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1 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Version 3.0 (Draft) Last Updated: 10 November 2011 Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more https://cpp.army.mil AMERICA’S ARMY: THE STRENGTH OF THE NATION Cost-Benefit Analysis (CBA) Four-Day Training Briefing Step 4: Develop Cost Estimates for Each Alternative

2 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Key Learning Objectives Objectives: 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 2

3 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 8. Report Results and Recommendations 7. Compare Alternatives 6. Define Alternative Selection Criteria 5. Identify Quantifiable and Non-Quantifiable Benefits 4. Develop Cost Estimates for Each Alternative 3. Define Alternatives 2. Define the Scope; Formulate Facts and Assumptions 1. Define the Problem/Opportunity and Objective Step 4: Develop Cost Estimates for Each Alternative 33 Cost Estimate: Captures the total cost of each alternative over its relevant life cycle Cost estimate requires robust documentation to facilitate review and validation of the CBA.

4 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Introduction and overview Cost fundamentals – a brief primer Principles and rules Tools Cost Estimating Methods Summary and conclusion Outline 4

5 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 5 Introduction and Overview

6 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Cost: The monetary representation of resources used, sacrificed, or liabilities incurred to achieve an objective. –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 and Cost Estimating Definition 6 Cost estimating is thought by some to be difficult, but the skills and knowledge are logical and straightforward. It isn’t rocket science.

7 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 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. Purpose of Cost Estimating 7

8 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 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 Characteristics of a Good Cost Estimate 8

9 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 9 Cost Fundamentals A Brief Primer

10 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 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 Examples of Cost Estimates 10  This discussion will focus on cost estimating to support CBAs  But … these types of estimates are not totally separate from each other. Concepts from other types can also apply to CBA.  This discussion will focus on cost estimating to support CBAs  But … these types of estimates are not totally separate from each other. Concepts from other types can also apply to CBA.

11 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Costs may be: Direct or indirect Recurring or nonrecurring Burdened or unburdened Variable or fixed Some Characteristics of Costs 11

12 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Direct Cost Can be easily and conveniently traced to a specific cost element/objective –Example: The cost of ammunition fired in a training event at the firing range Indirect Cost Cannot be easily and conveniently traced to a specific cost element/objective –Example: Installation support to the firing range (utilities, upkeep, etc) Direct vs. Indirect 12

13 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Recurring vs. Nonrecurring 13 Recurring Cost Cost that is incurred regularly in producing a product or providing a service –Examples: Civilian and military personnel who conduct the activity, recurring sustainment of facilities, supplies, personnel training, utilities, equipment maintenance, janitorial service, office supplies Non-Recurring Cost Cost that only occur once or infrequently. –Examples: Major items of equipment, major and minor construction, one-time training in new procedures, activities conducted in direct support of individual process improvement efforts

14 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Burdened vs. Unburdened 14 Unburdened Cost Cost of a product/service that does not consider other related costs necessary to provide that product/service. – Examples: Direct compensation, cost of a gallon of fuel in a theater of operations, etc. Burdened Cost Cost of a product/service plus an apportioned cost of other related costs necessary to provide that product/service. – Examples: Salary plus the cost of benefits (health, retirement, etc.), facilities support cost allocated to an activity or personnel – There are degrees of burden in a CBA. For example: Direct compensation for military and civilian personnel is always burdened with the cost of personnel benefits Facilities support cost is allocated to a COA only if it can demonstrated that the COA causes the cost to be incurred

15 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Variable vs. Fixed 15 Variable Cost A cost that varies based on the level of activity or output. This can be either a linear relationship or a step function. – Examples: Fuel cost for vehicles varies in a linear fashion relative to the number of miles driven. The number of instructors needed to teach a class can vary in a step function based on the number of students (e.g., 1 instructor for 25 students, 2 instructors for students, etc). Fixed Cost A cost that does not vary based on the level of activity or output. – Example: At an Army installation, the cost associated with the commander and his/her immediate staff is unlikely to vary as the installation population or other variables change. VariableSemi-VariableFixed Cost Note: Most costs are semi- variable

