Presentation on theme: "February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005."— Presentation transcript:
February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005
February 2005 Contents Requirements for project success Requirements for project success Cost estimating basics Cost estimating basics –Purpose, Applications, Skills, Benefits, Qualities, Limitations, Concerns Principles of Cost Analysis Principles of Cost Analysis Elements of Life Cycle Costing Elements of Life Cycle Costing Influences of Costs Influences of Costs Illustrations and issues Illustrations and issues Some myths of project management and costs Some myths of project management and costs
February 2005 To bring a project in to Time and Cost requires that: - Targets are realistic Targets are realistic –Targets can be challenging but they must be attainable or else the programme is doomed to failure from the start The project is well managed The project is well managed –The possibility for expenditure and delay are unbounded The requirement remains stable The requirement remains stable –To get anywhere one must know where one is going –Navigation is hindered if the customer tears up the map
February 2005 Causes of Failure Causes of delay to in-service date Causes of delay to in-service date –Technical difficulties –Need to redefine a project –Deferring projects to match overall funding Causes of cost variance Causes of cost variance –Programme changes –Inflation adjustments –Specification changes Source: NAO MoD Major Projects Report
February 2005 Proximate and ultimate causes Ø For cost/time estimating, requirements capture etc. Estimating failures Failure to allow for technical difficulties Erroneous inflation/productivity expectations Inadequate methodology Ø Underestimates of cost and times Infeasible targets Cost/time overruns Specificatio n changes Programme changes Project deferment Diminished value for money
February 2005 Success requires:- Full Allowance for technical difficulties present and potential Full Allowance for technical difficulties present and potential Realistic appraisal of prospects for relative price inflation including promised productivity gains Realistic appraisal of prospects for relative price inflation including promised productivity gains Use of a methodology that gives accurate unbiased estimates of cost and time Use of a methodology that gives accurate unbiased estimates of cost and time
February 2005 But, success is rare at present Major UK defence projects Source: NAO MoD Major Projects Reports
February 2005 Success is the right contract price - not the lowest 05 Min. cost exceeds customers’ max. price by 12.5 % 3.54.0 4.55.5 Boeing costings Airline demands Unit price $M Source: H. Mansfiled, “Vision, Popular, New York, 1966” 1 1. Boeing offer price set at $4.5M (1) 2 2. Boeing share Pan American order with Douglas (2) 3 3. Boeing lose United order to Douglas 4 4. Boeing share burgeoning market with Douglas and Convair 5 5. Rivals lose $950M in executing their contracts; Boeing shows profit on it 6 6. Boeing has funds to launch B727 and dominates jet airliner market Where are Douglas and Convair now? First generation jet airliners 1955 Notes 1.) Boeing do not revise estimates downward to match rivals’ offers and airline expectations. 2.) Notwithstanding Boeing’s advantage of a demonstrable prototype.
February 2005 Cost Estimating Cost Estimating: Cost Estimating: –The process of collecting and analyzing historical data and applying quantitative models, techniques, tools, and databases to predict the future cost of an item, product, program or task. Purpose of cost estimating Purpose of cost estimating –Translate system/functional requirements associated with programs, projects, proposals, or processes into budget requirements. –Determine and communicate a realistic view of the likely cost outcome, which can form the basis of the plan for executing the work.
February 2005 Fundamentals to Consider There are three basic methods of estimating: There are three basic methods of estimating: “Top Down” “Top Down” –Analogy: comparing the cost of an item to be estimated to a similar item. –Parametric: mathematical relationship between one or more parameters (cost, performance, programme, etc). “Bottom-Up” “Bottom-Up” –Detailed Estimating: at the lowest definable level using industrial engineering techniques & standards.
