Acquisition Cost Estimating


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Guide to Cost Estimaitng in DoD

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Acquisition Cost Estimating

  1. 1. COST ESTIMATING Lesson SummaryLesson Outcome: Recognize the concepts, activities and key players in the costestimating processTopic 1: Life Cycle Cost (LCC) termsDefine Life Cycle Cost (LCC) terms: LCC, TOC and affordability.Life Cycle Cost (LCC): Life-cycle cost can be defined as the sum of four major costcategories, where each category is associated with sequential but overlapping phases ofthe program life cycle. Life-cycle cost consists of: 1. research and development costsassociated with the Materiel Solution Analysis phase, the Technology Developmentphase, and the Engineering and Manufacturing Development phase, 2. investment costsassociated with the Production and Deployment phase, 3. operating and support costsassociated with the sustainment phase, and 4. disposal costs occurring after initiation ofsystem phase-out or retirement, possibly including demilitarization, detoxification, orlong-term waste storage.Total Ownership Cost (TOC): TOC is related to LCC, but broader in scope. TOCconsists of the elements of LCC, as well as other infrastructure or business process costsnot necessarily attributable to the system. In most cases, traditional LCC estimates areadequate enough in scope to support decisions involving system design characteristics(such as system weight, material mix, or reliability and maintainability). In some cases,however the broader perspective of TOC may be more appropriate than the LCC. SeeChapter 3 of the Defense Acquisition Guidebook for more information on TOC.Affordability: The degree to which the Life Cycle Cost of an Acquisition Program is inconsonance with the long-range modernization, force structure, and manpower plans ofthe individual DoD Components, as well as for the Department as a whole. Affordabilityis an important part of program decisions throughout the life cycle, to include thedevelopment of operational performance attributes which must supported by anoperationally oriented analysis that takes into account fiscal constraints.Topic 2: Life Cycle Cost (LCC) GroupsIdentify life cycle cost LCC groupings pertinent to the acquisition community.Appropriations categories reflect a view of LCC preferred by Congress and thecomptrollers at various levels. Most appropriations received by Congress fall into fivemajor categories: Research, Development, Test and Evaluation (RDT&E); Procurement,Operations and Maintenance (O&M); Military Construction (MILCON); and MilitaryPersonnel (MILPERS). The break-out of LCC by appropriation is required for internalbudgets and to submit budget requests to Congress.Lesson #8 – Cost Estimating Page 1 of 6
  2. 2. The Work Breakdown Structure (WBS) is another way of grouping LCC. A programWBS is a product-oriented family tree composed of hardware, software, services, data,and facilities. It provides a framework for program and technical planning, costestimating, resource allocation, performance measurement and status reporting. Costbreakouts by WBS are useful to the program office and the contractor in managing theprogram.Topic 3: Life Cycle Cost (LCC) CategoriesDefine four LCC categories including their relationship to Acquisition ProgramCost terms.LCC Categories: The Program Office and Service Cost Center’s presentation of costestimates to the OSD Director, Cost Assessment and Program Evaluation (CAPE) usethese four cost categories. • R&D • Investment • Operating & Support • DisposalR&DResearch and Development (R&D) consists of Development Costs incurred from thebeginning of the Materiel Solution Analysis, through the end of the Engineering andManufacturing Development Phase, and potentially into Low Rate Initial Production.This typically includes costs of: • Materiel Solutions Analysis trade studies and advanced technology development; system design and integration; • development, fabrication, assembly, and test of hardware and software for prototypes and/or engineering development models; • system test and evaluation; • system engineering and program management; • peculiar and common support and training equipment/initial training, and technical publications/data) and; • initial spares and repair parts associated with prototypes and/or engineering development modelsInvestmentInvestment includes Production and Deployment Costs incurred from the beginning ofLow Rate Initial Production through completion of deployment. Investment typicallyincludes costs associated with: • producing and deploying the primary hardware; • system engineering and program management; peculiar and common support and equipment/initial training, and technical publications/data); • initial spares and repair parts associated with production assets;Lesson #8 – Cost Estimating Page 2 of 6
