Cost estimating in these times of austerity

06/06/2014
1
UNCLASSIFIED QinetiQ Proprietary
© Copyright QinetiQ Limited 2014
QINETIQ/TIS/S&AS/PUB1401673
Abstract
• The presentation will review the maturity of risk management and cost
estimating in organisations and the effect this can have upon financial
decisions made by project managers.
• This presentation will briefly discuss the three methods of estimating;
analytical, analogous and parametric before studying parametric cost
and schedule estimating in more depth. It will consider the benefits of
generating parametric estimates early in the project life cycle and other
applications of parametric estimating when little information is
available to the Project Manager.
• Finally, the presentation will explore means of making the project more
cost effective using cost estimating relationships (CER) to explore cost
saving measures suitable for these years of austerity.
UNCLASSIFIED
QinetiQ Proprietary
Cost estimating in these
times of austerity
Association of Project Managers (APM)
South Wales and West of England Branch
4th June 2014
Dale Shermon
QinetiQ Fellow / Head of Profession Cost Engineering

06/06/2014
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Contents
1. Introduction
2. Cost and Risk Maturity
assessments
3. Methods of cost estimating
4. FACET Parametric estimating
5. Austerity – project cost saving
measures
6. Summary
1.
Introduction

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3
Dale Shermon BA, ACCA CDip (A&F)
• Rolls-Royce, British Aerospace,
Matra Marconi Space, UK MOD /
SPS & PFG, PRICE Systems;
• QinetiQ Fellow and Head of
Profession Cost Engineer;
 Council member and Fellow
ACostE (FACostE)
 Member of APM (MAPM)
 Life member and Certified
Parametric Practitioner (CPP) of
ICEAA
 Chairman and member of SCAF
• Parametrician of the Year 2013
• Frieman award 2009 for
“outstanding lifetime contribution
to cost estimating”
• ISPA St. Louis, Best Hardware
paper, 2006, “TrueConcepts a
methodology not a model”
• ISPA Florida, Best Applications
paper, 2003, “If a little knowledge
is dangerous… what is a lot of
knowledge?”
SCAF

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QinetiQ Procurement Advisory Service (QPAS)
Advice Services
Evaluation Services
QPAS
AWARD - QinetiQ Commerce Decisions Ltd
CostEngineering
Programme&Project
Management
Requirements
Acceptance
ThroughLifeServices
RiskManagement
BusinessAnalysis
Knowledge Based Estimating (KBE)

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2.
Cost and Risk Maturity
assessments
Why Conduct a Maturity Assessment?
 Assess the quality and consistency of cost and risk management
implementation
 Understand cost and risks and their impacts across the enterprise
 Improve cost and risk management to inform decision-making across the
organisation portfolio
 Realise tangible benefits in capability acquisition and support
 Reduce duplication of effort, across organisations
 Improve communications, where common issues are identified
 Improve coherency and alignment, and share good practice
“Major projects that have used the QinetiQ benchmarking tool and subsequently
improved their risk maturity have reduced forecast overspend by an average of 20% of
project value and forecast schedule overrun by 41 months”
Source: NAO Major Projects Report
10

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Evidence – Performance Against Schedule
11
Current Schedule Performance vs Original Forecast of MOD Top 20 Major Projects
41%
46%
114%
47%
32%
51%
63%
54% 53%
42%
75%
8%
10%
0% 0% 0%
11%
0%
0%
20%
40%
60%
80%
100%
120%
Typhoon(Nov-87)
StingRay(May-95)
NimrodMRA4(Jul-96)
AstuteClassSub(Mar-
97)
A400M(May-00)
Type45Destroyer(Jul-
00)
SupportVehicle(Nov-01)
NGLAAW(May-02)
Terrier(Jul-02)
NavalEHF/SHFSat
Comms(Aug-03)
Soothsayer(Aug-03)
MTADS(Sep-04)
Watchkeeper(Jul-05)
Falcon(Mar-06)
Merlin(Mar-06)
FutureLynx(Jun-06)
AdvancedJetTrainer
(Aug-06)
TyphoonFuture
Capability(Jan-07)
Scheduleoverrunas%oforiginalforecast
Risk Maturity Uncontrolled Risk Maturity @ Level 3+
Evidence – Performance Against Cost
12
Current Schedule Performance vs Original Forecast of MOD Top 20 Major Projects
-21%
28%
48%
0%
29%
-7%
-18%
6%
-26%
42%
-7%
-1%
-5%
-1%
1%
-5%
-2%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Typhoon(Nov-87)
StingRay(May-95)
NimrodMRA4(Jul-96)
AstuteClassSub(Mar-
97)
A400M(May-00)
Type45Destroyer(Jul-
00)
SupportVehicle(Nov-01)
NGLAAW(May-02)
Terrier(Jul-02)
NavalEHF/SHFSat
Comms(Aug-03)
Soothsayer(Aug-03)
MTADS(Sep-04)
Watchkeeper(Jul-05)
Falcon(Mar-06)
Merlin(Mar-06)
FutureLynx(Jun-06)
AdvancedJetTrainer
(Aug-06)
TyphoonFuture
Capability(Jan-07)
Currentoverspendas%oforiginalforecast
Risk Maturity Uncontrolled Risk Maturity @ Level 3+

