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Cost Estimation PDF
Cost Estimation PDF
Outline
Data Collection
Data Required
All CES elements will need data to support the estimate
Historical cost and non-cost data need to be collected to
support various estimating techniques
Technical non-cost data describes the physical,
performance, and engineering characteristics of a system
Examples: weight, # of design drawings, SLOC, function points,
# of integrated circuit boards, square footage, etc.
Important to pick data that is a predictor of future cost
Data Collection
Data Required(contd)
Identify both direct and indirect costs
Direct costs are called touch labor and include direct manufacturing,
engineering, quality assurance, material, etc. costs which have a direct
bearing on the production of a good.
Also included are direct non-wage costs such as training, supplies, and travel.
11
Data Collection
Data Required (contd)
Some direct costs may be burdened with indirect costs and
some may not
Need to know to avoid double-counting or, worse yet,
underestimating
Important to ask when collecting data whether costs are burdened
with indirect costs
12
Data Collection
Data Required (contd)
Data can be collected in a variety of ways
Contractor site visits
Data requests for all relevant CES elements
Documented cost estimates, if available for earlier versions of the
current system
Can save valuable research time for statistical analysis
13
Data Collection
Typical data sources
Two types of data sources:
Primary & Secondary
Primary data is found at the original source (e.g., contractor
reports, actual program data, etc.)
Preferred source of data
14
Data Collection
Typical data sources
Current Program Milestone schedule (for phasing program costs over
time)
Current Program System Description
Important to have a technical understanding of how the system will
work
Approved program funding (Compare to proposal estimate)
Contractor actual cost reports (from internal Management Information
System)
Current program estimate documentation (if available)
Contractor proposals (Compare to program funding profile)
Commercial Off-the-Shelf (COTS) catalogs
Manufacturer websites (e.g., Dell, Microsoft, etc.)
15
Data Collection
Typical Data Sources (contd)
Forward Pricing Rate Agreements (FPRA)
Similar program historical actual costs and estimate
documentation
Engineering drawings/specifications,
Interviews with technical and program management
personnel
Surveys
Professional journals and publications
Industry guides and standards
Technical Manuals
16
Data Analysis
Data Validity/Integrity
Important to ensure that the cost data collected is
applicable to the estimate.
Identifying limitations in the historical data is imperative for
capturing uncertainty
When using historical cost data for a similar system, appropriate
adjustments need to be made to account for differences in the new
system being estimated.
Data may need to be mapped from the contractors accounting
system to the Cost Element Structure (CES)
17
Data Analysis
Data Validity/Integrity (contd)
Proposal data should be validated to ensure that contractor
motivations to buy-in or low-bid their estimates are not
occurring.
Compare previous contractor proposal bids and actual costs for
similar programs.
Look for trends in underbidding.
Participate in a fact-finding trip to discuss contractor proposal
estimates and gather supporting data/evidence.
18
Data Analysis
Normalization
Involves making adjustments to the data so that it can
account for differences in
Inflation rates,
Direct/indirect costs,
Recurring and non-recurring costs,
Production rate changes or breaks in production,
Anomalies such as strikes, major test failures, or natural disasters
causing data to fluctuate, and
Learning curve (cost improvement) effects due to efficiencies
gained from continually repeating a process
Data Analysis
Normalization (contd)
Accounting for Economic Changes (e.g., inflation)
Lack of cost data uniformity due to upward movement in prices
and services over time.
Index numbers are used to deflate or inflate prices to facilitate
comparison analysis.
Wrong to compare costs from 1980s to today without accounting for
inflation over the past 20 years.
Cost estimators use inflation indices to convert costs to a constant
year dollar basis to eliminate distortion that would otherwise be
caused by price-level changes.
Constant dollar estimates represent the cost of the resources required
to meet each years workload using resource prices from one
reference year (e.g., constant 2003 dollars).
Constant dollars reflect the reference year prices for all time periods
allowing analysts to determine the true cost of changes for an item
20
Data Analysis
Normalization (contd)
For the United States, the Office of Management and
Budget (OMB) is responsible for developing inflation
guidance by appropriation for government estimates.
Most common indices used by United States Cost
Estimators are published by the U.S. Department of Labor,
Bureau of Labor Statistics.