  3. 3. • military construction and operations and maintenance associated with system site activationOperating & SupportO&S consists of sustainment costs, incurred from the initial system deployment throughthe end of system operations, as well as all costs of operating, maintaining, andsupporting a fielded system. Specifically, this consists of the costs (organic andcontractor) of personnel, equipment, supplies, software, and services associated withoperating, modifying, maintaining, supplying, training, and supporting a system in theDoD inventory. This includes costs directly and indirectly attributable to the system (i.e.,costs that would not occur if the system did not exist), regardless of funding source ormanagement control.DisposalDisposal includes the costs of demilitarizing and/or disposing of the system after the endof its useful life. Generally funded by O&M appropriations, other appropriations may benecessary such as construction of a disposal facility funded by MILCONAcquisition Program Costs: These additional terms are used in congressional reportingrequirements like the Selected Acquisition Report (SAR), the Acquisition ProgramBaseline (APB), the Unit Cost Report (UCR), and in the budget justification materialprovided to Congress concurrent with the annual President’s Budget. • Development Cost • Fly Away Cost • Weapon System Cost • Procurement Cost • Program Acquisition Cost • Operating & Support • DisposalDevelopment CostThis is the cost of all R&D-related activities, government and contractor, necessary todesign and test the prime mission equipment and all of its supporting items. Prototypesand test articles are included. Development costs are funded by the RDT&Eappropriation.Fly Away CostAlso called roll-away cost or sail-away cost, Fly Away Cost includes the cost ofprocuring the prime mission equipment such as a ship, aircraft, or armored vehicle. Itdoes not however include the cost of personnel, fuel, ammunition, etc. Fly Away Cost ismostly funded by Procurement Appropriations.Weapon System CostWeapon System Cost refers to the cost of procuring the prime equipment and all of thesupporting items required to deliver a complete functioning weapon system. Thesesupport items are the same as those included in development costs (tech data,Lesson #8 – Cost Estimating Page 3 of 6
  4. 4. publications, training, etc.), except that they are for the production system and fundedwith Procurement Appropriations.Procurement CostProcurement Cost consists of the total cost to procure the system. It includes the WeaponSystem Cost plus the cost of initial spares, and is funded entirely from ProcurementAppropriations.Program Acquisition CostThe Program Acquisition Cost contains all costs associated with development,procurement and housing a weapon system. This is the total cost of acquiring a weaponsystem that is ready to operate, however does not include support. Program AcquisitionCost is the sum of Development Cost + Procurement Cost, and facilities costs. It isfunded by RDT&E, Procurement, and MILCON appropriations.Operating and Support (O&S)O&S includes all personnel, equipment, supplies, software, and services including:contract support, associated with operating, modifying, maintaining, supplying, training,and supporting a weapon system throughout its useful life. O&S is funded from theO&M, MILPERS, Procurement, MILCON, stock funds and other appropriations.DisposalDisposal includes the costs of demilitarizing and/or disposing of the system after the endof its useful life. Generally funded by O&M appropriations, other appropriations may benecessary such as construction of a disposal facility funded by MILCON.Topic 4: Cost Estimating MethodsRecognize the four most common methods used in Cost Estimating and when theymight be used.The four most common cost estimating methods are: 1. Analogy 2. Parametric 3. Engineering 4. Actual CostsWhen used: At the beginning of a program, during the Technology Development Phase,or early in the Engineering and Manufacturing Development Phase, analogy or very highlevel Parametric estimates may be used for most of the program’s cost elements. Thistakes into consideration that little is known at this point about the system’s design,production requirements, support concept, etc. As the program matures, more details arefleshed out, the Work Breakdown Structure (WBS) is better defined, and actual costs areaccumulated. Then the more accurate estimating methods of Engineering and ActualCosts can be used as appropriate.Lesson #8 – Cost Estimating Page 4 of 6
