Cost analysis if often viewed as applying basic principles and cost methodologies to determine total system cost. These finished estimates then flow into a decision making process and the cost estimator leaves the stage. Reality shows that the cost estimator is actually one of the main contributors to the decision making process. Our introduction to this special issue explores the areas where cost estimating plays a major role in program management in areas beyond the normal program estimate. We have included articles that show the key role estimators can play in source selection strategies and evaluation; cost of delay analysis for management decisions, earned value management methods to predict program costs; decision criteria to rank competing projects that complement traditional cost-based methods; and a new methodology for determining research and development budget profiles

Green, Steve G.

Greiner, Michael A.

Kammerer, Joseph T.

King, David R.

Stockman, William K.

English

epublications@Marquette

Marquette Universitye-Publications@MarquetteManagement Faculty Research and Publications Management, Department of1-1-2002The Relationship between Cost Analysis andProgram ManagementWilliam K. StockmanDayton AerospaceJoseph T. KammererDepartment of the United States Air ForceDavid R. KingMarquette UniversitySteve G. GreenUnited States Air Force AcademyMichael A. GreinerAir Force Institute of TechnologyPublished version. Journal of Cost Analysis and Management, Vol. 4, No. 2 (2002): 1-7. DOI. Thisarticle originally appeared in The Journal of Cost Analysis and Management, © 1999-2007, Society ofCost Estimating and Analysis. All Rights Reserved. Written permission to reprint articles orreproduce materials from this journal for use in the classroom or for research or other scholarlypurposes must be requested from the SCEA & ISPA Joint Office.David R. King was affiliated with Indiana University at the time of publication.The Relationship Between Cost Analysis and Program Management Williarn K. Stockman, Ph.D. Dayton Aerospace Joseph T. Kammerer Department ofthe United States Air Force David R. King Indiana University-Bloomington Steve G. Oreen, DBA United States Air Force Academy Michael A. Greiner, Ph.D. Air Force Institute ofTechnology (AFIT) llisclaimer Th . oflicial polic :r Vlews expressed in this article are those of the author and do not reflect the govemm t Y posltlon ofthe United States Air Force, Department ofDefense, or the U.S. en. A..cknowledgem . . bringing th.- ents .. We would hke to thank severa! people for facilitating the process of for consi·d 18 ~pecialissue to fruition. First, we thank all the authors that submitted papers eratlon Se d h . butcerta 1 · con • we t ank the people that served as anonymous rev1ewers. Last, 10 Y not least, we thank Bud Bowlin for the opportunity to pursue this special issue. Abstract e .. gies lo d · ost analys¡s 1s often viewed as applying basic principies and cost methodolo-rnakin etenrune total system cost. These finished estimates then flow into a decision estima~ process and the cost estimator leaves the stage. Reality shows that the cost introct or" actually one of the main contributors to the decision malcing process. Our Uctlon to this · 1 · · · · 1 in pro spec1a lSsue explores the areas where cost esumanng plays a maJar ro e articl gram management in areas beyond the normal program estímate. We ha ve included es that sho th k · · d evaluaf w e ey role cost estimators can play in source selecnon strateg1es an rnethoct100; cost. of delay analysis for management decisions, eamed value management rnent s topredlct program costs; decision criteria to rank competing projects that comple-devel~achtional cost-based methods; anda new methodology for determining research and pment budget profiles. The Relationship Between Cost Analysis and Program Management "l believe that without concerted attention to the problems in acquisition, logistics, and industrial practices and procedures, the technological edge that is our war-fighter's greatest advantage could be eroded." Darleen Druyun, Principal Deputy Assistant Secretary of the Air Force, Acquisition (Druyun, 2001) INfRODUCTION The United S tates is an undisputed super power with access to the best technol~­gies and information systems. In this environment coupled with increased defense spe~ -ing, one would expect Department ofDefense (DoD) decision makers would be confr~~ung fewer challenges. The reality of course is quite different. Wbile we do have the best.rmhtai)' in the world, maintaining it in a future of ill-defined and sometimes conflicting requtrementsd · · · perations an presents a maJar challenge. We suffer from aging weapon systems, nsmg o support costs and declining manpower with increasing operations. be t Addressing these challenges requires that our decision makers receive t~e . 