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- Analysis for the Un- Initiated” Initiated” (Part 1) (Part 1) Arthur Griffiths Arthur Griffiths Chairman, SCAF Chairman, SCAF 23 23 rd rd February 2005 February 2005

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Page 1: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 2: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd 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

Page 3: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

February 2005

Requirements for Requirements for

Project SuccessProject Success

Page 4: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 5: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 6: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 7: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 8: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 9: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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.

Page 10: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

February 2005

Cost Estimating BasicsCost Estimating Basics

Page 11: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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.

Page 12: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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.

Page 13: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 14: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 15: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 16: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

February 2005

Basic principles of cost Basic principles of cost analysisanalysis

Page 17: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 18: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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”

Page 19: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 20: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 21: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

February 2005

Elements of Life Cycle CostElements of Life Cycle Cost

Page 22: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

February 2005

Life cycle cost

Non-recurring

Recurring

Development

Production

In-service

Disposal

RDT&EProductionInvestment

Crew

Non-crew

DirectIndirect

AmmunitionFuelMaintenance

Acquisition

Support

Page 23: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 24: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 25: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 26: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 27: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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)

Page 28: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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)

Page 29: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 30: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 31: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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

Page 32: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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.

Page 33: February 2005 “Cost Forecasting and Analysis for the Un-Initiated” (Part 1) Arthur Griffiths Chairman, SCAF 23 rd February 2005

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]