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Acquisition Cost Estimating
1. COST ESTIMATING
Lesson Summary
Lesson Outcome: Recognize the concepts, activities and key players in the cost
estimating process
Topic 1: Life Cycle Cost (LCC) terms
Define 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 cost
categories, where each category is associated with sequential but overlapping phases of
the program life cycle. Life-cycle cost consists of: 1. research and development costs
associated with the Materiel Solution Analysis phase, the Technology Development
phase, and the Engineering and Manufacturing Development phase, 2. investment costs
associated with the Production and Deployment phase, 3. operating and support costs
associated with the sustainment phase, and 4. disposal costs occurring after initiation of
system phase-out or retirement, possibly including demilitarization, detoxification, or
long-term waste storage.
Total Ownership Cost (TOC): TOC is related to LCC, but broader in scope. TOC
consists of the elements of LCC, as well as other infrastructure or business process costs
not necessarily attributable to the system. In most cases, traditional LCC estimates are
adequate 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. See
Chapter 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 in
consonance with the long-range modernization, force structure, and manpower plans of
the individual DoD Components, as well as for the Department as a whole. Affordability
is an important part of program decisions throughout the life cycle, to include the
development of operational performance attributes which must supported by an
operationally oriented analysis that takes into account fiscal constraints.
Topic 2: Life Cycle Cost (LCC) Groups
Identify life cycle cost LCC groupings pertinent to the acquisition community.
Appropriations categories reflect a view of LCC preferred by Congress and the
comptrollers at various levels. Most appropriations received by Congress fall into five
major categories: Research, Development, Test and Evaluation (RDT&E); Procurement,
Operations and Maintenance (O&M); Military Construction (MILCON); and Military
Personnel (MILPERS). The break-out of LCC by appropriation is required for internal
budgets and to submit budget requests to Congress.
Lesson #8 – Cost Estimating Page 1 of 6
2. The Work Breakdown Structure (WBS) is another way of grouping LCC. A program
WBS is a product-oriented family tree composed of hardware, software, services, data,
and facilities. It provides a framework for program and technical planning, cost
estimating, resource allocation, performance measurement and status reporting. Cost
breakouts by WBS are useful to the program office and the contractor in managing the
program.
Topic 3: Life Cycle Cost (LCC) Categories
Define four LCC categories including their relationship to Acquisition Program
Cost terms.
LCC Categories: The Program Office and Service Cost Center’s presentation of cost
estimates to the OSD Director, Cost Assessment and Program Evaluation (CAPE) use
these four cost categories.
• R&D
• Investment
• Operating & Support
• Disposal
R&D
Research and Development (R&D) consists of Development Costs incurred from the
beginning of the Materiel Solution Analysis, through the end of the Engineering and
Manufacturing 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 models
Investment
Investment includes Production and Deployment Costs incurred from the beginning of
Low Rate Initial Production through completion of deployment. Investment typically
includes 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;
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3. • military construction and operations and maintenance associated with system site
activation
Operating & Support
O&S consists of sustainment costs, incurred from the initial system deployment through
the end of system operations, as well as all costs of operating, maintaining, and
supporting a fielded system. Specifically, this consists of the costs (organic and
contractor) of personnel, equipment, supplies, software, and services associated with
operating, modifying, maintaining, supplying, training, and supporting a system in the
DoD 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 or
management control.
Disposal
Disposal includes the costs of demilitarizing and/or disposing of the system after the end
of its useful life. Generally funded by O&M appropriations, other appropriations may be
necessary such as construction of a disposal facility funded by MILCON
Acquisition Program Costs: These additional terms are used in congressional reporting
requirements like the Selected Acquisition Report (SAR), the Acquisition Program
Baseline (APB), the Unit Cost Report (UCR), and in the budget justification material
provided to Congress concurrent with the annual President’s Budget.
• Development Cost
• Fly Away Cost
• Weapon System Cost
• Procurement Cost
• Program Acquisition Cost
• Operating & Support
• Disposal
Development Cost
This is the cost of all R&D-related activities, government and contractor, necessary to
design and test the prime mission equipment and all of its supporting items. Prototypes
and test articles are included. Development costs are funded by the RDT&E
appropriation.
Fly Away Cost
Also called roll-away cost or sail-away cost, Fly Away Cost includes the cost of
procuring the prime mission equipment such as a ship, aircraft, or armored vehicle. It
does not however include the cost of personnel, fuel, ammunition, etc. Fly Away Cost is
mostly funded by Procurement Appropriations.
Weapon System Cost
Weapon System Cost refers to the cost of procuring the prime equipment and all of the
supporting items required to deliver a complete functioning weapon system. These
support items are the same as those included in development costs (tech data,
Lesson #8 – Cost Estimating Page 3 of 6
4. publications, training, etc.), except that they are for the production system and funded
with Procurement Appropriations.
Procurement Cost
Procurement Cost consists of the total cost to procure the system. It includes the Weapon
System Cost plus the cost of initial spares, and is funded entirely from Procurement
Appropriations.
