cost estimating basics
DESCRIPTION
Cost Estimating Basics. Why cost estimating (and an overview of how ). Unit Index. Unit I – Cost Estimating Cost Estimating Basics Costing Techniques Parametric Estimating Unit II – Cost Analysis Techniques Unit III – Analytical Methods Unit IV – Specialized Costing - PowerPoint PPT PresentationTRANSCRIPT
Unit I - Module 1 1Cost Prof
Cost Estimating Basics
Why cost estimating (and an overview of how)
Unit I - Module 1 2Cost Prof
Unit IndexUnit I – Cost Estimating
1. Cost Estimating Basics2. Costing Techniques3. Parametric Estimating
Unit II – Cost Analysis TechniquesUnit III – Analytical MethodsUnit IV – Specialized CostingUnit V – Management Applications
Unit I - Module 1 3Cost Prof
Outline• Introduction to Cost Estimating and
Analysis• Overview of Cost Estimating and
Analysis• Cost Estimating Products• Cost Estimating Process & Methods• Cost Estimating Certification• Summary• Resources
Unit I - Module 1 4Cost Prof
Introduction to Cost Estimating and Analysis
• Definition and Purpose
• Applications• Organizations• Skills
Unit I - Module 1 5Cost Prof
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– 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
Unit I - Module 1 6Cost Prof
Applications of Cost Estimating
• As part of a total systems analysis, cost estimating helps decision makers to:– Make decisions on program viability,
structure, and resource requirements– Establish and defend budgets– Assess technology changes– Conduct analysis of alternatives (AoA)– Create new business proposals and perform
source selection– Perform design trade-offs– Comply with public law– Satisfy oversight requirements
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Unit I - Module 1 7Cost Prof
Cost Estimating Organizations
• Cost oversight organizations• Program Offices and project teams• Budgeting, contracting, and
purchasing organizations• Manufacturers• Consultants
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Unit I - Module 1 8Cost Prof
Cost Estimating Skills• Cost estimating and analysis at its
best is an interdisciplinary mix of:– Mathematics, Probability, Statistics– Economics, Econometrics, Business,
Accounting, Budgeting– Operations Research, Management
Science, Industrial Engineering– Mechanical Engineering, Systems
Engineering, Physics, etc.– Sales and Marketing
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Cost Estimating 101, Naval Center for Cost Analysis (NCCA), http://www.ncca.navy.mil/about/101.cfm.
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Unit I - Module 1 9Cost Prof
Overview of CostEstimating and Analysis
• Requirements• Benefits and Qualities• Limitations and
Concerns• Types of Cost
Estimates• Government Entities
Unit I - Module 1 10Cost Prof
Requirements for Cost Estimating
• Must estimate and plan consumption of resources– Capture impacts of changing resources
• Validated cost estimate necessary to continue through milestone reviews– Estimates should be updated periodically as program
matures technically and schedules change
• Efficient management of changing requirements under tight constraints– Supports management decisions by quantifying the
resource impact of alternativesCost analysis is required whenever resources are
allocated
Cost analysis is required whenever resources are
allocated
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Unit I - Module 1 11Cost Prof
Benefits of Cost Estimating• Supports budgeting process by enabling you to:
– Integrate the requirements and budgeting processes – Assess reasonableness of program budgets– Effectively defend budgets to oversight organizations– Quickly/accurately determine impacts of budget cuts
on program baselines and associated functionality
• Enhances profitability and organization’s future business potential
• Uses established, repeatable methods• Enables identification of potential pitfalls such
as cost growth, schedule slips early in a program’s life
• Enables identification of future cost improvement initiatives
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Unit I - Module 1 12Cost Prof
Benefits of Cost Estimating• Provides for the identification and objective
quantification of the impact of program risks (technical and schedule risks)
• Provides basis for evaluating competing systems/initiatives (cost/benefit analyses and AoAs)
• Enables proposal pricing and evaluation of proposals for cost reasonableness