Producers Price Index (http://www.bls.gov/ppi/) for goods
Employment and Earnings Index
(http://www.bls.gov/ces/home.htm#data) for services
Data Analysis
Normalization (contd)
For budgetary purposes, however, data expressed in
constant dollars should be inflated to represent current year
(or Then-year) dollars.
Current year estimates calculate the cost of the resources using the
estimated prices for the year in which the resources will be
purchased.
Current year estimates reflect inflation
22
Data Analysis
Normalization (contd)
Example: Assume 5% escalation rate compounded annually
Base-year cost
Then-year cost
Current year
$273,100 * 1.0000 multiplier = $ 273,100
Current year + 1 $1,911,700 * 1.0500 multiplier = $ 2,007,285
Current year + 2 $4,096,500 * 1.1025 multiplier = $ 4,516,391
Current year + 3 $8,193,000 * 1.1576 multiplier = $ 9,484,217
Current year + 4 $6,144,750 * 1.2155 multiplier = $ 7,468,944
Current year + 5 $1,092,400 * 1.2763 multiplier = $ 1,394,230
Total Estimated Labor cost (budget quality)
$25,144,167
23
Expert Opinion,
Analogy,
Parametric,
Engineering, and
Actual.
24
Estimating Methodology
Considerations
Choice of methodology is dependent upon
Type of system
Software, hardware, etc
Phase of program
Development, Production, Support
Available data
Historical data points from earlier system versions or similar system
Technical parameters of system
25
Methodology
Expert Opinion
Often called Delphi method, proposed by Dr. Barry Boehm
in his book, Software Engineering Economics.
Useful in assessing differences between past projects and
new ones for which no historical precedent exists.
26
Methodology
Expert Opinion (contd)
Pros:
Little or no historical data needed.
Suitable for new or unique projects.
Cons:
Very subjective.
Experts may introduce bias.
Larger number of experts will help to reduce bias
27
Methodologies
Expert Opinion - Steps
Gather a group of experts together,
Describe overall program in enough detail so experts can provide an
estimate,
Each member of the expert group then does an independent of the
resources needed,
Estimates are gathered anonymously and compared,
If there exists significant divergence among the estimates, the
estimates will be returned to the expert group,
The expert group then discusses the estimates and the divergence and
works to resolve differences, and
The expert group once again submits anonymous, independent
estimates which continues until a stable estimate results.
28
Methodology
Expert Opinion - Example
Three software engineers are renown in the ERP software
development.
You hold interviews which each explaining the requirements,
sizing level, and development process for your new system.
Each member of the group submits their opinion of the final
cost and the estimate converges to $50M.
29
Methodologies
Analogy
Estimates costs by comparing proposed programs with
similar, previously completed programs for which
historical data is available.
Actual costs of similar existing system are adjusted for complexity,
technical, or physical differences to derive new cost estimates
Analogies are used early in a program cycle when there is
insufficient actual cost data to use as a detailed approach
Compares similarities and differences
30
Methodologies
Analogy (contd)
Often use single historical data point.
May have several analogy estimates of sub elements to
make up the total cost.
Comparison process is key to success.
May have to add or delete functionality from historical costs to
match new program
Methodologies
Analogy (contd)
Good choice for:
A new system that is derived from an existing subsystem.
Make sure actual cost data is available
32
Methodologies
Analogy (contd)
Pros:
Inexpensive
Easily changed
Based on actual experience (of the analogous system)
Cons:
Very Subjective
Large amount of uncertainty
Truly similar projects must exist and can be hard to find
Must have detailed technical knowledge of program and analogous
system
33
Methodologies
Analogy - Steps
Methodologies
Analogy - Example
Your company is developing a new IT payroll system
serving 5,000 people and containing 100,000 lines of C++
code. Another company developed a similar 100,000 lines
of code system for $20M for only 2,000 people. Your
software engineers tell you that the new system is 25%
more complicated than the other system.
Other system development cost was $20M.
Estimated cost for new system = 1.25 * $20M = $25M
Plus 5,000/2,000, or 2.5 * $25M = $62.5M total cost
35
Methodologies
Parametric
Utilizes statistical techniques called Cost Estimating
Relationships (CER).