5 1 · d · f t nalysts mto ana ysts an analysts that the nation can provide. The integrat10n o cos a th d · · · can make the ese ectstons ts needed so that the senior leadership and program mangers best use of DoD's scarce resources. As stated in the above quote, we ha ve many proble~~ that must be sol ved to maintain our 1eading position and cost ana1ysis can help us to arn at the better decisions. Traditionally when one addresses the analyses provided by cost analysts, the subject is focused on: l. Developing cost improvement curves; 2 Collecting an appropriate data set to develop those curves; · 3· l!sing the data to derive cost estimating re1ationships (CER's) with the best statts-tlcal characteristics· ' 4· Utilizing available tools creatively to simplify the estimating process; and/or 5· Employing the best methodologies availab1e to produce a credible cost estímate (Kammerer2001 ). T~e preceding list comprises the traditional role of the cost analyst in a pro~ office. Whtle these aspects of cost analyst's . . d d e proper attentl remam tmportant an eserv •s by cost ana1ysts, there are other areas of cost 1 . th . . al1 · portant to ooD . . . . ana ysts atare cnuc y tm e dectston makers. Thts spectal issue introdu 1 . f alysis that haV . . ces severa maJor types o an t etther recently trnpacted key decisions or se 1 h venues for cos o o rve as ear y researc on new a th analysts. The rernamder of the paper surnmano " . o t alysis and e zes tOUr current toptcs m cos an latest relevant research, befare concluding woth b o f I a ne sumrnary. 2 Stockman, Kammerer, King, Green, Greiner COSTSAVING INITIATIVF.SPROPOSED BYTIIECONfRACfOR Defense contractors often propose cost saving initiatives to reduce the cost of ~eapon systems (Kammerer 2001). In sorne cases these initiatives are associated with an mve~t~~nt. The retum on the investment yields savings in the production phase of the ~cqutsttion program. The F-22 Raptor aircraft program is one such program that has em-(~ed ~ost saving initiatives. These initiatives are called Production Cost Reduction P1ans Stri~ s). Other U.S. Air Force programs that ha ve proposed similar initiatives are the Joint e Fighter (JSF) program and the Osprey (V -22) program. o For the cost analyst, this is a new twist. While significant cost reduction is expected ~ the form of cost improvement curves as production quantities increase, PCRP's may go yond the normal cost reduction associated with cost improvement curves. An example of such a o o o o . 1 o n InttiatiVe mtght be "lean manufacturing." The con tractor determines that by adopt-~ng a manufacturing process that is more efficient significant cost savings cou1d be realized. uch a change in process may require investment in new too1s or supply concepts, and a :~:rra~gement of the workspace in the factory. In the case of the F-22, the con tractor has a onctl that evaluates proposed PCRP's, the investment required, and the expected return-on-mvestment. th The evaluation of a PCRP presents a cost analyst with a threefold dilemma. First, is it e c~st saving initiative real or not? That is, does the cost saving initiative ha ve merit or is unhkely to produce savings? Second does the initiative represent a saving that wou1d nonna11 be ' . o Y expected to occur as part of the normal cost improvement one expects m produc-tJon and wh· h · · 11 h Ic IS captured by the historical cost improvement curve? Fma y, once t e cost an~lyst decides whether to accept or reject the cost saving initiative, how do you deve1op the ~stímate of the savings that is subsequently subtracted from your baseline estímate? It is tmportant to track to a consistent baseline as the program changes that can be used to measure a d . n track any savmgs. In the case of the F-22 Air Force cost analysts ha ve provided detai1ed reviews for approximately 80 such cost sa;ing initiatives proposed by the contractor. These required ~veloping separate return-on-investment relationships that were tended to be lower than e contractor's forecasts. However the Air Force has gone on to fund severa] contractor proposed o . ' . mvestments that were JUdged to ha ve ment. PROGRAMBUDGETS Is the budget based on the cost estímate or the cost estímate based ono the budget ~~mmerer 2001)? The cost analyst often finds himself in the quanodary ofotrym~ to fit an Stírnate to a budget, and this presents a dilemma, which may questton th~ mtegn~ ?f the COst analyst. Heroic measures may even be proposed to keep the cost estimate wtthm ~e prescribed budget. For example, program proponents ha ve been kno"_Yn t? propose ap~lymg aH the Principies of acquisition reform to achieve a 20 percent reduction 10 the first umts of The Relatíonshíp Between Cost Analysis and Prograrn Management productíon. When asked exactly what they would do to achíeve such reductions, they are usually less specífic. But they know they will achíeve theír goal because everyone on the team knows the goal and will be working toward ít. The cost analyst must stand firm in such cases and not support such specious goals. Other techniques proposed to keep the cost estímate withín the budget include the application of the Costas an Independent Variable (CAIV) technique, in which tradeoffs are made early in the development stages to reduce or stabilize costs. In the case of the F-22 aircraft program and the introductíon of cost savíngs through the PCRP's, nota single PCRP was accepted by the Aír Force wíthout specific plans that had worked their way up