• Captures cost impacts of design decisions to facilitate tradeoffs in CAIV/DTC/Target Costing
• Facilitates evaluation of the impact of new ways of doing business (e.g., in-sourcing vs. outsourcing, COTS vs. custom software)
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Unit I - Module 1 13Cost Prof
Cost Estimate Qualities• The characteristics of high quality
cost estimates are:– Accuracy– Comprehensiveness– Replicability and Auditability– Traceability– Credibility– Timeliness
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Unit I - Module 1 14Cost Prof
Limitations of Cost Estimating
• Cost estimating cannot – Be applied with cookbook precision– Produce results that are better than
input data – Predict political impacts– Substitute for sound judgment,
management, or control– Make final decisions
Unit I - Module 1 15Cost Prof
Cost Estimating Concerns• Support Critical Decisions
– May be difficult to quantify cost impacts of alternatives– Cannot trade off non-cost variables
• Timeliness– Schedule constraints on estimate delivery
• Estimate quality suffers with fast turnaround requirements– Quick and easy access to historical data may not be possible– Lower quality estimate limits utility to key decision makers
• Quality– Definition of “good data”– Adjustments to raw data may be made several times– Inadequate documentation– Undocumented or tacit knowledge
• Coordination– Large number of organizations may be involved
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Unit I - Module 1 16Cost Prof
Cost Estimating Concerns• Consistency
– Estimates must track over time– Estimates developed by other organizations
must be based on same content and assumptions
– Historical data is not consistent between differing cost element or work breakdown structures
• Security/access– Company-proprietary data– Data classification/security– Possible misuse of data
Unit I - Module 1 17Cost Prof
Types of Cost Estimates – Budget
• Budget Estimate– Estimate prepared for inclusion in budget to
support acquisition programs– Ensures project feasibility and attainable
performance levels– A reliable project cost estimate consistent
with realistic schedules– Used to establish baseline project
definitions, schedules, and costs– May or may not include risk
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Unit I - Module 1 18Cost Prof
Types of Cost Estimates – LCCE
• Life Cycle Cost Estimate (LCCE)– “Cradle to grave" estimate – Includes research and development (R&D),
production, operations and support (O&S), and disposal
• Commercial definitions are similar• Life cycle is often confused with O&S but actually
includes all of the above
– Should be performed as early in the life cycle as possible
– Estimate costs regardless of funding source– AKA Total Ownership Cost (TOC) estimate
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Unit I - Module 1 19Cost Prof
Types of Cost Estimates – ICE• Independent Cost Estimate (ICE)
– LCCE developed by an independent organization
– “True facts" assessment of what the program's most likely cost will be
– Provides an unbiased test of the reasonableness of the Program LCCE (PLCCE)
– Identifies potential budgetary excesses and shortfalls
– Reduces the cost risks associated with the project
Unit I - Module 1 20Cost Prof
Types of Cost Estimates – ROM & EA
• Rough-Order-of-Magnitude (ROM)– Very little specific information is known about the
project – The design effort has not begun– Estimate uses ratios or factored historical information – Used for feasibility studies and selection from among
alternatives– AKA “Quick Look”
• Economic Analysis (EA)– Describes specific mission requirement(s) and lists
specific alternative courses of action– Framework for systematically investigating problems of
choice– Compares the costs and benefits associated with each
alternative course of action
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Unit I - Module 1 21Cost Prof
Types of Cost Estimates – AoA & ABC
• Analysis of Alternatives (AoA) – Evaluates the costs and benefits of different
alternatives– Shows advantages and disadvantages of the
alternatives being considered
• Activity Based Costing (ABC)– Accounting methodology that assigns all
costs to activities– Enables resources and overhead costs to be
accurately assigned to products and services– Assists in making decisions about pricing,
outsourcing, capital expenditures and operational efficiency.