February 2005 Cost Estimate Qualities The characteristics of high quality cost estimates are: The characteristics of high quality cost estimates are: –Accuracy –Comprehensiveness –Replicability and Auditability –Traceability –Credibility –Timeliness
February 2005 Limitations of Cost Estimating Cost estimating cannot: - Cost estimating cannot: - –Be applied with cookbook precision –Produce results that are better than the input data –Predict political impacts –No substitute for sound judgment, management, or control –Make final decisions
February 2005 A Few - Cost Estimating Concerns Consistency Consistency –Estimates must track over time –Estimates developed by other organisations must be based on same content and assumptions –Historical data is not consistent between differing cost element or work breakdown structures Security/access Security/access –Company-proprietary data –Data classification/security –Possible misuse of data
February 2005 Basic principles of cost analysis
February 2005 General introduction to some concept and current issues Some definitions and distinctions Some definitions and distinctions Elements of Life-Cycle cost Elements of Life-Cycle cost Influences on cost Influences on cost Illustrations and issues Illustrations and issues Economics of scale Economics of scale
February 2005 Non-recurring costs are once for all. Recurring costs multiply with quantity. Quantity can be units made, hours used, years elapsed etc… Recurring and non-recurring costs Cost Unit non-recurring cost e.g. unit production cost Recurring cost e.g. production cost Non-recurring cost e.g. development cost Unit cost e.g. unit acquisition cost 0Q Quantity e.g. Units made Note: Need a careful definition of a “Unit Cost”
February 2005 Direct costs are those costs which are associated directly and unambiguously with the product or activity in question. Indirect costs are costs associated with a range of products or activities and which have to be apportioned between these in a more-or-less arbitrary fashion. Indirect costs make the costs of one product a function of demand not only for it but for each of a range of associated products also. Head office Production centres Products Indirect (overhead) costs Direct and indirect costs
February 2005 Activities CostsPrimary influences Develop Acquisition costs Equipment type and performance Build Operate Support costs Equipment type and performance Support costs Equipment type and performance Maintain Patterns of use Maintain Patterns of use Support costs are as much a matter of user choice as they are of equipment type and supplier efficiency. Acquisition and running costs
February 2005 Life cycle cost Non-recurring Recurring Development Production In-service Disposal RDT&E Production Investment Crew Non-crew Direct Indirect Ammunition Fuel Maintenance Acquisition Support
February 2005 Activities preparatory to and enabling production Research, Development, Test and Evaluation (RDT&E) Costs dominated by the design/make/test cycle Production Investment (PI) Tools & Test Equipment etc. required for production Start DesignMake Test OK? Finish Development yes No
February 2005 Manufacture of items for service use Materials Materials in raw or semi-finished form Bought-out Complete functioning items or systems from specialist suppliers Labour Personnel employed by or at production centre Finished product Production
February 2005 Crew Pay and allowancesSupport and welfare Training Pay, NI, pensions etc.Medical, victualling etc Training for both primary and any secondary duties Total crew cost Often, cost of maintaining a qualified person in post >>cost of paying person in post Non-crew Consumables Replacement of material consumed intentionally during use eg fuel and ammunition. Spares & Repairs Replacement or refurbishment of items becoming unserviceable during use. Preventative Maintenance Replacement or refurbishment of items to promote continued availability Total non-crew running cost Support costs
February 2005 There are different costs for disposal by: Sale for reuse Sale for reuse Sale for scrap Sale for scrap Destruction/ incineration Destruction/ incineration Terminal use Terminal use Indefinite storage Indefinite storage Land fill/ dump at sea Land fill/ dump at sea Employment of environmentally damaging materials can impose high disposal costs. May invoke wider legal and ecological issues. Disposal
February 2005 Influences on cost (Other than technical characteristics of the equipment in question)
February 2005 RDT&E - Precursor designs (But, new has still to be proven) (But, new has still to be proven) - Sharing costs through collaboration (But, this generates extra overheads) (But, this generates extra overheads) -Parallel development of variants (Often, a price of collaboration) (Often, a price of collaboration)
February 2005 Production Investment - intended production quantity and rate - variants of basic design 0 Quantity/Rate P.I. Multiple variants Single design
February 2005 Production 0 Quantity (Also rate in some cases) Unit production cost Multiple variants Single design Worst of all worlds is to plan for many and make actually only a few in many variants Learning is a fragile plant whose progress takes very little to set it back
February 2005 Support costs Crew -Deployment and rouelment -Other duties -Career/command structure -Training needs Non-Crew -Deployment -Availability -Surge capacity -Training needs Running costs are as much a matter of user policy as of equipment characteristics
February 2005 Disposal Can be a negative cost if the equipment is sold on. Can be a negative cost if the equipment is sold on. Can be sensitive to use of hazardous materials. Can be sensitive to use of hazardous materials. Disposal (or, even, non-disposal) of nuclear materials is a special problem. Disposal (or, even, non-disposal) of nuclear materials is a special problem.
February 2005 Questions & Contact Details Arthur Griffiths HVR Consulting Services Ltd Selborne House Mill Lane AltonHants GU 34 2QJ Tel: 01420-87977 Email: firstname.lastname@example.org