Relates a dependent variable (cost) to one or more independent
variables
Based on specific factors that have a high correlation to total cost
36
Methodologies
Parametric (contd)
Pros:
Cons:
Often lack of data on software intensive systems for statistically
significant CER
Does not provide access to subtle changes
Top level; lower level may be not visible
Need to be properly validated and relevant to system
37
Methodologies
Parametric Example
You have a previously developed CER to estimate a new IT system based on
SLOC.
Cost = SLOC * 25 $/SLOC
The CER is based on systems ranging from 1,000,000 to 3,000,000 SLOC.
You have estimated 2,600,000 SLOC for new system
Cost = 2,600,000 * $25 = $65M
38
Methodologies
Parametric (contd)
Cost estimators can develop their own CERs or they can use
existing commercial cost models.
Various Software cost estimating models will be discussed next
39
Methodologies
Parametric CERs
CERs are defined as a technique used to estimate a
particular cost by using an established relationship with an
independent variable.
Can be as simple as a one variable ratio to a multi-variable
equation.
CERs use quantitative techniques to develop a
mathematical relationship between an independent variable
and a specific cost.
40
Methodologies
Parametric CERs (contd)
Different statistical techniques may be used to judge the quality of the CER.
Least squares best fit (regression analysis, or the ability to predict one variable on the basis of
the knowledge of another variable)
Multiple regression (a change in the dependent variable can be explained by more than one
independent variable)
Curvilinear regression (relationship between dependent and independent variable is not liner,
but based on a curve)
Learning curve (describe how costs decrease as the quantity of an item increases)
41
Methodologies
Parametric CERs (contd)
Statistics may be used to evaluate how well the CER will produce a reliable
estimate.
Coefficient of determination, R2:
Percent of the variation in the Y-data explained by the X-data, (ie. How close the points
are to the line)
t-stat
Tests whether the individual X-variable(s) is/are valid
F-stat
Tests whether the entire equation, as a whole, is valid
No single statistic may validate or invalidate a CER, quality of the input data is
just as important.
Best to use a statistical software package like SAS or SPSS to quickly evaluate
alternative CERs.
42
Methodologies
Parametric CERs - Steps
Define the dependent variable (e.g., cost dollars, hours, etc.) and what the CER will
estimate,
Select independent variables to be tested for developing estimates of the dependent
variable,
Collect data concerning the relationship between the dependent and independent
variables,
Select the relationship that best predicts the dependent variable, and
Most difficult and time consuming step, but essential that all data is checked to ensure that all
observations are relevant, comparable, and free of unusual costs
A high correlation often indicates that the independent variable will be a good predictive tool
Identify independent variables tested, data gathered along with sources, time period
(normalization for inflation effects), and any adjustments made to the data
43
Methodologies
Parametric Learning Curves
Basic premise:
Repetitive tasks should result in productivity for subsequent, similar
tasks
This improvement is usually quantified at a rate Y = AXb
Methodologies
Parametric Learning Curve - Example
Say that the first 100 tasks of an installation took 10 hours
per task and the next 100 averaged 8 hours per task. Thus,
the learning curve would be calculated as follows:
Learning curve = 8 hours per task/10 hours per task = 0.8
Implies an 80% learning curve meaning an improvement of
20% occurred between the first 100 tasks and next 200
tasks
45
Methodologies
Rate Impact
Basic premise: The number of units produced in a single lot effects the
overall cost of producing that lot.
Costco theory that buying in bulk makes the unit cost less
Methodologies
Engineering
Also referred to as bottoms up or detailed method.
Underlying assumption is that future costs for a system can be
predicted with a great deal of accuracy from historical costs of that
system.
Involves examining separate work segments in detail and then
synthesizing these detailed estimates along with any integration
costs into a total program estimate.
Methodologies
Engineering (contd)
Most useful for systems in production.
Design configuration has stabilized
Test results are available
Development cost actuals are available
48
Methodologies
Engineering
Pros:
Objective
Reduced uncertainty
Cons:
Expensive
Time Consuming
Not useful early on
May leave out software integration efforts
49
Methodologies
Engineering Steps
Summarize estimate.
50
Methodologies
Engineering Example
New IT system can be broken down into Labor and Material
costs.
Labor: Estimated number of hours
250,000 hrs * $200/hr = $50M
Material: From vendor quotes
Server = $10M
COTS = $3M
Desktops (50 @ $100k) = $5M
Cost = $50M+$10M+$3M+$5M = $68M
51
Methodologies
Actual
Bases future costs on recent historical costs of same
system.