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Unit I - Module 1 22Cost Prof
Government EntitiesResponsible for Cost Estimating
• OSD Cost Analysis Improvement Group (CAIG)– Milestone review authority, has oversight of DoD service cost
centers• Intelligence Community CAIG (IC CAIG)
– Provides independent cost assessments to the Director of Central Intelligence (DCI) for selected IC programs
• Naval Center for Cost Analysis (NCCA) – Prepares and briefs the Component Cost Analysis (CCA) to the CAIG– Holds a reconciliation meeting prior to the formal CAIG meeting
• US Army Cost and Economic Analysis Center (CEAC)– CEAC prepares CCA and briefs results to the CAIG– Army Cost Review Board works with the Assistant Secretary of the
Army (Financial Management) to develop the Army cost position briefed to the CAIG
• Air Force Cost Analysis Agency (AFCAA)– Air Force Cost Directorate, SAF/FMCC, prepares the AF cost
position, after reconciliation between the System Program Office estimate and the AFCAA’s CCA
Unit I - Module 1 23Cost Prof
Cost Products• Cost Analysis
Requirements Description (CARD)
• Cost Estimate• Estimate
Documentation
Unit I - Module 1 24Cost Prof
Cost AnalysisRequirements Description (CARD)• Cost Analysis Requirements Description
(CARD) – Detailed technical, programmatic, and schedule
description
• Purpose of CARD– Collect, integrate and coordinate technical,
programmatic, and schedule information necessary to estimate the costs of a program
– Ensures that cost projections developed by the analyst are based on a common definition of the system and the acquisition programCARD is a DoD requirement for major programs but a CARD-like document should be developed for any estimate, government or private industry
CARD is a DoD requirement for major programs but a CARD-like document should be developed for any estimate, government or private industry
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Unit I - Module 1 25Cost Prof
CARD Contents• CARD includes:
– System Technical Description
– Work Breakdown Structure (WBS)
– Predecessor System Description
– Manpower Requirements
– Risk– Operational
Concept– Deployment
– Logistics Support Concept
– Training– Acquisition
Schedule– Acquisition
Strategy– System Test and
Evaluation (ST&E)– Environmental
Impact Analysis– Track to Prior CARD
Unit I - Module 1 26Cost Prof
CARD Contents• CARD includes:
– System Technical Description
– Work Breakdown Structure (WBS)
– Predecessor System Description
– Manpower Requirements
– Risk– Operational
Concept– Deployment
– Logistics Support Concept
– Training– Acquisition
Schedule– Acquisition
Strategy– System Test and
Evaluation (ST&E)– Environmental
Impact Analysis– Track to Prior CARD
Unit I - Module 1 27Cost Prof
Cost Estimate• Definition of a cost estimate
– Cost estimate is an analysis of individual cost elements using established methodologies to project from data to estimated costs
– Various types of estimates can be developed• Budget Estimate, LCCE, ICE, ROM Estimate, EA, AoA,
ABC, etc.
• Developed using one or more estimating techniques
• Analyst should consider past and current actual data
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Unit I - Module 1 28Cost Prof
Cost Estimate Characteristics• Input rates
– Labor, materials, tooling, scrap, etc.– Application of audited or negotiated direct
and indirect rates
• Model structure– Estimate developed to a varying level of
detail depending on system and schedule – Estimate is inflated and time phased
• Model execution– Applies COTS or custom model – May include sensitivity/risk analysis 9
Unit I - Module 1 29Cost Prof
Estimate Documentation• Why document the estimate?
– Provides reviewers with:• Purpose of cost estimate• Program background and system
description• Program Schedule• Scope of cost estimate• Ground rules and assumptions
– Robust and detailed documentation permits reviewers to follow estimate logic from assumptions to resultsDocument not only for an external audience but for
yourself!Document not only for an external audience but for
yourself!
Unit I - Module 1 30Cost Prof
Estimate Documentation• What should be documented?
– The data, data sources, and normalization procedures
– Labor rates and hours, content, and how they were developed
– Material requirements and subcontracts
– Methodology for any applicable cost improvement curves
– Details regarding the factors and cost estimating relationships (CERs) applied
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Unit I - Module 1 31Cost Prof
Estimate Documentation• What should be documented?