16 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES  Definition: Factors, activities, or events that cause costs to be incurred  Usually can be quantified/measured (e.g., number of hours spent on a task, supported population)  Analyst should identify and focus on the primary cost drivers that affect total cost  Helps to ensure the accuracy and reliability of the cost estimate  Makes it easier to control costs within the organization  Examples:  The labor cost associated with assembling a HMMWV at a the factory would be driven by the quantity of vehicles produced  Energy consumption at the PX is driven by the square footage of the building and the operating hours  The cost of printing budget documents for the Office of Management and Budget is driven by the number of pages in each set and the number of sets needed Cost Drivers 16 Organizations perform work activities to deliver products/services to a stakeholder.

17 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES The cost of second order effects—the effects of the COA under consideration beyond the immediate effects—must be taken into account in the cost estimate. Second Order Effects 17

18 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Adjusting for inflation is a specific form of normalization, an adjustment intended to make a given data set consistent and comparable with other data sets A frequent use of simple normalization is to adjust based on quantities. For example: – In a manufacturing process, COA 1 produces 17,000 widgets per year at a total cost of $33,765 and COA 2 produces 14,500 widgets at a total cost of $28,725. It’s difficult to evaluate these COAs unless we normalize by computing a unit cost, which shows us that COA 2, with a unit cost of $1.95 per widget, is preferable to COA 1, which has a unit cost of $1.99. Normalization and Inflation 18

19 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES What is Inflation? 19 Of all the topics discussed in cost analysis, none will be encountered more frequently than inflation. Definition A rise in the general level of prices Measure of change in the dollars’ purchasing power In other words A given dollar amount will have less buying power next year than it does this year To maintain consistent buying power, we must adjust this year’s dollars with the inflation factor from year to year Common methods for normalization: Discounting Constant (Base) Year

20 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Inflated Dollars – Terminology and Uses 20 Type of DollarOther TermsWhen Used ConstantBase Year Uninflated Used in the cost estimate of a CBA to compare COAs and to make the decision CurrentThen-year Inflated Used to determine the POM/budget resourcing impact of a COA. For the approved COA, the current dollar estimate is the amount that must be funded in each year. Therefore, it is also used to determine the dollar amount of required bill- payers.  Constant-dollar values must be accompanied by a base year: The fiscal year in which the program was initially funded or the analysis was performed.  Constant and current year data cannot be used in the same analysis.

21 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Basic calculations: – (Constant Dollars) * (Inflation Factor) = Current (Dollars) – Inflation is compounded from year to year (i.e., multiplied, not added). Example: A loaf of bread in 1950 cost $0.25. In 2011, it costs $3.00. Supposing that the price of bread is a good indicator of the general price of goods, then FY1950 $0.25 is worth $3.00 in In other words, $0.25 could buy in 1950 what $3.00 buys in 2011—and between 1950 and 2011 there was 1100% inflation (12 x). The average annual inflation rate can be calculated to be about 4.1% (12 raised to 1/61 power, so that 1.041^61 = 12). If between 2007 and 2011 there was 3% inflation each year, then $1 in 2007 could have bought what $1 x 1.03 x 1.03 x 1.03 x 1.03 x 1.03 = $1.16 can buy in Inflation Calculation and Examples 21

22 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Data: We’ve calculated the annual cost for a given COA in FY12 constant dollars: – Civilian personnel: $145,000 – Contract support: $100,000 (paid by OMA appropriation) Applicable inflation factors: – Civilian personnel: 2% per year – OMA appropriation: 3% per year Calculation for the first three years of the life-cycle: Example—Current Dollar Calculation 22 Cost Element Const. Dollar Cost Infl. Factor Current- Dollar CalculationCurrent-Dollar Cost FY12FY13FY14FY12FY13FY14 Civ per145,0002%145,000145,000 * * 1.02^2 145,000147,900150,858 Contract100,0003%100,000100,000 * ,000 * 1.02^2 100,000103,000 Total cost245, ,900256,948 To implement this COA in the POM/budget, the dollar amounts in the three right- hand columns would be used. To cost the COA in the CBA, the Const. Dollar Cost column should be used.

