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 Presidents 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.
Estimating Techniques Analogy Parametric Engineering Bottom up Price Data Expert Option Extrapolation from 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 Cost Estimation Technique and Project Maturity
Which Technique to use, when Costing Methodology DCP EntryDCP Update1 st Pass Approval 2 nd 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, 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 –Doesnt 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 Vernes 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 ElementMetric 1st to 2nd Pass Activities0.5%to1.5% Detailed Design Activities3.0%to5.0% Mission System ILS & Support20.0%to50.0% Project Management2.0%to5.0% Contingency20.0%to50.0% As a percentage of Mission System Cost
Estimation at DCP Entry Metrics - Rules of Thumb Cost ElementMetricComments PM, SE& ILS Management10%to15% Test & Evaluation2%to5%Depends upon many factors Initial Spares7.5%to15%Depends on ROE, BOP, system Data & Documentation2%to5%IP, language, MIL-SPEC vs COTs. Facilities2%to5% Training2%to5% Support Equipment1%to3% PHS&T1%to3%Depends on delivery point DMO PO5%to15% FMS2.5% to5% Australian Prime10%to15% 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 MetricTotalContTotal 1st to 2nd Pass Activities0.50%$1.89$0.50$2.39 Acquisition Mission System $271.10$81.33$352.43 Premium to build in Australia30.00%$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 & Support30.00%$113.23$33.97$118.10 Project Management5.00%$18.87$5.66$19.70 Total Acquisition Cost $511.42$153.36$630.85
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 Cost New = Cost Old * Disp New / Disp Old 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
Weight Based Analogy Joint Light Tactical Vehicle CapabilityM-ATVHMMWVJLTV Gross vehicle weight (GVW) (pounds) 32,50012,10019,950 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
Weight Based Analogy Joint Light Tactical Vehicle Do you think the estimate is reasonable?
CapabilityM-ATVHMMWVJLTV Turning radius (feet) 5425 Payload (pounds) 4,0001,800 -3,500 - 3,9505,100 Gross vehicle weight (GVW) (pounds) 32,50012,100 -19,95 - 14,80023,950 Maximum speed at GVW (miles per hour) 6563.870 Minimum range (miles) 300250400 Reliability (mean miles between operational mission failure) 600800 -4,500 - 2,2505,170 Operational availability80%90%95% Power generation -on-board/exportable (kilowatt) 12.7/01.2/020/10 Estimated base price per system (without GFE and other costs) $445,000$186,000$306,000 - $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 STEAMING DAY RATES $ ClassSea days RationsFuelWeaponsDMO Stores DMO RefitSuppliers FFG93$3,347$54,516$12,688$59,596$245,637$4,506 FFH122$2,591$31,904$6,916$86,382$150,452$5,285 ACPB215$241$5,492$210$461$8,878$148 SML122$194$2,505$19$6,315$9,727$136 AGS173$718$7,374$169$16,242$42,502$577 MHC118$630$4,372$833$17,678$61,044$732 Step 1 – Obtain daily steaming day rates for exemplar vessels What next?
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 ClassDisp (tonnes) RationsFuelWeaponsDMO Stores DMO RefitSuppliersTotal 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 = Disp new / Disp old Step 5 – Multiply annual cost by Displacement Ratio Annual Cost $m ClassDisp (tonnes) RationsFuelWeaponsDMO Stores DMO RefitSuppliers 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 2 nd Pass Approval. 1 st 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 1 st to 2 nd Pass activities) are to be of tender quality 2 nd 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