– Details regarding the applied cost models including
• Relevance to the system/program• Inputs/outputs• Calibrations performed
– Inflation indices used and time phasing details
– Detailed description of judgments applied by estimator(s)
– Any details of risk and confidence analysis– The conclusion(s) resulting from the estimate– Appendices and appropriate references
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Unit I - Module 1 32Cost Prof
Cost Estimating Process• Work Breakdown Structure
(WBS) Development• Program/System Baseline
Development• Data Collection and Analysis • Cost Element Methodology• Estimate Development and
Validation• Results and Report
Generation
WBS
Baseline
Data Collectio
nData
Analysis
Methodology
Validation
Reports
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Unit I - Module 1 33Cost Prof
Work Breakdown Structure (WBS)
• What is a WBS?– Common frame of reference for relating job tasks
to each other and relating project costs at the summary level of detail
– Framework for specifying the objectives, labor, materials, and contracts of the system/program
• Structure defining the total program/system • Detailed definitions of individual elements required
• WBS varies by program and project phase• WBS Cost Element Structure (CES)• MIL-STD-881B previously the DoD standard
– Now MIL-HDBK-881B is guidance– Excellent resource for WBS components/content
WBS
Baseline
Data Collectio
nData
Analysis
Methodology
Validation
Reports
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Unit I - Module 1 34Cost Prof
Purpose of a WBS• Displays and defines the system/program to
be developed as a product-oriented family tree– Includes hardware, software, support, and/or
service elements– WBS should encompass complete life cycle of the
system/program• CARD (or similar type of document) is the source for
this program plan
• Establishes the physical work packages or elements and the activities within those packages that completely define a project– Organizes the physical work packages into levels
that can be developed into a summary
WBS
Baseline
Data Collectio
nData
Analysis
Methodology
Validation
Reports
Unit I - Module 1 35Cost Prof
Purpose of a WBS• Relates the work scope elements to
each other and to the end product(s)– Makes the relationships of the
components clear and the relationship of the tasks to be completed (to each other and to the end product) clear
• Key to developing/tracking costs– Provides financial reporting framework – Assists in tracking the status of efforts,
resource allocations, cost estimates, expenditures, and cost and technical performance
WBS
Baseline
Data Collectio
nData
Analysis
Methodology
Validation
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Unit I - Module 1 36Cost Prof
Work BreakdownStructure (WBS) Early Development
• WBS development should start early in the conceptual stages of the program– Provides structure to the design
requirements and functional architecture
• WBS evolves as system/program evolves– Evolves through iterative analysis of the
development strategy, objectives and requirements
– Define detailed technical objectives and specify work tasks for each WBS element
WBS
Baseline
Data Collectio
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Analysis
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Unit I - Module 1 37Cost Prof
Work BreakdownStructure (WBS) Continued
Development• As the program/system matures– Engineering efforts focus on system-level
performance requirements and top-level specifications
– Major subsystems and configuration items are identified
– WBS continues to be defined at lower levels– Eventually the total system definition is complete
• During production, maintain and update the WBS
• WBS Dictionary– Develop WBS dictionary while developing WBS– Should be routinely revised to incorporate changes
and current status of the program throughout the program's life
WBS
Baseline
Data Collectio
nData
Analysis
Methodology
Validation
ReportsTip: Dictionaries are often
overlooked and are critical to use of a WBS
Unit I - Module 1 38Cost Prof
Program/System Baseline Definition
• Program/system baseline definition encompasses all the information of a CARD
• Process for defining program/system baseline– Determine the programmatic scope of
estimate• Period to be estimated• Phases estimated
– Determine the technical scope of estimate• Program requirements• Work not included• Deliverables
WBS
Baseline
Data Collectio
nData
Analysis
Methodology
Validation
Reports
Unit I - Module 1 39Cost Prof
Program/System Baseline Definition
• Process for defining program/system baseline – Develop detailed system technical
description• Include key performance characteristics,
hardware/software components, architecture, configurations, reliability and security requirements, etc.
– Include previously developed WBS– Develop detailed description of
predecessor systems, if any• Include technical details, reason for replacing,
legacy hardware/software, phase-out plan, etc.
WBS
Baseline
Data Collectio
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Analysis
Methodology
Validation
Reports
Unit I - Module 1 40Cost Prof
Program/System Baseline Definition
• Process for defining program/system baseline – Determine manpower requirements
• Include skills, salaries, location, etc.
