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Cost Factors

Chapter 13

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Introduction

• We tend to think of cost estimating relationships (CERs) as complex equations with a number of independent variables.

• However, a CER can be as simple as a ratio between two variables.

• A CER in which COST is directly proportional to a single independent variable is known as a COST FACTOR.

• A Cost Factor is expressed as either a ratio or a percentage, and is used as a multiplier of an independent variable.

• Examples: – POL costs = (POL Factor) x (Miles traveled)– SE/PM costs = (SE/PM Factor) x (Recurring

hardware)– Software costs = (Software Factor) x (Lines of Code)

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Cost Factor Development

• Identification of cost drivers– Miles traveled causes POL cost– Recurring hardware causes SE/PM cost– Lines of code causes software cost

• Specification– It is assumed the relationship is LINEAR, and the

intercept is zero.

• Selection of analogous systems– Analogous systems should have the same cost

driver, and follow a similar functional form.

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Cost Factor Development

• Data Collection– Collect ACTUAL cost data, not BUDGET data.

• Normalization– Usually no need to normalize for inflation (unless

data spans multiple years), since the factor is represented as a percentage.

– Still need to normalize for quantity, e.g., T1.

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Example

• Suppose we want to estimate the EMD peculiar support equipment (PSE) cost for the (new) APG-195 radar.

• We are currently in the Program Definition and Risk Reduction (PDRR) phase of acquisition, and have no detailed description of the PSE other than that it will be similar to previous systems such as the APG-180.

• Consultation with technical experts has led us to believe the PSE cost is driven by recurring hardware (Prime Mission Equipment).

• EMD cost data were collected on six radar systems which are analogous to the APG-195.

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Example

Program Name: APG-180 Contractor: ICUPhase: EMD Contract Type: FPIF

Budgeted Cost of Work

Performed (BCWP) ($K)

Budget at Completion ($K)

Latest Revised Estimate ($K)

APG-180 SystemRecurring Hardware 202555 238120 244920

Central Processor 35600 39000 39300Peripheral Subprocessors 12205 14560 15520Antenna Subsystem 65900 72930 74500Other Subsystems 16450 18350 18900System Software 62900 75800 78600Integration, Assembly & Test 9500 17480 18100

Platform Integration 5010 9350 9650System Engineering / Program Management 39100 47900 49200System Test & Evaluation 3090 18540 19350Training 5250 8960 9080Data 1500 3470 3520Peculiar Support Equipment 9580 18750 19650

TOTAL 266085 345090 355370

ITEM

APG-180 Cost Performance Report

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Example

• For contracts that are not yet complete, use LRE costs.

• The PSE cost factor is calculated as follows:

%0.8100244,920

19,650 Factor PSE

100Hardware Recurring

PSEFactor PSE

LRE

LRE

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Example

• Assume that after calculating the factors from each of the six analogous systems our results look like the following:

• Judgment now plays a role in whether we:– Average the factors– Select an individual factor– Use some other method

• On the other hand, what if our factors looked more like this?– Would you still take an average?– Does our original assumption hold

true?

Factor (%)8.0%5.7%9.1%6.5%7.7%8.2%

Factor (%)8.0%15.7%3.1%12.5%7.7%18.2%

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Strengths & Weaknesses

• There are often times when we have limited visibility into the task that we are estimating.

• Sometimes we need to “fill in a hole” in our estimate

• Another use of cost factors is as a sanity check of the primary estimating methodology.

• The Cost Factor methodology has often been criticized for its simplicity. But remember the principle of parsimony. All else being equal, use the simplest technique available.

• Also remember that this is but one of several tools in the cost estimator’s toolbox.