from an idea to a plan for ímplementation. This type of cost analysís allows the program manager to make a fact-based decision on whether to accept or decline contractor proposals. New research and development (R&D) programs by definítíon are high risk due ~o the insertíon of new technologíes and capabilities. Determining the right budget profile 15 often no better than the proposed program estímate phased according to past programs. The new research in this special issue by Brown, Gallagher and White demonstrate a new tech-ni~ue to determine fundíng profiles. The authors present a method to derive b~dge~ by usmg a Weibull-based forecasting method to project an expenditure profile. Startmg wtth a recent database of 102 completed R& D defense programs, they developed a methodology to determine the required statistical inputs for the Weibull distribution. From this data, they d~v~loped a model that predicts R&D funding profile projections. These models representa stgmficant improvement over past attempts in this area. . D t · · . h 11 ge Whtle e ermmmg the final cost of a program at completion is a maJOf e a en · cost analysts may have access to detailed program cost models and program data bases, cost overruns continue to plague DoD. New research in this special issue by Christense.n and Rees address this problem with research on boundíng the estímate at completion. Prevt-ou~ work by Christensen demonstrated that the Estímate at Completion (EAC) comput~~ usmg the cumulative Cost Performance Index (CPI) is a reasonable bound to the final cost . a defense contract (Christensen 1996). This new research confrrms that a CPI-based E~C ts a reasonable lower-bound to the final cost of a defense acquisition program when denved early in the program. However, in the later stages (70% complete), CPI-based EAC is no longer acts as a reliable lower bound. PROGRAM CHANGESANDUNCERfAINTY h th Prhogram managers and cost analysts have a difficult time estimating resources w en ey ave a well-defi d . d'ffi ult for a . me program. The challenge becomes exceedmgly 1 te program wtth constant h . gram demonstrates a d'l e anges (Kammerer 2001). A recent Air Force satelhte pro theY were told that ~ emma. Shortly after the analysts had completed their cost estimates, the program from fivee ~rofam exc~ded the budget and that they would ha ve to reduc~ the Department of Defe~seo~~~;lhtes. In the review of the acquisition program throug Jlite program because it would 'the.y were told that the program could not be a four-sate the not satisfy the requirement. In a further effort to reduce 4 Stockman [(, . ' ammerer, Kmg, Green, Greiner apparent costs of the ro am number of ground te!in~ ' the program proponents decided not to include the total regulations are clear that th s that would eventually b~ purchased for the system. DOD All of th e total program must be estimated and reported. ese problerns assoc · t d ·th .. cost analyst Th ta e wt program defimtwn cause a dilemma for the · e cost analyst is s t' k . . . changing requirem ts ome tmes as ed to modtfy hts esttmate to respond to units are bought th e~ a~d a smaller budget. Often he cannot do this, because as fewer the new progra~ e 0: cost of the program increases. Add to this problem the fact that challenge that may efy Congressional directions or even common sense, one sees the resource analysts face. What constitutes the ? · pursue diligentl t . program · It ts a very relevant question for the cost analyst to Y o avotd such a d 'l Th . only with the pr 1 emma. e cost analyst must research the tssue, not exampJe ofth t ogram propo~ents but also with other authorities in the DOD. An excellent Greiner in th~s ~pe ~~~alysts requi.red is explained by McNutt, Hutchinson, Reinertsen and creating taetieal r~l . ISSUe. Thetr paper details a methodology and its application, in sary day-to-da trecdtston rules to assist weapon system program managers in making neces-. Y a e-offs and d · · ~tsts in identify a d . ectstons regarding their programs. The resulting tool as-m conducting th n measunng the value of time and pro vides support to the decision maker · e trade off d · · tng for weapo - ectstons associated with cost, schedule, perfonnance and fund-n systems programs. OUfSOURCING ANDPROCUREMENTDECISIONS Under the R b . War. With the Cold eagan ~tldup, the DoD grew dramatically in an effort to win the Cold F'Y85 Ievels . th War o ver m the 1990s, the size of the DoD dropped by 39 percent from drastic red u ; 1 the Air Force budget dropping by almost 50 percent (Chelf 2002). These ization 0 e tons ha ve forced the DoD to find new ways to save budget dollars for modero-. ne solution is t d · d · · · or by outs . o re uce government operating costs by mtro ucmg competitwn ourcmg work t . . . cost anal y . h . o pnvate cornpanies. The vast majority of these deciSions rest on Whsts t at 15 critica! to the manager's decisions. ti. ether the man · 'd' · · · n· on eost 1 ager ts gut mg an A-76 competltton oran outsourcmg compe -' ana ys· · · . . sees Th 15 18 cntical and very different from that which the cost commumty nonnally · e anal · . . . . not a typ· al ysts focuses on the costs of running