Used later in development or production.
Preferred method.
Costs are calibrated to actual development or production
productivity for your organization
52
Methodologies
Actual
Pros:
Most accurate
Most objective of the five methodologies
Cons:
Data not available early on
Time consuming
Labor intensive to collect all the data necessary
53
Methodologies
Actual - Example
The development process is nearing completion. The material
has all been procured at a cost of $20M.
The labor cost to date is $30M. According to earned value
cost performance reports (CPRs) the estimate at complete for
the remainder of the labor is another $20M.
54
Methodologies
Summary of the Five Cost Estimate Results
Expert - $50M
Analogy - $62M
Parametric $65M
Engineering $68M
Actual - $70M
55
58
Requirements Definition
Analysis, Design, and Integration
Quality Assurance Program
Configuration Management
Software Design and Development
HW/SW Integration, Assembly, Test and Checkout
System Operational Test and Evaluation
System Independent Software Verification and Validation
Site Acceptance Testing
Independent Operational Test and Evaluation
Program Management
Installation and Checkout
Corrective Maintenance
59
COCOMO
COSTXPERT
SLIM
SEER
Costar, REVIC, etc.
60
61
62
64
65
67
68
These should be
adjusted for every
estimate to approximate
the new, unique
development effort.
69
70
71
72
73
COCOMO
COSTXPERT
SLIM
SEER
REVIC
Costar, Price S, etc.
74
77
COCOMO
COSTXPERT
SLIM
SEER
REVIC
Costar, Price S, etc.
78
79
80
COCOMO
COSTXPERT
SLIM
SEER
REVIC
Costar, Price S, etc.
82
COCOMO
COSTXPERT
SLIM
SEER
REVIC
Costar, Price S, etc.
85
86
COCOMO
COSTXPERT
SLIM
SEER
REVIC
Costar, Price S, etc.
87
88
Factors tend to be the most common approach for top level checks.
Software cost models play an important role during later stages of
development phase.
Can be used to cross-check the reasonableness of costs forecasted using
either the engineering or actual cost methods.
89
91
94
After thousands of trials, statistics of the results and the certainty of any
outcome can be obtained from the CDF.
97
98
Documentation
After cross-checking the estimate major cost drivers, the next step, and
most important one of all, involves documenting the entire estimate
process.
Although this is a difficult and time-consuming procedure, the level of
detail and attention will pay big dividends when it comes time to reestimate
May also help data collection of actual analogous costs.
100
Documentation (contd)
Best to provide more vs. less information
Assume reader knows nothing about the system being
estimated.
Include step-by-step instructions for how the estimate
was developed.
Aim to provide enough information for the estimate to be recreated by
a cost analyst independent of the team.
Most users of the documentation will either be updating the estimate
at a later date or will relay on data for estimating an analogous
system.
101
Documentation (contd)
Documentation should include at a minimum:
Introduction
Purpose of estimate
Estimate team members, POC information, and area of responsibility
Program background and system description
Program schedule (necessary for phasing costs over time)
Scope of estimate (including what was omitted and why)
Ground rules and assumptions (all technical and program specific
assumptions that bound the estimate e.g., constant 2003 dollars using xx
inflation rates)
Summary of estimate by year to show phasing by CES
Overview of main body that describes how each CES element was
estimated
102
Documentation (contd)
Summary of estimate by year showing phasing by CES element
(In constant 2002 millions of dollars)
Investment Costs
Systems Eng/Program Management
Development/Installation/Training
Initial Biometric Hardware Costs
Initial Biometric Software Costs
Network Infrastructure
Consulate Facility Renovation
Hardware Infrastructure Upgrades
Total Investment Costs
FY2002
$
$
$
$
$
$
$
$
540
7,900
6,045
4,600
100
570
19,755
FY2003
$
$
2,523
2,523
$
$
2,523
2,523
$
$
2,523
2,523
$
$
2,523
2,523
FY2003
540
926
6,400
100