  5. 5. Topic 5: Cost DocumentsIdentify the cost documents produced by the Program Office, Service,Headquarters, and the Office of the Secretary of Defense (OSD) for each milestoneor decision in the acquisition process.The cost documents are:Component Cost Estimate (CCE): A CCE of life cycle costs may be a program officeestimate or an estimate produced by the Service Cost Center (in some cases, both arerequired by the acquisition executive). The program office estimate is normally the firstCCE produced and may be the only estimate available for POM/budget purposes. TheCDD/CPD affordability section should reflect the latest CCE.Component Cost Position (CCP): A Component-level cost position, endorsed by theacquisition executive and chief financial officer, is required for ACAT I programs atMilestones A, B, C and Full-Rate Production Decision Reviews. The CCP is based on aCCE performed by the program office and/or the Service Cost Center.Economic Analysis (EA): An EA supports a systematic approach to selecting the mostefficient and cost-effective strategy for satisfying an agency’s need’s for automatedinformation systems. An EA is mandatory for ACAT IA (major automated informationsystem (MAIS)) programs.Independent Cost Estimate (ICE): Public law requires the Secretary of Defense toconsider an independent estimate of the LCC of an ACAT I program prior to grantingMilestone B, Milestone C, and Full-Rate Production approval. ACAT I programs requireand ICE conducted by the OSD Director, Cost Assessment and Program Evaluation(CAPE) to satisfy the requirement for program certification at Milestones A and B.Cost Analysis Requirements Description (CARD): For ACAT I and IA programs, theProgram Manager is required to prepare a CARD. The CARD helps ensure that the costestimates are based on common and accurate information and provide the level of detailrequired by decision makers to make informed decisions.Affordability Assessment (AA): For all acquisition programs, affordability assessmentsare required at Milestones B and C. The purpose of the assessment is for the DoDComponent to demonstrate that the program’s projected funding and manpowerrequirements are realistic and achievable, in the context of the DoD Components overalllong-range modernization plan.Will-Cost and Should-Cost ManagementShould cost targets are required for all programs. They are based on bottom-upassessments of what programs should cost, if reasonable efficiency and productivityenhancing efforts are undertaken. Will cost estimates are the official position of the DoDfor use in budgeting, programming, acquisition program baselines, and all reportingrequirements external to DoD. Requirements Manager’s should be familiar with bothLesson #8 – Cost Estimating Page 5 of 6
  6. 6. types of cost data, and understand the implications of any reductions to program scope toachieve should cost targets.Topic 6: Cost Review processRecognize the roles and responsibilities of participants in the Cost Review Process atthe Service Level and in the Office of the Secretary of Defense (OSD) for majoracquisition programs in four acquisition categories (ACAT).ACAT ID Cost Review ProcessThe program office and service cost center estimates are reviewed by the Service’sAssistant Secretary (Financial Management & Comptroller) and reconciled into aComponent Cost Position (CCP). The OSD Director, CAPE prepares the ICE, comparesthe CCP to the ICE and analyzes the differences in a report to the appropriateOverarching Integrated Process Team (OIPT) prior to a Defense Acquisition Board(DAB) review. The OIPT considers the program’s affordability using the CCP and CAPEanalysis. Any affordability issues that cannot be resolved at the OIPT level are referred tothe DAB for resolution.ACAT IC Cost Review ProcessThe service cost center prepares the ICE (unless an OSD CAPE ICE is required forprogram certification), compares the program office estimate and the ICE and analyzesthe differences in a report. The program office estimate, the cost center ICE and reportare reviewed by the service’s Assistant Secretary (Financial Management &Comptroller). They are then forwarded to the service acquisition review panel, for use inevaluating the program’s affordability, before making recommendations to the MDA(Service Acquisition Executive).ACAT IAM Cost Review ProcessFor ACAT IAM programs reviewed by the Information Technology Acquisition Board(ITAB) an EA and a service cost center estimate are prepared. The EA and cost centerestimates are reviewed by the Service’s Assistant Secretary (Financial Management &Comptroller) (FM&C) and forwarded to the OSD CAPE. CAPE reviews the twoestimates, and provides its assessment to the OIPT overseeing Information Technology.The ITAB makes final recommendations to the MDA (USD(AT&L) or designee).ACAT IAC Cost Review ProcessAn ACAT IAC program approaching a major milestone requires two cost estimates: theEA and the service cost center estimate. Both sets of estimators use the CARD to ensurethat the estimates are comparable. After review by the service’s Assistant Secretary(FM&C), the EA and cost center estimates are forwarded to the service AcquisitionReview Panel. The service Acquisition Review Panel considers the program’saffordability before making final recommendations to the MDA.Lesson #8 – Cost Estimating Page 6 of 6