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Considering the Costs

Summary

The following learning objectives are covered in this unit:

Given an Initial Capabilities Document (ICD) and a summary Analysis of Alternatives,(AoA), select an appropriate concept, from the perspective of thesystem developer, to meet the user's needs.

Given a cost breakdown, determine Development Cost, Flyaway Cost, WeaponSystem Cost, Procurement Cost, Acquisition Cost, and Life Cycle Cost.

Select an appropriate method to estimate the cost of an acquisition program. Select an appropriate approach (e.g., Analogy, Parametric, Top-Down,

Engineering (Bottoms-Up), Actual, Delphi) to estimate the cost and schedule for asoftware-intensive system.

Relate the typical distribution of software lifecycle costs to the planning of an

acquisition program. Recognize the impact and interrelationship of logistics support and lifecycle cost.

1. An Analysis of Alternatives (AoA) is used to help select the best, most cost-effectiveway to meet a capability need. An AoA:

Is a study of operational effectiveness and life-cycle cost Is mandatory for all ACAT I and IA programs Provides objective feedback on cost and effectiveness of alternatives Is based on information from the Initial Capabilities Document (ICD), including

o Functional areaso

Range of military operationso Timeo Key attributes defined by measures of effectiveness

The AoA can be used to justify starting, stopping or continuing an acquisition program based on cost, performance and schedule factors.

2. Cost Estimation - An analysis of costs of hardware, software or services derived fromhistorical cost, performance, schedule and technical data of similar items or services and

performance, schedule, and technical data for the new system. Methods used to preparecost estimates include:

Analogy A new system or component is compared with a similar, existing systemor component. Generally this type of analysis can be done quickly andinexpensively. Analogy estimates are commonly used early in the acquisition

process, but are subjective and less precise than other methods. Parametric - Statistical analysis of a database of similar systems is used to

develop a relationship between cost and one or more performance or designcharacteristics of the systems. The resulting Cost Estimating Relationship can

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then be used to estimate the cost of a new system. This method is inexpensive andused relatively early in the acquisition process. The cost estimating relationship isvery useful in analyzing "what-if" scenarios, but it is only as valid as thestatistical correlation and the database used to create it.

Engineering (Bottoms-Up) - Detailed analysis of all of the materials, parts and

labor required to produce a system is performed from the bottom up. This analysisis very accurate and is more objective than other methods, but it can be expensiveand very time-consuming. Engineering estimates are typically used for elementsidentified as cost drivers in the later stages of system development.

Actual Costs - Costs of future efforts are extrapolated based on the previous costof identical or nearly identical systems. This method also refers to the use of actual cost data from completed portions of the program to update the program'slife cycle cost estimate.

Methods used to prepare cost estimates for software development include the analogy, parametric, and the bottom-up methods above, plus:

Top-Down - a systems-level view of the project Delphi - a team of experts combine different approaches to arrive at a collective

judgment.

Generally, a life cycle cost estimate will use a combination of different methods. Thetype of estimating method that is used on each of the cost elements that comprise theestimate should be based on the type and accuracy of available data, the stage of theacquisition life cycle, and the relative importance of the cost element. Each of thesemethods can be used independently or in combination.

3. Cost Terms and Definitions are provided in DoD 5000.4-M, and include seven typesof acquisition-based costs:

Development Cost Cost of all research and development-related activities that arenecessary to design and test the system. Funded with RDT&E appropriation.

Flyaway Cost (a.k.a. rollaway)Cost of producing prime mission equipment suchas ships or tanks. Funded with procurement appropriations

Weapon System Cost Sum of flyaway cost and cost of associated supportequipment and services (including initial training). Also funded by procurementappropriations.

Procurement Cost Sum of weapon system cost and cost of the system's initialspares. Funded with procurement appropriations.

Program Acquisition Cost All costs associated with developing, procuring andhousing a weapon system. Procurement, RDT&E, and MILCON appropriationsare used to fund this cost.

Operating and Support All costs for personnel, equipment, supplies, software,and services associated with operating, maintaining, supplying and providingongoing training for any DoD system. Most O&S costs are funded with the O&M

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