a business or maJor mdustnal operatton, te weapo od l 1 · around D . n system. Thus, there are not normally any validated cost m e s ymg d · atatsalway bl · · h h th · td ta ue to its . . s a pro em, smce most prívate finns don't wts tos are etr cos a hirnseif heompetttion sensitive nature. One of the biggest problems is the cost analyst - e usuall · • · ft contra t' Y tsn tan experienced cost analyst (Srnith 2001). Rather, he ts o en a e mg offic · . . · · ti b th th evaJuat· er Wtth sorne pncmg experience. Thts problem ts common or o e ton team and th k Th . soluti e governrnent team that is bidding on the wor . ere IS no easy . on to this p bl . . . . . D D t sunpi ro em. Wtth contmued downstzmg of the cost field m o , one may no seleet~ transfer more experienced cost estimators to these activities. Many of these source rnanct Ions oceur at base level so the depth of knowledge is often one-deep. Local com-day e~s ~e often faced with ~Iacing their best people on the tearns and leaving the day-to-aettvtttes to falt er. 5 e:,:. 1 • ---The Relationship Between Cost Analysis and Program Management A popular analysis method for large source selections is the best value decision. This method bases the decision on a total system evaluation that considers cost, technical, business performance o ver all aspects of the procurement (Borchers 2001 ). The cost analyst is challenged to consider more than just the cost of the immediate contract, but rather to consider total costs, benefits and risks to the govemment, or purchasing firm. This often requires the cost anal yst to determine a price for the value or cost of the benefit, cost or risk. This can be as simple as detennining the cost of extending an existing contract to evaluating the value of keeping and aircraft in the inventory an extra five years. A related method, Value Focused Thinking, offers an objective method to evaluate altematives over a variety of customers when faced with a limited budget. Lowe and Gale detail this approach in their paper "Laboratory Purchases: A Multidimensional Approac~." This method takes organization values and goals and translates them into objectives. Usmg decision makers within the organization, altematives are ranked based on how well they meet the objectives. Alternatives are then chosen based on this ranking until the allotted budget is gone. SUMMARY As this brief introduction to the special issue on the relationship between cost analysis and program management shows, cost analysts play key roles in providing needed information to managers and decision makers. Indeed, we conclude that cost analysis and program management are inextricably linked. Together cost analysis and program manage-ment will play a decisive role in shaping future military and commercial competitiveness of the United S tates. The following four papers provide new techniques that decision makers can use to control schedule and program risk, while balancing scarce resources. Author Biographical Infonnation William Stockman, a senior as socia te at Da y ton Aerospace and was a professor the Air Force Institute of Technology and both teaches and performs research on cost analysis. Joseph Kammerer is the Deputy Assistant Secretary (Cost and Economics) for the Air Force in the Pentagon. David King is an Air Force sponsored doctoral student researching the strategic i~­pacts of mergers and acquisition activity. Previously he has served on the faculty of the Atr Force Academy and as an acquisition manager. Ste~e Oreen is a Professor in the Management Department at the Air Force AcademY· H~ recetved a DBA from United S tates lnternational University in 1987, and has served in the Atr Force as a cost analyst. Mic~ael Grei~er is an Assistant Professor of Acquisition Management at the AFff. His research mterests mclude acquisition reform and its relationship with cost management, Stockman, Kammerer; King, Green, Greiner weapon systerns developrnent, and risk rnanagernent. He received his Ph.D. in Industrial Engineering frorn Arizona S tate University. Borchers, J.R. 2001. "Dollarizing Qualitative Discrirninators U sed In Best Value Source Selec-tions," Thesis. Wright-Patterson AFB, OH: Air Force lnstitute ofTechnology. Chelf, K.A. 2002. "Beyond A-76: How to Achieve the Goals Without Pain," Thesis. Wright-Patterson AFB, OH: Air Force Institute ofTechnology. Christensen, D.S. 1996. "Project Advocacy and the Estirnate at Completion Problem." The Journal ofCost Analysis and Management (Spring): 35-60. 1 Druyun, D. 2001. "A Blueprint for Action: Final Report", pp 2-3. Kammerer, J.T. 2001. "Current Dilemrnas in U.S. Air Force Cost Analysis," Proceedings. Royal Aeronautical Society's meeting on Cost Forecasting and Analysis: 3 Octo-ber. Smith, A. 2002. "An Analysis ofthe Knowledge and Skill Levels Required to Effectively Support Analytical Cost Decisions in Source Selections," Thesis. Wright-Patterson AFB, OH: Air Force Institute ofTechnology. 

The Relationship between Cost Analysis and Program Management

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The Relationship between Cost Analysis and Program Management

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