– Incorporate technical/performance, schedule, and cost risk
• Determined by management and/or engineers
– Define the operational concept• Include program management details,
operation specifics, platforms
– Determine deployment details• Include sites, schedules, special preparations,
site configurations, transition plans, etc.
WBS
Baseline
Data Collectio
nData
Analysis
Methodology
Validation
Reports
Unit I - Module 1 41Cost Prof
Program/System Baseline Definition
• Process for defining program/system baseline – Detail logistics support
• Include maintenance, sparing, and upgrade plans
– Define the training plan• Include types of training/certification,
providers, locations, frequency, etc.
– Establish the acquisition schedules• Include milestones, strategy,
contracting details, etc.
WBS
Baseline
Data Collectio
nData
Analysis
Methodology
Validation
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Unit I - Module 1 42Cost Prof
Program/System Baseline Definition
• Process for defining program/system baseline – Detail the system test and evaluation
plan• Include schedule, number of tests,
criteria, locations, etc.
– Describe any environmental impacts• Include disposal concept, mitigation
plans, conditions, materials, etc.
– Maintain track to the original baseline• As programs mature, define changes
WBS
Baseline
Data Collectio
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Analysis
Methodology
Validation
Reports
Unit I - Module 1 43Cost Prof
Data Collection and Analysis
• Data Collection– Obtaining data– Normalizing data
• Data Analysis– Methods and process
4WBS
Baseline
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Tip: These two steps of the process go hand in hand and
are somewhat iterative.
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Unit I - Module 1 44Cost Prof
Data Collection• Understand total picture of
estimating task– Intended use of the estimate– Scope of the estimate
• Establish cost element structure– Based on WBS
• Understand estimating techniques and data collection needs– Identify proposed estimating
technique(s)– Identify potential data sources
WBS
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Unit I - Module 1 45Cost Prof
Data Collection• Develop data collection plan
– Ensure sources identified for all needed cost elements
– Identify alternative/backup data sources– Identify sources for cross-checks– Establish a timeline/schedule
• Collect the data• Normalize the data
– Make data consistent and comparable– Types of normalization include Cost
Units, Sizing Units, Key Groupings, State-Of-Development Variables, and End Terms for Homogeneity
WBS
Baseline
Data Collectio
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Analysis
Methodology
Validation
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Unit I - Module 1 46Cost Prof
Data Analysis• Scatter plot the data
– Develop visual depiction of the relationships in the data
• Calculate descriptive statistics– For example, the means and CVs
• Look for outliers– Points far from the center of the
data• Compare to history
– Standard factors, rules of thumb, other historical data
6WBS
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Unit I - Module 1 47Cost Prof
Cost Element Methodology• Select estimating methodology that
most reliably estimates program costs
• Primary cost estimating techniques or methodologies– Analogy– Parametric– Engineering build-up
• Other methods – Expert opinion– Extrapolation from actuals
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WBS
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Unit I - Module 1 48Cost Prof
Estimate Development and Validation
• Develop estimate with appropriate costing techniques
• Validate estimate– Crosscheck with historical data for
similar programs, another estimating methodology, or another model
– Compare estimate with industry “rules of thumb”
– Crosscheck proprietary models with Excel backups
• Document estimate while developing
WBS
Baseline
Data Collectio
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Analysis
Methodology
Validation
Reports
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Unit I - Module 1 49Cost Prof
Results and Report Generation• Document the estimate
