february 2005 “cost forecasting and analysis for the un-initiated” (part 1) arthur griffiths...
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February 2005
““Cost Forecasting and Cost Forecasting and Analysis for the Un-Initiated”Analysis for the Un-Initiated”
(Part 1)(Part 1)
Arthur GriffithsArthur Griffiths
Chairman, SCAFChairman, SCAF
2323rdrd February 2005 February 2005
February 2005
ContentsContents
Requirements for project successRequirements for project success Cost estimating basicsCost estimating basics
– Purpose, Applications, Skills, Benefits, Qualities, Purpose, Applications, Skills, Benefits, Qualities, Limitations, ConcernsLimitations, Concerns
Principles of Cost AnalysisPrinciples of Cost Analysis Elements of Life Cycle CostingElements of Life Cycle Costing Influences of CostsInfluences of Costs Illustrations and issuesIllustrations and issues Some myths of project management and costsSome myths of project management and costs
February 2005
Requirements for Requirements for
Project SuccessProject Success
February 2005
To bring a project in to Time and Cost To bring a project in to Time and Cost requires that: -requires that: -
Targets are realisticTargets are realistic– Targets can be challenging but they must be Targets can be challenging but they must be
attainable or else the programme is doomed to failure attainable or else the programme is doomed to failure from the startfrom the start
The project is well managedThe project is well managed– The possibility for expenditure and delay are The possibility for expenditure and delay are
unboundedunbounded The requirement remains stableThe requirement remains stable
– To get anywhere one must know where one is goingTo get anywhere one must know where one is going– Navigation is hindered if the customer tears up the Navigation is hindered if the customer tears up the
mapmap
February 2005
Causes of FailureCauses of Failure
Causes of delay to in-service dateCauses of delay to in-service date– Technical difficultiesTechnical difficulties– Need to redefine a projectNeed to redefine a project– Deferring projects to match overall fundingDeferring projects to match overall funding
Causes of cost varianceCauses of cost variance– Programme changesProgramme changes– Inflation adjustmentsInflation adjustments– Specification changesSpecification changes
Source: NAO MoD Major Projects ReportSource: NAO MoD Major Projects Report
February 2005
Proximate and ultimate causesØ For cost/time estimating, requirements capture etc.
Estimatingfailures
Failure to allow for technical difficulties
Erroneousinflation/productivity
expectations
Inadequatemethodology Ø
Underestimatesof cost and times
Infeasible targets
Cost/time overruns
Specification changes
Programme changes
Project deferment
Diminished value for money
February 2005
Success requires:-Success requires:-
Full Allowance for technical difficulties Full Allowance for technical difficulties present and potentialpresent and potential
Realistic appraisal of prospects for Realistic appraisal of prospects for relative price inflation including promised relative price inflation including promised productivity gainsproductivity gains
Use of a methodology that gives accurate Use of a methodology that gives accurate unbiased estimates of cost and timeunbiased estimates of cost and time
February 2005
But, success is rare at presentBut, success is rare at present
Major UK defence projectsSource: NAO MoD Major Projects Reports
Over cost and time
On/under time only
On/under time and cost
On/under cost only
February 2005
Success is the Success is the rightright contract price - not the lowest contract price - not the lowest
0 5
Min. cost exceeds customers’ max. price by 12.5 %
3.5 4.0
4.5 5.5
Boeing costings
Airline demands
Unit price $MSource: H. Mansfiled, “Vision, Popular, New York, 1966”
1. Boeing offer price set at $4.5M (1)
2. Boeing share Pan American order with Douglas (2)
3. Boeing lose United order to Douglas
4. Boeing share burgeoning market with Douglas and Convair
5. Rivals lose $950M in executing their contracts; Boeing shows profit on it
6. Boeing has funds to launch B727 and dominates jet airliner market
Where are Douglas and Convair now?
First generation jet airliners 1955Notes
1.) Boeing do not revise estimates downward to match rivals’ offers and airline expectations.2.) Notwithstanding Boeing’s advantage of a demonstrable prototype.
February 2005
Cost Estimating BasicsCost Estimating Basics
February 2005
Cost EstimatingCost Estimating
Cost EstimatingCost Estimating: : – The process of collecting and analyzing historical The process of collecting and analyzing historical
data and applying quantitative models, techniques, data and applying quantitative models, techniques, tools, and databases to predict the future cost of an tools, and databases to predict the future cost of an item, product, program or task. item, product, program or task.