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QINETIQ/TIS/S&AS/PUB1401673 13
Cost Engineering Heath Check (CEHC)
Why Electronic Voting
• Well-established method of Group Decision Support
• Provides a framework to consider arguments before expressing
opinion
• Votes are anonymous
• Primarily interested in the reasons for the votes
• Used to elicit opinion
• Discussion is limited to clarification before voting
• Divergence in votes may provide additional insight
• Understand how the question and context relate to the project
14

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What’s The Process? – Delphi Technique
1. Question is posed
2. Think!
3. Consider the question and context
4. Vote
5. Facilitated discussion
6. Voting results presented
7. Salient points recorded for
analysis/reporting
8. Record the consensus view
9. Re-vote (as necessary)
10. Record the consensus view
15
Case Study - Cumulative result of SCAF assessment
16
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5
A1
A5
B1
B3
C4
C16
C15
C5
D3
D13
D6
A15
1. Schedule risk
analysis tools
2. Technical
data storage
3. Software
estimating tools
4. Planning and
communication
Weak Excellent

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Case study - UK MOD Assessment of Cost Maturity
0.00
1.00
2.00
3.00
4.00
5.00
SCAF
EACE
MOD
3.
Methods of Cost Estimating

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Cost Engineering
• Estimating techniques include:
1. Analytical
2. Analogy
3. Parametric
• Selecting appropriate methodology
UNCLASSIFIED
QinetiQ Proprietary
Analytical

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Analytical / Detailed Estimating
• Traditional approach and understanding of ‘estimating’
 Also known as “Bottom-Up”
• Most common technique in cost proposals
• Complete for each functional labour category against a breakdown
structure:
 Engineering
 Manufacturing
 Program Management
 Quality
 Tooling and Test
Equipment or Produce Breakdown Structure (PBS)
Helicopter
Airframe Propulsion
Engine Engine Control
Engine Control
software
AV Application
software
Product Breakdown
Structure (PBS)
Work Breakdown Structure
(WBS)
Organisation
Breakdown Structure
(OBS)
Focus on what is deliverable!

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Work Breakdown Structure (WBS)
PBS
Project
Management
Engineering
Manufacture,
Assembly,
Integration and Test
Product Breakdown
Structure (PBS)
(WBS)
Organisation
Breakdown Structure
(OBS)
Usually accompanied by a Work Package Description:
• Inputs
• Output
• Activities
• Assumption / Dependencies
• Duration / Effort
Organisation Breakdown Structure (OBS)
PBS
WBS
Project Manager
Project Control
Cost Engineering
Configuration Control
Travel and Subsistence
costs
Product Breakdown
Structure (PBS)
(WBS)
Organisation
Breakdown Structure
(OBS)

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Helicopter
Airframe Propulsion
Engine Gear box Engine Control
Project Management Engineering MAIT
Project Manager
Project Control
Cost Engineering
Configuration Control
Requirements
analysis
Systems Eng.
Electronic Eng.
Mechanical Eng.
Travel and
Subsistence costs
Computing costs
Material cost
Fabrication labour
Machining labour
Sub-contractor costs
AV Application software
Engine control s/w
Product Breakdown
Structure (PBS)
(WBS)
Organisation
Breakdown Structure
(OBS)
Detailed Build Up (Cont…)
• Estimated Labour – the Direct (booked) effort for a person;
 Clearly identify all categories (functions) of labour required to complete the
Work Package activities
 For example, Project Management time
 Calculated in hours for example;
 7.5 hours per day
 37 hours per week

