or service Cost Estimating: • The process of collecting and analyzing data and applying quantitative models, techniques, tools, and databases to estimate the future cost of an item, product, program, or task Cost estimating is thought by some to be difficult, but the skills and knowledge are logical and straightforward It isn’t rocket science Purpose of Cost Estimating CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • Enable managers to – – – – Make resource-informed decisions Develop and defend budgets Identify specific cost drivers Improve cost controls • Translate system/functional needs associated with programs, projects, proposals, or processes into costs • Determine and communicate a realistic view of the probable costs, which will be used to inform the decision-making process Characteristics of a Good Cost Estimate • CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • • • Well documented – – – Includes source data and its significance Clearly details calculations and results Contains explanations for choosing a particular method or reference Comprehensive – Ensures a level of detail where cost elements are neither omitted nor double counted Accurate – – Avoids bias and overly conservative or optimistic estimates Bases its assessments on most likely scenarios and assumptions Credible – Discusses any limitations of the analysis deriving from the uncertainty/bias of the data or assumptions CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Cost Fundamentals A Brief Primer CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Examples of Cost Estimates  This This discussion discussion will will focus focus on on cost cost estimating estimating to to support support CBAs CBAs  But But … … these these types types of of estimates estimates are are not not totally totally separate separate from from each each other other Concepts Concepts from from other other types types can can also also apply apply to to CBA CBA • Cost estimates may be used in any decision-making process, but particularly in: – Contracts and acquisitions – Cost Benefit Analysis (CBA) • • • Analysis of Alternatives (AoA) Economic Analysis (EA) Business Case Analysis (BCA) – Independent Cost Assessment 10 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Cost Estim ating Actual Cost Method: • If historical costs from experience or trends from prototypes,Meth engineering development models, and early production itemsods: Actu are available, they can be used to cost current goods or services al • Extracts costs that were actually incurred on same system Cost during an earlier period Meth – Obtaining access to these actual costs may be difficult od When is it used? • The actual data from the same system is present 53 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED a b c d Exa The development process is nearing completion mp The materials have all been procured at a cost of le $20M – The labor cost to date is $30M Act According to earned value cost performance reports (CPRs), the estimated cost at completion for the ual remainder of the labor is another $20M Cos t Cost = $20M + $30M + $20M = $70M Me tho 54 Cost Estimating Methods: Expert Opinion Method Expert Opinion Method: • Obtains opinions from experienced individuals or group CBA 4-DAY TRAINING SLIDES UNCLASSIFIED – Document the sources of opinions – List attributes of the sources When is it used? • When availability of data is limited Delphi Technique Query expert opinion from group Seek expert opinion from each group, and then summarize results to send in reports Gather another opinion and summarize those results Continue process until experts reach a consensus 55 Example - Expert Opinion Method Scenario: Three software engineers are recognized experts in ERP software development CBA 4-DAY TRAINING SLIDES UNCLASSIFIED You hold interviews to explain the Stakeholders’ Needs, sizing level, and development process for your new system Each member of the group submits his/her opinion of the final cost If all expert opinions converge to or hover around the same figure, that may be taken as a good cost estimate 56 Cost Estimating Exercises CBA 4-DAY TRAINING SLIDES UNCLASSIFIED The Army Corps of Engineers needs to estimate the cost of constructing a special type of portable, aluminum bridge Data for past construction projects for an analogous type of bridge is given in the following table Bridge Length (ft) 130 # of Cables used Total Cost $275K Bridge 130 Bridge 180 Bridge 200 Bridge 300 $281K $381K $427K $609K Give a cost estimate for a bridge of length 450 ft built with cables 57 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Cost Estimating Exercises 2) A new type of MRE is being manufactured by a contractor, and the Army is looking for its own cost estimate in order to compare price quotes A WBS reveals the following information: each MRE contains ¼ lb of dehydrated lobster, lb of 90% lean beef jerky, ½ lb of pasta, ½ lb of dehydrated carrots, and a self-heating pouch Historical costs of the heating pouch, pasta, and carrots are known: they are $1.50, $3/lb, and $1/lb, respectively You have consulted fisheries experts, who have given you estimates of $7.25, $6.80, and $7.05 for each pound of dehydrated lobster Costs of beef jerky and labor, by certain parameters, are given below Give an estimate of the production cost per MRE packet Jerky Jerky Jerky % lean 75 80 85 Cost/lb $1.50 $1.60 $1.70 Edible weight Labor Cost/MRE MRE 1 lb MRE 2 lbs MRE 3 lbs $0.50 $1.00 $1.50 58 CBA 4-DAY TRAINING SLIDES 59 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 60 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Summary and Conclusion 61 Closing Thoughts CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • The cost estimate is a critical part of a CBA and is likely to receive significant scrutiny • A cost estimate that is clearly presented, logical, and welldocumented will help send a positive message to users of the CBA • A wide range of tools is available to support the analyst • Cost estimating requires logical thinking and a some understanding of resource management concepts, but it’s not rocket science Most people should be able to acquire the necessary skills and knowledge 62 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Cost Analysis is NOT Magic Cost Analysis is not magic! An effective cost analysis is well documented, comprehensive, accurate, and credible 63 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Review Exercise: Henry Ford • In a rented garage at 58 Bagley Street in Detroit, Henry Ford completed his first gas-powered car on the morning of June 4, 1896 He had spent $250 FY1896 dollars on equipment to build the car, and $100 on labor The garage cost $15 per month to rent After the car was assembled, it was clear that it would not be able to fit through the door of the rented garage The car was to be used as a model for the two-year long test-driving phase of his R&D process, with the final goal of arriving at a model for mass production and sale After negotiating with the landlord, it was agreed that the garage door could be widened for a onetime payment of $25 64 Review Exercise: Henry Ford CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • Provide a cost estimate for each of the following COAs: – COA1 (Status Quo): Leave the car in the garage, nothing else – COA2: Disassemble the car and reassemble it outside the garage – COA3: Widen the garage door 65 Mini-case Exercise #4 or “how much can I spend again?” CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • U.S Army Special Operations Command has scheduled the procurement of seven “Longbow Apache 2” helicopters with a preliminary delivery date of 15 May 2013 (with 95% certainty) Normal procurement cost per Apache is $35M Each of the new Apaches has been ordered with a classified modification to suit the customized mission requirements of USASOC, at an additional cost of $7M over the normal procurement cost for each Apache All seven customized Apaches are necessary for mission effectiveness It is known that to achieve the delivery date of 15 May 2013 at the given degree of certainty, the required production rate must far exceed normal capacity, and that this contributes as a cost factor An analysis of past production performance has determined that the relation between cost and risk can be approximated by r = 0.09c2 – 1.24c + 4.32 (for values of c between 3.64 and 10) where r is the risk (expressed as a decimal between and 1) that delivery will miss the deadline, and c is the cost in millions of dollars over the normal procurement cost per Apache After setting the delivery date at 15 May 2013, USASOC receives an order from SECARMY restricting total procurement costs for the Apache procurement program to $280M USASOC now needs to determine the optimal value of c Perform all CBA steps to determine alternatives and recommend a course of action 66 Mini-case Exercise #4 or “Apache Part II: who should I listen to?” CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • Due to a last minute change in mission requirements, the original modification has been scrapped in favor of one with a wider range of alternatives As in part (a), a maximum of $5M per helicopter may be spent on the new modification The modification can be customized according to two dimensions: survivability and lethality, each scored on a scale between and (1 being the best possible) The associated costs are $5M per point for survivability, and $10M per point for lethality Suppose that the benefit score may be calculated as LxSy, where L is the score for lethality, S is the score for survivability, x is the weight (as a decimal) placed on lethality, and y is the weight given to survivability To determine the relative importance of these two dimensions to the mission, you have conducted a survey within three separate populations: infantry, Apache pilots, and USASOC commanders Among infantry, the consensus is that x = 0.8 and y = 0.2 Among pilots, the consensus is that x = 0.3 y = 0.7 Commanders believe x = 0.6 and y = 0.4 State the problem, objective, constraints, and determine alternatives and the recommended course of action 67 ... CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • Obtain an introduction to cost estimating • Understand cost fundamentals • Understand the cost estimating process – – – – – – – Prepare for the cost estimate... skills and knowledge are logical and straightforward It isn’t rocket science Purpose of Cost Estimating CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • Enable managers to – – – – Make resource-informed decisions... life-cycles for COA1 and complete life cycles for COA2 CBA 4-DAY TRAINING SLIDES COA1 COA2 5 7 5 7 35 years 26 Sunk Costs CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • In general, sunk costs—costs that