Purpose of cost estimatingPurpose of cost estimating– Translate system/functional requirements associated Translate system/functional requirements associated
with programs, projects, proposals, or processes into with programs, projects, proposals, or processes into budget requirements.budget requirements.
– Determine and communicate a realistic view of the Determine and communicate a realistic view of the likely cost outcome, which can form the basis of the likely cost outcome, which can form the basis of the plan for executing the work.plan for executing the work.
February 2005
Fundamentals to ConsiderFundamentals to Consider
There are three basic methods of estimating:There are three basic methods of estimating: ““Top Down”Top Down”
– Analogy:Analogy: comparing the cost of an item to be estimated comparing the cost of an item to be estimated to a similar item.to a similar item.
– Parametric:Parametric: mathematical relationship between one or mathematical relationship between one or more parameters (cost, performance, programme, etc).more parameters (cost, performance, programme, etc).
““Bottom-Up”Bottom-Up”– Detailed Estimating:Detailed Estimating: at the lowest definable level using at the lowest definable level using
industrial engineering techniques & standards.industrial engineering techniques & standards.
February 2005
Cost Estimate QualitiesCost Estimate Qualities
The characteristics of high quality cost The characteristics of high quality cost estimates are:estimates are:– AccuracyAccuracy– ComprehensivenessComprehensiveness– Replicability and AuditabilityReplicability and Auditability– TraceabilityTraceability– CredibilityCredibility– TimelinessTimeliness
February 2005
Limitations of Cost EstimatingLimitations of Cost Estimating
Cost estimating cannot: - Cost estimating cannot: - – Be applied with cookbook precisionBe applied with cookbook precision– Produce results that are better than the input Produce results that are better than the input
data data – Predict political impactsPredict political impacts– No substitute for sound judgment, management, No substitute for sound judgment, management,
or controlor control– Make final decisionsMake final decisions
February 2005
A Few - Cost Estimating ConcernsA Few - Cost Estimating Concerns
ConsistencyConsistency– Estimates must track over timeEstimates must track over time– Estimates developed by other organisations must be Estimates developed by other organisations must be
based on same content and assumptionsbased on same content and assumptions– Historical data is not consistent between differing Historical data is not consistent between differing
cost element or work breakdown structurescost element or work breakdown structures
Security/accessSecurity/access– Company-proprietary dataCompany-proprietary data– Data classification/securityData classification/security– Possible misuse of dataPossible misuse of data
February 2005
Basic principles of cost Basic principles of cost analysisanalysis
February 2005
General introduction to some concept and General introduction to some concept and current issuescurrent issues
• Some definitions and distinctionsSome definitions and distinctions
• Elements of Life-Cycle costElements of Life-Cycle cost
• Influences on costInfluences on cost
• Illustrations and issuesIllustrations and issues
• Economics of scaleEconomics of scale
February 2005
Non-recurring costs are once for all. Recurring costs multiply with quantity. Non-recurring costs are once for all. Recurring costs multiply with quantity. Quantity can be units made, hours used, years elapsed etc… Quantity can be units made, hours used, years elapsed etc…
Recurring and non-recurring costsRecurring and non-recurring costs
CostUnit non-recurring cost
e.g. unit production cost
Recurring cost
e.g. production cost
Non-recurring cost
e.g. development costUnit cost
e.g. unit acquisition cost
0 Q Quantity
e.g. Units made
Note: Need a Note: Need a careful definition careful definition of a “Unit Cost”of a “Unit Cost”
February 2005
Direct costs are those costs which are associated directly and unambiguously with Direct costs are those costs which are associated directly and unambiguously with the product or activity in question.the product or activity in question.
Indirect costs are costs associated with a range of products or activities and which Indirect costs are costs associated with a range of products or activities and which have to be apportioned between these in a more-or-less arbitrary fashion.have to be apportioned between these in a more-or-less arbitrary fashion.
Indirect costs make the costs of one product a function of demand not only for it but Indirect costs make the costs of one product a function of demand not only for it but for each of a range of associated products also.for each of a range of associated products also.
Head officeHead office
Production Production centrescentres
ProductsProducts
Indirect (overhead) costs
Direct and indirect costsDirect and indirect costs
February 2005
ActivitiesActivities CostsCosts Primary influencesPrimary influences
DevelopDevelop
Acquisition costs Equipment type and performance Acquisition costs Equipment type and performance BuildBuild
OperateOperate
Support costsSupport costs Equipment type and performance Equipment type and performance
MaintainMaintain Patterns of use Patterns of use
Support costs are as much a matter of user choice as they are of equipment type and supplier efficiency.