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• Estimated Non-labour – the direct (billable) cost expenditure;
 Can be material, services, sub-contract costs or other direct costs
 For example, travel and subsistence
 Clearly identify all categories (test facilities, computer facilities, test
equipment, sub-contract support) of non-labour required to complete the
Work Package activities
 Calculated in single monetary units (£1,000), not thousands(£1k), millions (£1m),
etc.
 Identify the currency used, Pounds, Dollars, Euro
Excluded
• Overheads – the Indirect effort and costs that are not booked or
billable directly to the project
 For example, Security staff, Executive staff

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• When estimating resources or time consider the activity as a functions
of size, complexity and productivity relative to previous activities that
you have completed.
• Resource (or time) = f (size, complexity, productivity)
 Size = volume, weight, quantity, lines of code, surface area, power, thrust –
the magnitude of the problem
 Complexity = technology, materials, manufacturing process, design difficulty,
novelty, number of interfaces, number of requirements, customer – level of
difficulty
 Productivity = tools, staff skills, scope of design, communications, language,
access – achievement of the activity
# of Drawings x Drawing factor x Hours per Drawing
Case Study - Detailed Hour Build Up
• Estimated Number of Drawings = 100
• Drawing factor
 Detailed drawing = 1.0
 General Assembly = 1.5
• Engineering Dept. Standard = 40 Hours per Drawing
• Engineering basis of bid is then submitted to Cost Engineering function
for conversion to currency
Resource (or time) = f (size, complexity, productivity)

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Disadvantages
Advantages
• Time and resource intensive
• Omissions and duplications likely
• Often subjective and can contain distortions
• Changes can be time consuming
• Detailed specifications are required
• MS Excel spreadsheets can become complicated
• Very Detailed
• Well accepted methodology
• High level of detail gives a perceived view of
‘accuracy’
• MS Excel usual choice of tool
UNCLASSIFIED
QinetiQ Proprietary
Analogy

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Analogy
• A comparison between two systems or efforts
 Based on a relative scaling of a data point
 Determination of how much more or less the new system will be relative to
the historical data point
• Commonly used for ROMs and as cross-checks
• Subjective complexity factors are used many times to adjust analogous
system cost to new system
• Requires minimal time and cost
• Normally completed at the system or sub-system level
Case study - Estimating by analogy
Performance
(Mach Speed)
Unit Production
Cost (UPC)
(UK £)
Old analogous system: Mach 1.5 £30 Million
• New system speed is 2x old system
• Cost of new system is therefore =
2 x £30m = £60m
• Analogy normally assumes a Linear
Relationship

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Disadvantages
Advantages
• Can be subjective
• Assumes a linear relationship between cost, time
and technology
• Can be difficult to obtain detailed level of
information
• Can be used early in a project with minimum data
• Ideal for conceptual level estimating
Analogy (Cont…)
UNCLASSIFIED
QinetiQ Proprietary
Parametric

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Parametric Cost Model
• Commercially available cost models, for example:
 FACET
 SEER
 TruePlanning
• Cost Estimating Relationships (CER) is also considered a Parametric
Cost Model
• Parametric Cost Model
 Is a mathematical relationship:
 Cost to Cost
 Performance to Cost
 Statistical inferences
Parametric Cost Modelling
© PRICE Systems 2006 All
rights reserved
Historical
Project
Normalised
Independent
- Design
- Performance
Dependent
- Cost
- Schedule
- Performance
Cost Estimating Relationship (CER)