50,715
10,540
1,000
152
70,373
$
$
$
$
$
$
$
$
$
$
FY2004
540
926
6,400
100
50,715
10,540
1,000
152
70,373
$
$
$
$
$
$
$
$
$
$
FY2005
540
926
6,400
100
50,715
10,540
1,000
152
70,373
$
$
$
$
$
$
$
$
$
$
FY2006
540
926
6,400
100
50,715
10,540
1,000
152
70,373
$
$
$
$
$
$
$
$
$
$
FY2007
540
926
6,400
100
50,715
10,540
1,000
152
70,373
$
$
$
$
$
$
$
$
$
$
FY2008
540
926
6,400
100
50,715
10,540
1,000
152
70,373
$
$
$
$
$
$
$
$
$
$
FY2009
540
926
6,400
100
50,715
10,540
1,000
152
70,373
$
$
$
$
$
$
$
$
$
1,619.44
2,779
19,200
300
152,145
31,619
3,000
456
211,118
72,896
72,896
72,896
72,896
72,896
72,896
72,896
218,687
33,075
52,830
FY20010-2012
2,523
2,523
FY2009
$
$
FY2008
2,523
2,523
33,075
Software/System Maintenance
FY2007
$
$
FY2006
2,523
2,523
$
$
$
$
$
$
$
$
$
$
Program Management
FY2005
$
$
FY2002
FY2004
$
$
7,569
7,569
Total
$
$
$
$
$
$
$
$
540
7,900
6,045
4,600
100
570
25,229
44,983
$
$
$
$
$
$
$
$
$
$
Total
5,398
9,263
64,000
1,000
540,225
105,396
10,000
1,520
736,802
781,785
FY20010-2012
103
Documentation (contd)
Main Body documentation should include:
Enough detail for each CES element that would allow for another analyst
to replicate the cost estimate.
Each CES element should provide a description of the methods (with rationale
for choosing it), techniques, and data used to generate the estimate as well as
any cross-checks done to add rigor to the estimate.
Include information such as data sources, direct/indirect labor rates, labor
hours, material/subcontracts, learning curve data and methodology, factors,
cost estimating relationships with corresponding statistics and data ranges,
cost models used, inflation indices, time phasing (e.g., development lasts 3
years and 10 years operations and support), estimator judgments, cross-checks,
risk and confidence levels.
Documentation flow should follow the same CES structure shown in the
estimate summary by year.
If the estimate is an update to a prior estimate, then provide an explanation
for any differences.
104
Documentation (contd)
Be sure to spell out all acronyms when first introduced.
Cross-reference the reader to where data is used multiple times.
Show data at the lowest levels possible.
Include copies of vendor quotes, studies used, statistical analysis printouts,
cost model input and output reports, etc.
105
Need to invest in database capture of historical costs and technical data for proper CER
development
Can result in rough-order magnitude costs being used as budget quality estimates
Cause important steps like validation and Monte Carlo simulation to be omitted
Resources
106
Cost Estimating
Auditor Checklists (contd)
Various auditor checklists can be found in the many source documents
used to create this briefing. A few of these are shown below:
Department of the Army Economic Analysis Manual (U.S. Army Cost and Economic
Analysis Center, Feb 2001)
http://www.asafm.army.mil/pubs/cdfs/manual/economic.pdf
Appendix M, Economic Analysis Checklist
Department of the Army Cost Analysis Manual (U.S. Army Cost and Economic
Analysis Center, May 2002)
http://www.ceac.army.mil/pubs/default.asp
Link to a zipped MS Word file for downloading or printing
Checklist on page 42, Figure 3-4 Validation Considerations
TASC (The Analytic Sciences Corp.), The AFSC Cost Estimating Handbook, Reading,
MA, prepared for the U.S. AirForce Systems Command, 1986.
Chapter 8, Cost Models pages 8-6 through 8-12
Appendix D, Staff Review Cost Estimate Checklist pages D-1 through D-8
108
Cost Estimating
Auditor Checklists (contd)
Various auditor checklists can be found in the many source documents
used to create this briefing. A few of these are shown below:
Navy Post Graduate School Economic Analysis Handbook
http://www.nps.navy.mil/drmi/chapter6.htm
Chapter 6, Guide for Reviewers
109
Contact Information
For further information please contact us:
Karen Richey (202) 512 4784 or richeyk@gao.gov
Madhav Panwar (202) 512- 6228 or panwarm@gao.gov
Jennifer Echard (202) 512 3875 or echardj@gao.gov
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