Program Acquisition Cost
The Program Acquisition Cost contains all costs associated with development,
procurement and housing a weapon system. This is the total cost of acquiring a weapon
system that is ready to operate, however does not include support. Program Acquisition
Cost is the sum of Development Cost + Procurement Cost, and facilities costs. It is
funded 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 the
O&M, MILPERS, Procurement, MILCON, stock funds and other appropriations.
Disposal
Disposal includes the costs of demilitarizing and/or disposing of the system after the end
of its useful life. Generally funded by O&M appropriations, other appropriations may be
necessary such as construction of a disposal facility funded by MILCON.
Topic 4: Cost Estimating Methods
Recognize the four most common methods used in Cost Estimating and when they
might be used.
The four most common cost estimating methods are:
1. Analogy
2. Parametric
3. Engineering
4. Actual Costs
When used: At the beginning of a program, during the Technology Development Phase,
or early in the Engineering and Manufacturing Development Phase, analogy or very high
level Parametric estimates may be used for most of the program’s cost elements. This
takes 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 are
fleshed out, the Work Breakdown Structure (WBS) is better defined, and actual costs are
accumulated. Then the more accurate estimating methods of Engineering and Actual
Costs can be used as appropriate.
Lesson #8 – Cost Estimating Page 4 of 6
5. Topic 5: Cost Documents
Identify the cost documents produced by the Program Office, Service,
Headquarters, and the Office of the Secretary of Defense (OSD) for each milestone
or decision in the acquisition process.
The cost documents are:
Component Cost Estimate (CCE): A CCE of life cycle costs may be a program office
estimate or an estimate produced by the Service Cost Center (in some cases, both are
required by the acquisition executive). The program office estimate is normally the first
CCE produced and may be the only estimate available for POM/budget purposes. The
CDD/CPD affordability section should reflect the latest CCE.
Component Cost Position (CCP): A Component-level cost position, endorsed by the
acquisition executive and chief financial officer, is required for ACAT I programs at
Milestones A, B, C and Full-Rate Production Decision Reviews. The CCP is based on a
CCE performed by the program office and/or the Service Cost Center.
Economic Analysis (EA): An EA supports a systematic approach to selecting the most
efficient and cost-effective strategy for satisfying an agency’s need’s for automated
information systems. An EA is mandatory for ACAT IA (major automated information
system (MAIS)) programs.
Independent Cost Estimate (ICE): Public law requires the Secretary of Defense to
consider an independent estimate of the LCC of an ACAT I program prior to granting
Milestone B, Milestone C, and Full-Rate Production approval. ACAT I programs require
and 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, the
Program Manager is required to prepare a CARD. The CARD helps ensure that the cost
estimates are based on common and accurate information and provide the level of detail
required by decision makers to make informed decisions.
Affordability Assessment (AA): For all acquisition programs, affordability assessments
are required at Milestones B and C. The purpose of the assessment is for the DoD
Component to demonstrate that the program’s projected funding and manpower
requirements are realistic and achievable, in the context of the DoD Components overall
long-range modernization plan.
Will-Cost and Should-Cost Management
Should cost targets are required for all programs. They are based on bottom-up
assessments of what programs should cost, if reasonable efficiency and productivity
enhancing efforts are undertaken. Will cost estimates are the official position of the DoD
for use in budgeting, programming, acquisition program baselines, and all reporting
requirements external to DoD. Requirements Manager’s should be familiar with both
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6. types of cost data, and understand the implications of any reductions to program scope to
achieve should cost targets.
Topic 6: Cost Review process
Recognize the roles and responsibilities of participants in the Cost Review Process at
the Service Level and in the Office of the Secretary of Defense (OSD) for major
acquisition programs in four acquisition categories (ACAT).
ACAT ID Cost Review Process
The program office and service cost center estimates are reviewed by the Service’s
Assistant Secretary (Financial Management & Comptroller) and reconciled into a
Component Cost Position (CCP). The OSD Director, CAPE prepares the ICE, compares
the CCP to the ICE and analyzes the differences in a report to the appropriate
Overarching Integrated Process Team (OIPT) prior to a Defense Acquisition Board
(DAB) review. The OIPT considers the program’s affordability using the CCP and CAPE
analysis. Any affordability issues that cannot be resolved at the OIPT level are referred to
the DAB for resolution.
ACAT IC Cost Review Process
The service cost center prepares the ICE (unless an OSD CAPE ICE is required for
program certification), compares the program office estimate and the ICE and analyzes
the differences in a report. The program office estimate, the cost center ICE and report
are reviewed by the service’s Assistant Secretary (Financial Management &
Comptroller). They are then forwarded to the service acquisition review panel, for use in
evaluating the program’s affordability, before making recommendations to the MDA
(Service Acquisition Executive).
ACAT IAM Cost Review Process
For 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 center
estimates are reviewed by the Service’s Assistant Secretary (Financial Management &
Comptroller) (FM&C) and forwarded to the OSD CAPE. CAPE reviews the two
estimates, 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 Process
An ACAT IAC program approaching a major milestone requires two cost estimates: the
EA and the service cost center estimate. Both sets of estimators use the CARD to ensure
that 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 Acquisition
Review Panel. The service Acquisition Review Panel considers the program’s
affordability before making final recommendations to the MDA.
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