Parametric Cost Analysis Handbook

PARAMETRIC COST ESTIMATING HANDBOOK

TABLE OF CONTENTS

FOREWORD

PREFACE

CHAPTER I -- INTRODUCTION, BACKGROUND AND DEFINITIONSIntroduction .............................................................................................................. 1Background .............................................................................................................. 4Definitions and Terms .............................................................................................. 9Cost Realism ............................................................................................................ 10

CHAPTER II -- COLLECTION AND NORMALIZATION OF PARAMETRIC DATAGeneralizations ......................................................................................................... 12Significant Adjustments to Parametric Data ............................................................ 14

Consistent Scope .......................................................................................... 14Anomalies .................................................................................................... 14Improved Technology .................................................................................. 15

Other Types of Adjustments and Data Normalization ............................................. 15Inflation ........................................................................................................ 15Learning Curve ............................................................................................ 16Production Rate ............................................................................................ 16

Calibration and Validation of Cost Models ............................................................. 17Some Review and Audit Considerations ................................................................. 18Data Normalization Process ..................................................................................... 19Pitfalls to the Use of a Parametric Model ................................................................ 25Two Illustrations of Typical Data Normalization Problems .................................... 27Summary .................................................................................................................. 29

CHAPTER III -- ELEMENTARY STATISTICAL TECHNIQUES AND CER DEVELOPMENT

CER and Model Development - Uncertainty and Risk Reduction .......................... 32Developing Cost Estimating Relationships (CERs) ................................................. 34

Hypothesis Testing of a Logical CER ......................................................... 36The CER Model ........................................................................................... 36

When to Use a CER ................................................................................................. 36Strengths and Weaknesses of CERs ......................................................................... 37

Strengths ...................................................................................................... 38Weaknesses .................................................................................................. 38

Regression Analysis ................................................................................................. 38Curve Fitting ............................................................................................................ 41

Graphical Method ........................................................................................ 41LSBF Method .............................................................................................. 41Multiple Regression ..................................................................................... 44

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Parametric Cost Analysis Handbook

Curvilinear Regression ................................................................................ 45“Goodness” of Fit, R and R2 .................................................................................... 45

Correlation Analysis .................................................................................... 45Coefficient of Determination ....................................................................... 46Coefficient of Correlation ............................................................................ 47

The Learning Curve ................................................................................................. 47Limitations, Errors and Caveats of LSBF Techniques .............................................

49

Extrapolation Beyond The Range of the Observed Data ............................. 49Cause and Effect .......................................................................................... 50Using Past Trends to Estimate Future Trends ............................................. 50Misinterpreting the Coefficients of Correlation and Determination ............ 50Summary ...................................................................................................... 50

Examples of CER Use .............................................................................................. 51Construction ................................................................................................. 51Weapons Procurement ................................................................................. 51Electronics ................................................................................................... 51Cost and Price Analysis ............................................................................... 52Information and Techniques ........................................................................ 52Estimate Reliability ...................................................................................... 53Two Examples of CER Use ......................................................................... 54Common CERs ............................................................................................ 60

Acceptance Criteria for a Cost Estimating Relationship ..........................................

61

Auditing and Analyzing a CER ............................................................................... 63CER Analysis ............................................................................................... 63General Features .......................................................................................... 63Evaluating and Estimate .............................................................................. 64Summary of CER Audit and Analysis ......................................................... 65

CHAPTER IV -- HARDWARE COST MODELINGIntroduction .............................................................................................................. 68Overview of Hardware Cost Modeling .................................................................... 70Micro-Circuit and Electronic Module Modeling ..................................................... 77Hardware Operations and Support (O&S) of Life Cycle Models ............................ 79

Deployment and Employment ..................................................................... 81Hardware Parameters ................................................................................... 82Program Globals .......................................................................................... 82

Commercial Models ................................................................................................. 82MicroFASTE ............................................................................................... 83Price Parametric Models .............................................................................. 87SEER ............................................................................................................ 90

Regression Based Product Specific Cost Models .................................................... 91Non-Commercial Cost Models ................................................................................ 93Non-Statistical Cost Models .................................................................................... 94Model Calibration .................................................................................................... 95

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Parametric Cost Analysis Handbook

Cost Model Audit and Analysis ............................................................................... 96Analyzing a Product Specific Cost Model ................................................... 96Summary of Cost Model Audit and Analysis .............................................. 99

CHAPTER V -- SOFTWARE PARAMETRIC COST ESTIMATINGSoftware Definition .................................................................................................. 101The Importance of Software Today ......................................................................... 102The Software Development Process ........................................................................ 107

The Waterfall Model .................................................................................... 107The Software Cost Estimating Process .................................................................... 109

Define Project Objectives and Requirements .............................................. 111Plan the Activities ........................................................................................ 111Software Estimation Risks ........................................................................... 112Estimation Methodologies ........................................................................... 113Software Cost Estimating Standards ............................................................ 116Benefits ........................................................................................................ 116

Examples of Parametric Software Cost Estimating ................................................. 116Parametric Software Cost Estimating Tools ............................................................ 119

Desired Functional Capabilities of Parametric Tools .................................. 120Input Data Collection ................................................................................... 122Some Commercial Tools ............................................................................. 122Software Sizing Tools .................................................................................. 127

Glossary of Terms .................................................................................................... 130Model Calibration .................................................................................................... 130Trends and Conclusions ........................................................................................... 131

Trends .......................................................................................................... 131Conclusions .................................................................................................. 132

CHAPTER VI -- AUDITING PARAMETRIC ESTIMATES - A MANAGEMENT VIEWPOINT

Cost Estimating Relationships: A DCAA Perspective ........................................... 133Introduction .................................................................................................. 133Background .................................................................................................. 134Parametric Criteria ....................................................................................... 134Logical Relationships .................................................................................. 135Significant Statistical Relationships ............................................................ 135Verifiable Data ............................................................................................. 135Reasonably Accurate Predictions ................................................................ 135Proper System Monitoring ........................................................................... 136Audit Planning and Requirements ............................................................... 136Observations and Suggestions ..................................................................... 140Summary ...................................................................................................... 142

Estimating System Reviews ..................................................................................... 143Forward Pricing Rate Agreement (FPRAs) ............................................................. 145What to Look For in a Parametric Estimate ............................................................. 148

Rules of Thumb ........................................................................................... 150

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Parametric Cost Analysis Handbook

An Example ................................................................................................. 151

CHAPTER VII -- BUSINESS APPLICATIONS OF PARAMETRIC ESTIMATINGIntroduction .............................................................................................................. 153Parametric Estimating in New Business Development ............................................ 153Estimating Production Buys Using Parametrics ...................................................... 154

Example: Estimating Production Buys Using Parametrics ......................... 155Estimating Spares and Change Orders ..................................................................... 158

Appendix A Definitions of Estimating Terminology .................................................... 160Appendix B Work Breakdown

Structure .......................................................................177

Appendix C DCAA CAM 9-1000 Section 10, Review of Parametric Cost Estimates . 198Appendix D More About Statistics ................................................................................ 205Appendix E Examples of Other Hardware Estimating Models .................................... 209Appendix F Some Currently Available Software Estimation Products ........................ 218Appendix G Parametric Estimating System Checklist .................................................. 236

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