Acquisition and running costsAcquisition and running costs
February 2005
Elements of Life Cycle CostElements of Life Cycle Cost
February 2005
Life cycle cost
Non-recurring
Recurring
Development
Production
In-service
Disposal
RDT&EProductionInvestment
Crew
Non-crew
DirectIndirect
AmmunitionFuelMaintenance
Acquisition
Support
February 2005
Activities preparatory to and enabling production
Research, Development, Test and Evaluation (RDT&E)Costs dominated by the design/make/test cycle
Production Investment (PI)Tools & Test Equipment etc. required for production
Start Design Make Test
OK?
Finish
DevelopmentDevelopment
yes
No
February 2005
Manufacture of items for service use
Materials
Materials in raw or semi-finished
form
Bought-out
Complete functioning items or systems from
specialist suppliers
Labour
Personnel employed by or at production centre
Finished product
ProductionProduction
February 2005
Crew
Pay and allowances Support and welfare Training Pay, NI, pensions etc. Medical, victualling etc Training for both
primary and any secondary duties
Total crew costOften, cost of maintaining a qualified person in post >>cost of paying person in post
Non-crewConsumablesReplacement of material consumed intentionally during use eg fuel and ammunition.
Spares & RepairsReplacement or refurbishment of items becoming unserviceable during use.
Preventative Maintenance
Replacement or refurbishment of items to promote continued availability
Total non-crew running cost
Support costsSupport costs
February 2005
There are different costs for disposal by:There are different costs for disposal by:
• • Sale for reuseSale for reuse
• • Sale for scrapSale for scrap
• • Destruction/ incinerationDestruction/ incineration
• • Terminal useTerminal use
• • Indefinite storageIndefinite storage
• • Land fill/ dump at seaLand fill/ dump at sea
Employment of environmentally damaging materials can impose high Employment of environmentally damaging materials can impose high disposal costs. May invoke wider legal and ecological issues.disposal costs. May invoke wider legal and ecological issues.
DisposalDisposal
February 2005
Influences on costInfluences on cost(Other than technical characteristics of the (Other than technical characteristics of the
equipment in question)equipment in question)
February 2005
RDT&ERDT&E
- Precursor designsPrecursor designs
(But, new has still to be proven)(But, new has still to be proven)
- Sharing costs through collaborationSharing costs through collaboration
(But, this generates extra overheads)(But, this generates extra overheads)
-Parallel development of variantsParallel development of variants
(Often, a price of collaboration)(Often, a price of collaboration)
February 2005
Production InvestmentProduction Investment
- intended production quantity and rateintended production quantity and rate
- variants of basic designvariants of basic design
00 Quantity/Rate
P.I.Multiple variants
Single design
February 2005
ProductionProduction
00Quantity
(Also rate in some cases)
Unit production cost
Multiple variantsMultiple variants
Single designSingle design
Worst of all worlds is to plan for many Worst of all worlds is to plan for many and make actually only a few in many and make actually only a few in many variantsvariants
Learning is a fragile plant whose Learning is a fragile plant whose progress takes very little to set it progress takes very little to set it backback
February 2005
Support costsSupport costs
CrewCrew
-Deployment and rouelmentDeployment and rouelment
-Other dutiesOther duties
-Career/command structure-Career/command structure
-Training needs-Training needs
Non-CrewNon-Crew
-DeploymentDeployment
-AvailabilityAvailability
-Surge capacity-Surge capacity
-Training needs-Training needs
Running costs are as much a Running costs are as much a matter of user policy as of matter of user policy as of equipment characteristicsequipment characteristics
February 2005
DisposalDisposal
• Can be a negative cost if the equipment is Can be a negative cost if the equipment is sold on.sold on.
• Can be sensitive to use of hazardous Can be sensitive to use of hazardous materials.materials.
• Disposal (or, even, non-disposal) of nuclear Disposal (or, even, non-disposal) of nuclear materials is a special problem.materials is a special problem.
February 2005
Questions & Contact DetailsQuestions & Contact Details
Arthur GriffithsArthur Griffiths
HVR Consulting Services LtdHVR Consulting Services Ltd
Selborne HouseSelborne House
Mill LaneMill Lane
AltonAlton
HantsHants
GU 34 2QJGU 34 2QJ
Tel: 01420-87977Tel: 01420-87977
Email: [email protected]: [email protected]