23 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Cost Estimating Principles and Rules 23

24 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Use authoritative data sources Ensure that cost estimates support “apples-to-apples” comparison among COAs Ensure the cost estimate is well-documented, comprehensive, accurate, and credible Constant vs. current dollars – Use constant (uninflated) dollars for even comparison for COAs in CBAs – Convert estimate to current (inflated) dollars to determine POM/budget resourcing requirements Cost Estimating Principles and Rules 24

25 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES The timeframe for the cost estimate is the life-cycle of the COAs. For example: – If the CBA seeks the best solution for housing Soldiers at a CONUS installation, one of the COAs might call for constructing a barracks with a 50-year useful life. In this case, the life-cycle timeframe would be 50 years. – If the CBA addresses a requirement that will exist for only three years, the life-cycle timeframe would be three years. – Must use the same timeframe for all COAs The timeframe for the POM/budget resourcing estimate is the full POM/budget period * or the life-cycle timeframe, whichever is shorter. *The POM/budget period includes the year of execution (current year), the budget year (next year), and the POM period (four or five years beyond the budget year). Cost Estimating Principles and Rules 25

26 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Timeframe example: – Two weapons systems being compared in a CBA have different life-cycles. The system in COA1 has a life-cycle of 5 years, while the one in COA2 has a life-cycle of 7 years. – The timeframe should be the same for both cost estimates—in addition, it should include a whole number of life-cycles for both systems. – The appropriate timeframe in this case is 35 years. This would allow for 7 complete life-cycles for COA1 and 5 complete life cycles for COA2. Cost Estimating Principles and Rules COA1 COA2 35 years

27 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES In general, sunk costs—costs that have already been incurred regardless of which course of action is chosen—should not be included in a cost estimate. For example, in a CBA evaluating options for which weapons system to deploy: if COA 1 deploys a weapon system that has already been procured (procurement cost is a sunk cost), and COA 2 uses a weapon system that still needs to be procured, then the procurement costs for the system in COA 1 should not be included in the cost estimate. In certain cases, sunk costs can be included in an estimate, but should only be used as a baseline—it should not factor into the analysis for comparison between COAs. Sunk Costs 27

28 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES After a CBA is submitted, the analyst who prepared the cost estimate might not be immediately available to answer questions. How supporting documentation is used: – A CBA reviewer should be able to use the supporting documentation, with no additional input, and arrive at a cost estimate identical to that in the CBA. – If an analyst must consult the estimate several months after it is finalized, the supporting documentation will eliminate the need to reconstruct the thought process, data sources, and calculations supporting the estimate. – If the analyst is no longer available, subsequent analysts can use the documentation to understand how the estimate was prepared so that adjustments can be made if needed. Include Supporting Documentation 28

29 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Identification of all data sources Rationale, assumptions, and the thought process that produced the estimate Points of contact for all data. What to Include in Supporting Docs 29

30 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES List cost elements in a spreadsheet Include POCs for all preparers/analysts Hyperlink websites Reference all data sources Use comments to document and explain costing methodology Cells that contain equations should be free of constants— link to other cells instead, so that it is clear what data is being used in the calculation. Guidelines for Excel 30

31 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 31

32 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 32 Tools

33 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Data Sources PersonnelEquipmentFacilities Form 1391 – MILCON construction costs Modeled costs Unified Facilities Criteria Facilities sustainment costs estimation Army Equipping Enterprise System Equipment costs by LIN Services, leases, and equipment FORCES OPTEMPO, equipment, force structure, transportation, CONOPS Electronic Document Access Contract data Available Tools and Models for Cost Data 33 AMCOS must be used for military and civilian personnel compensation and benefits