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Filling the gaps - International Data
Non UK Vehicles
BMP -3 Pandur
Tracked
Wheeled
2004 2006 2007?
FV432 Scorpion Striker Spartan Warrior
1963 1972 1975 1978 1986
Shortland
APC
1965
Fox
1973
Saxon
1976
(PV)
Current UK Army vehicles
Future UK Vehicle
requirements
Non UK Vehicles
BMP -3 Pandur
Tracked
Wheeled
Stingray
1988 1990
CV 9040
1993 1995
Pizarro
1998
Centuaro
1991
Simba
1993
Stingray CV 9040 Pizarro
1998
Centuaro Simba
2004 2006 2007?
1960 1970 1980 1990 2000 20101960 1970 1980 1990 2000
FV432 Scorpion Striker Spartan Warrior
1963 1972 1975 1978 1986
Shortland
APC
1965
Fox
1973
Saxon
1976
(PV)
Current UK Army vehicles
Future UK Vehicle
requirements
FRES
MRAV, Tracer, ABSV
Indicative sample only from
QinetiQ database which covers
72 types of AFV in current
production and / or service
Parametric Cost Model (Cont…)
• Commonly used for:
 ROMs
 Proposal Costs
 Trade Studies
 Budgetary Estimates
• Requires more time than Analogy, but considerably less time and cost
than a Detailed Build Up

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Parametric Cost Model (Cont…)
• Commercial Cost Model
 Requires specialized training
 Can be applied at all levels; system, subsystem, LRU, or SRU level
 Used as sole estimating tool or independent cross-check of an estimate
 Must be able to calibrate model to local experiences
 Can be calibrated to reflect performance to cost effectiveness
 Database is required for use as Basis of Estimate (BoE)
Disadvantages
Advantages
• Trained personnel usually required
• Regular calibration required to maintain Cost
Estimating Relationships (CERs)
• ‘Black Box’ syndrome
• Can be produced in minimal time
• Removes any bias
• Consistent due to mathematics
• Can also relate performance to cost
• Can be used ‘Out Of The Box’
Parametric (Cont…)

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UNCLASSIFIED
QinetiQ Proprietary
Selecting the Most Appropriate
Methodology
General Selection Criteria
• The “most appropriate” methodology or methodologies is generally
based on considerations such as:
 Program phase
 Program requirements stability/maturity
 Availability of relevant historical data
 Type of estimate required
 Customer requirements and/or preferences
 Time and/or manpower to complete estimate

06/06/2014
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Programme Life Cycle
Selecting the Most Appropriate Methodology
Concept & Assessment
Development /
Demonstration
Manufacture & Entry
Into Service
In Service Operation &
Support
Parametrics
Analogy
Engineering / Bottom Up
Extrapolation From Actuals
Gross Estimate Detailed Estimate
Parametric
AnalyticalAnalogous
Little Confidence
CostCost
Time
Parametric
Analytical
Analogous
More Confidence
Cost
Time
Multiple estimating methods provide confidence

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4.
FACET Parametric estimating
Early Estimates set the budget!
C A D M I D
C A D M I D
Cumulative Project
Expenditure
Decisions impacting
upon Project Costs
During this period of the
project life there is the
opportunity for projects to
influence the Whole Life
Cost at minimum expense to
the overall project

06/06/2014
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Operational
Analysis
• Identify Acquisition cost
• Identification of In-service cost
• Top level trade off
• Performance
• Design
• Programme issues.
• Down selection of options
• Multiple platform solutions.
Key Decision made at the very beginning of a project
need to be based on sound information such as;
Cost Estimating aims
Combining Performance and Design

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Estimating Requirements?
Requirements Cost
Concept Design
?It’s not possible to
estimate capability
or requirements
without a design
Estimating early concept design
Requirements Cost
Concept Design
Therefore we create
a concept and
estimate it to a high
tolerance

06/06/2014
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The reality?
Requirements Cost
Final Design
Then discover the
design is not the same
as the concept?
Requirements based Design plus estimate
Requirements Cost
Final Design
What is required is early
relationship between
requirements, design
and forecast cost

06/06/2014
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Deterministic prediction for X
In-service
date
Costperunitmass
Prediction
X
Y
Recognising the uncertainty in the input
In-service
date
Costperunitmass
Prediction
X
Distribution Y

06/06/2014
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Recognising the compound error of CER and input
In-service
date
Costperunitmass
Prediction
X
Distribution Y
Case studies

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0
5
10
15
20
25
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Date
ProgrammeCostsFFrBn
Case study - Charles De Gaulle; Programme Costs
Programme authorised
First steel cut
First block
Official Launch
Start of sea trials
Commissioned
FFr 15.6 Bn First
published estimate of
the Programme cost
April 1992
FFr 17.2Bn
FFr 18.8Bn
FFr 20 Bn Last
Programme cost
estimate Sept 2000
FFr 20.38 Bn Estimated
Programme cost. Using
FACET and only technical
data available in 1992
28% cost growth between first and last
official programme costs
Less than 2% difference between
FACET and last official programme cost
0
2
4
6
8
10
12
14
16
18
20
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Date
ProgrammeCostsEuroBn
Case study - Eurofighter Development Costs
Less benefit of EAP
demonstrator
FACET
Official
Feasibility study
French withdraw
Start Project Definition
Development start
Production start
110% cost growth between first and last
official programme costs
Less than 8% difference between
FACET and last official programme cost