– Written justification of the estimate– Well-documented estimate withstands
scrutiny and increases credibility– Provide sufficient information to replicate
the estimate
• Develop results and report at appropriate level of detail– Crisp and complete– Easy to comprehend– Address important details– Convey competence
WBS
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Methodology
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Unit I - Module 1 50Cost Prof
Results and Report Generation• Conduct other analysis
– Cost As an Independent Variable (CAIV)• Making performance and schedule a function
of available resources
– Sensitivity analysis• Tool for determining effect of changes for
decision-making
– Risk analysis• Analyzing technical, schedule, performance
and other risks• Used to adjust cost estimate
• Final result is defendable cost estimate for decision making
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WBS
Baseline
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Analysis
Methodology
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Unit I - Module 1 51Cost Prof
Cost Estimating Certification• So you want to be a cost analyst…
– Society of Cost Estimating and Analysis (SCEA) offers the important professional certification Certified Cost Estimator/Analyst (CCE/A)
– Combination of educational and job experience requirements (minimum 2 years)
– CCE/A exam ($85)– More details on SCEA website (
http://www.sceaonline.net) under Certification
Unit I - Module 1 52Cost Prof
Summary• Rigorous and systematic estimating leads to a
better understanding of the problem• Quality and accuracy depend on the expertise
of the estimator– Estimator must understand complexity, technology,
and programmatic issues
• Don’t lose sight of the forest for the trees– Leaving out components– Double-counting components– Forgetting integration costs
• Ability to reproduce the estimate• Estimator must understand all estimating
methods applied
Unit I - Module 1 53Cost Prof
Resources• Cost Estimating Handbook, 2nd ed.,
Rodney D. Stewart, Wiley, 1991• Engineering Cost Estimating, 3rd
ed., Phillip F. Ostwald, Prentice-Hall, 1991
• DoD MIL-HDBK-881 “Work Breakdown Structure,” 02 Jan 1998
Unit I - Module 1 54Cost Prof
Resources – Agencies• Oversight agencies
– NCCA, http://www.ncca.navy.mil– CEAC, http://www.ceac.army.mil– AFCAA, http://www.saffm.hq.af.mil/afcaa
• NCCA Cost Analysis 101– http://www.ncca.navy.mil/about/101.cfm
• Budget/financial organizations– GAO, http://www.gao.gov– OMB, http://www.whitehouse.gov/omb– USD(C), http://www.dtic.mil/comptroller– DCAA, http://www.dcaa.mil
Unit I - Module 1 55Cost Prof
Resources – Regulatory• Title 10, United States Code,
Section 2434– Independent Cost Estimates;
Operational Manpower Requirements
• Clinger-Cohen Act of 1996
Unit I - Module 1 56Cost Prof
Resources – Regulatory• Title 10, United States Code,
Section 2434– Independent Cost Estimates;
Operational Manpower Requirements
• Clinger-Cohen Act of 1996
Unit I - Module 1 57Cost Prof
Resources – Regulatory• Title 10, United States Code,
Section 2434– Independent Cost Estimates;
Operational Manpower Requirements
• Clinger-Cohen Act of 1996
Unit I - Module 1 58Cost Prof
Resources – Policy• DoDD 5000.1, DoDI 5000.2 “Defense Acquisition
System,” 23 October 2000 (incl Change 1, 4 Jan 2001)
• DoD 5000.2-R “Mandatory Procedures for MDAPs and MAIS Acquisition Programs,” 11 Jun 2001– http://www.acq.osd.mil/ar/library.htm#directives
• DoDD 5000.4 “OSD Cost Analysis Improvement Group (CAIG)”
• DoD 5000.4-M “Cost Analysis Guidance and Procedures,” 11 Dec 1992– http://www.dtic.mil/whs/directives/corres/html/50004m.
htm
• DoDI 7041.3– Economic Analysis and Program Evaluation for Resource
Management
Unit I - Module 1 59Cost Prof
Resources – Policy• DoDD 5000.1, DoDI 5000.2 “Defense Acquisition
System,” 23 October 2000 (incl Change 1, 4 Jan 2001)
• DoD 5000.2-R “Mandatory Procedures for MDAPs and MAIS Acquisition Programs,” 11 Jun 2001– http://www.acq.osd.mil/ar/library.htm#directives
• DoDD 5000.4 “OSD Cost Analysis Improvement Group (CAIG)”
• DoD 5000.4-M “Cost Analysis Guidance and Procedures,” 11 Dec 1992– http://www.dtic.mil/whs/directives/corres/html/50004m.
htm
• DoDI 7041.3– Economic Analysis and Program Evaluation for Resource
Management