34 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Available Tools and Models for Cost Data Tool/ModelURLPurpose FORCES Cost Models https://www.osmisweb.army.mil/forces/login.aspx Suite of models that provides quick and reasonable unit cost estimates to a wide variety of users Army Military-Civilian Cost System (AMCOS) https://www.osmisweb.army.mil/amcos/app/home.aspx Personnel costs for military, civilian, and/or contractor ASA(FM&C) Website rates/indices.xls Inflation indices Capabilities Knowledge Base guidances/ckb-ui.pdf Research, development, and acquisition costing for major weapon/material systems Operating and Support Management Information System (OSMIS) https://www.osmisweb.army.mil/osmisrdb/login.aspx Operating and support information for major weapon/material systems Some of the websites listed here require user accounts. In most cases, anyone with a dot mil address can obtain an account. You are encouraged to scan these sites and request an account to any site that you think will be useful to you. This will save time when you need to use any sites to support a CBA or other projects. 34 Access links through the “Resources” tab in the CBA Portal at https://cpp.army.mil

35 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES AMCOS 35

36 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES AMCOS 36 AMCOS  Applications  AMCOS lite

37 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Capabilities Knowledge Base 37

38 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Capabilities Knowledge Base 38

39 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES OSMIS 39

40 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES OSMIS 40

41 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 41 Cost Estimating Methods

42 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Available methods: Analogy Parametric Engineering Actual Cost Expert Opinion Learning Curves Available Cost Estimating Methods 42 Most CBAs utilize all cost estimating methods.

43 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Cost Estimating Methods Parametric Analogy Actual Costs Engineering GROSS ESTIMATESDETAILED ESTIMATES Source - Acquisition 101 Lesson 8: Financial Management: Cost Estimation 43 The use of each method is based on the information available to support it. Figure 1: A summary of the usual application of each technique.

44 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Cost Estimating Methods: Analogy Method 44 Analogy Method: Estimates the cost, based on historical data, of an analogous system or subsystem Utilizes a current fielded system that is similarly designed to the proposed system Adjusts historical cost of the current system to account for differences –Adjustments should be made through parameters/scaling factors based on quantitative data  These adjustments should show validity of comparison When is it used? When an analogous case (that can be applied to a subsystem or component level) exists

45 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES AttributeOld SystemNew System Engine:F-100F-200 Thrust:12,000 lbs16,000 lbs Cost:$5.2M? Q: What is the unit cost of the F-200? A: $5.2M * (16,000/12,000) = $6.9M Warning 2: An adjusted analogy is, by definition, estimating outside the range of the data. Warning 1: An adjusted analogy is like a regression, but the slope is just a guess. 45 Example - Analogy Method

46 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES ElementOld Sys1Old Sys2Old Sys3New Sys Airframe$500/lb$250/lb$750/lb1.2 x Sys1 Engine2M/Unit3M/Unit5M/Unit.8 x Sys3 Avionics$3K/lb$2K/lb$4K/lb1.0 x Sys2 Payload6M/Unit8M/Unit7M/Unit.65 x Sys1 Analogy Method Estimating with Factors 46

47 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Cost Estimating Methods: Parametric Method Parametric Method: Uses regression or other statistical methods to develop a cost estimating relationship based on observed patterns of how specific parameters influence total cost. Utilizes: High-level Work Breakdown Structure (top down approach) A database from elements of one or more systems When is it used? Historical data is available but not detailed In earlier stages of the system or project life cycle 47

48 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Example - Parametric Method High Mobility Wheeled Vehicles Database Is ‘Cubic Ft Shipping’ a good predictor of cost? Cost of Gross Curb Cubic Ft Net Vehicle First Unit Weight Weight Shipping Horsepower M274 $ 9,585 1, M561 50,002 8,363 5, M656 93,262 24,785 14,785 1, M ,889 36,590 10,500 2,

49 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Example - Parametric Method (Cont’d) We can estimate the cost of any vehicle given the shipping capacity using the above equation. 49

50 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Cost Estimating Methods: Engineering Method 50 Engineering Method: Breaks down the system of interest into lower level components, each of which is estimated separately –Work Breakdown Structure Uses algebraic equations (bottom up approach) –Most detailed of all techniques Requires extensive knowledge of a system’s characteristics and the respective detailed data Is expensive and time consuming When is it used? All potential costs can be assumed or estimated Types of Army data sources (AMCOS Lite, MILCON, SRM, historical,execution, travel, etc.).

51 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES What the WBS does: – Ensures that all component elements are identified so that all costs are counted once and only once – Provides a systematic, standardized way to collect data. Decompose to as many levels as needed Example: The airplane cockpit can be decomposed into its subelements: – Instrument panel Primary flight instruments – Directional gyro – Turn and bank indicator – Altimeter – Airspeed indicator Avionics controls – Communications – Navigation – Radar Developing the WBS 51 – Flight control systems Rudder pedals Steering yoke Trim tab controls – Seats Seat and shoulder belts Cushions Head rest … and so on A well-decomposed process flowchart that defines/describes the COA is a useful tool in developing the WBS A well-decomposed process flowchart that defines/describes the COA is a useful tool in developing the WBS

52 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES WBS – Another Example 52

53 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Cost Estimating Methods: Actual Cost Method 53 Actual Cost Method: If historical costs from experience or trends from prototypes, engineering development models, and early production items are available, they can be used to cost current goods or services. Extracts costs that were actually incurred on same system during an earlier period –Obtaining access to these actual costs may be difficult When is it used? The actual data from the same system is present

54 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Example – Actual Cost Method a.The development process is nearing completion. b.The materials have all been procured at a cost of $20M. c.The labor cost to date is $30M. d.According to earned value cost performance reports (CPRs), the estimated cost at completion for the remainder of the labor is another $20M. 54 Cost = $20M + $30M + $20M = $70M

55 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Cost Estimating Methods: Expert Opinion Method 55 Expert Opinion Method: Obtains opinions from experienced individuals or group –Document the sources of opinions –List attributes of the sources When is it used? When availability of data is limited. Delphi Technique 1.Query expert opinion from group 2.Seek expert opinion from each group, and then summarize results to send in reports 3.Gather another opinion and summarize those results 4.Continue process until experts reach a consensus

56 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 1.You hold interviews to explain the Stakeholders’ Needs, sizing level, and development process for your new system. 2.Each member of the group submits his/her opinion of the final cost. 3.If all expert opinions converge to or hover around the same figure, that may be taken as a good cost estimate. Example - Expert Opinion Method 56 Scenario: Three software engineers are recognized experts in ERP software development.

57 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 1.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. Give a cost estimate for a bridge of length 450 ft built with 8 cables. Cost Estimating Exercises 57 Bridge 1Bridge 2Bridge 3Bridge 4Bridge 5 Length (ft) # of Cables used Total Cost$275K$281K$381K$427K$609K

58 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 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, 1 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 3 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. Cost Estimating Exercises 58 Jerky 1Jerky 2Jerky 3 % lean Cost/lb$1.50$1.60$1.70 MRE 1MRE 2MRE 3 Edible weight 1 lb2 lbs3 lbs Labor Cost/MRE $0.50$1.00$1.50

59 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 59

60 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 60

61 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 61 Summary and Conclusion

62 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 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 well- documented 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. Closing Thoughts 62

63 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Cost Analysis is NOT Magic Cost Analysis is not magic! 63 An effective cost analysis is well documented, comprehensive, accurate, and credible.

64 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES In a rented garage at 58 Bagley Street in Detroit, Henry Ford completed his first gas-powered car on the morning of June 4, 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 one- time payment of $25. Review Exercise: Henry Ford 64

65 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES Provide a cost estimate for each of the following COAs: – COA1 (Status Quo): Leave the car in the garage, do nothing else. – COA2: Disassemble the car and reassemble it outside the garage. – COA3: Widen the garage door. Review Exercise: Henry Ford 65

66 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 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 = 0.09c 2 – 1.24c (for values of c between 3.64 and 10) where r is the risk (expressed as a decimal between 0 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 8 CBA steps to determine alternatives and recommend a course of action. Mini-case Exercise #4 66 or “how much can I spend again?”

67 UNCLASSIFIED CBA 4-DAY TRAINING SLIDES 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 0 and 1 (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 L x S y, 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. Mini-case Exercise #4 67 or “Apache Part II: who should I listen to?”


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