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£0M £100M £200M £300M £400M £500M £600M
Option 3
Option 2
Option1
MoD Indicative
Design
Commercial Design
(risk to performance
from under sizing)
(Size well matched to
MoD requirements)
281 397
366 486
437 519
470 550
492 563
Bands show spread of ±
standard error about
estimate
Programme cost (1994 prices)
Key
LCU EH-01
Spot
Flag Capability
Reduced Cost Options
Case study - Balance of Investment (BOI)
• Buying a new ship
with a limited
budget:
 Identify alternative
options;
 Estimates quickly
with tolerances on
the estimates;
 Analyse what is
afforable;
 Consider cost-
effectivness.
FACET Model

06/06/2014
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FACET WLC Models : Input Screen
FACET WLC Models : Input Screen
1,000 kg
reduction

06/06/2014
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FACET WLC Models : Results Screen
FACET Cost Context Model Output
The context model provide a rapid
evaluation capability of quotation and
internal estimates

06/06/2014
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5.
Austerity – project cost saving
measures
Non-recurring cost
• Non-recurring costs are defined
as those which only happen
once in a project.
• Non-recurring costs can be
either;
• duration-related, for example
project management, or
• task-related, for example
conducting a stress analysis.

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0%
20%
40%
60%
80%
100%
120%
0 1 2 3 4 5 6 7
PercentageallocatedtoeachNation
Number of Nations
Development cost versus participating nations
100% funded by one nation Proportional funding by nations
International cooperation - theory
Winning
space!
New design
High
Non-recurring
Cost
Low
Low High
Percentage New
Winning
space!

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36
Commonality / modularity in development
High
Non-recurring
Cost
Low
Low High
Design Repeat
Winning
space!
New
Adapted
Deleted
Translated
0% Test
0% Code
0% Design
Auto Generation
?% Design
?% Code
?% Test
Reused
100% Test
100% Code
100% Design
Software development is a non-recurring activity
Winning
space!

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37
1 2 3 4 5 5 6 7 8 9 1011121314151617181920
Capability
Years in-service
Incremental Traditional
Incremental development versus ‘big bang’
Winning
space!
Time
Cost
Lower complexity Higher complexity
Time Now
Cheaper but less capable technology
Not desirable for Defence
Market forces = technology maturity

06/06/2014
38
Recurring cost
• Recurring costs are defined as
those which occur repeatedly in
a project.
• Recurring costs tend to be task-
related (rather than duration-
related), for example
manufacturing components.
Overlapping schedule
Development
Production
Delayed schedule
Development
Production
Optimisation of the schedule
Optimised schedule
Development
Production
Winning
space!

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39
100 off
50 off
UPC50
UPC100
Learning or Cost improvement curve
Assumes:
• Low turnover of staff;
• Consistent manufacturing
process;
• Single shift pattern;
• Single facility;
100 off
50 off x UPC100
Learning or Cost improvement curve
Acquire 50 off items from a total batch of 100 off
Assumes:
• that you only pay for the items you require
• you take evenly over the period
• there is a customer for the other 50 off

06/06/2014
40
500 missiles from a larger production batch
£-
£200,000
£400,000
£600,000
£800,000
£1,000,000
£1,200,000
£1,400,000
£1,600,000
500 1,000 1,500 2,000 2,500 3,000
Total Production Quantity
UnitProductionCost(UPC)
£@constant2011ec
Case Study - Commonality / modularity in production
Winning
space!
100 off
50 off
50 off
Equal learning and un-learning
Breaks in production
Winning
space!
Common reasons are:
• Design changes;
• Introduction of major
production methods
improvements;
• Replacement of worn
tooling;
• Funding limitations;
• Strikes;

06/06/2014
41
In-service cost
• In-service costs are defined as
costs which occur following the
manufacture of the platform,
system or service.
• As such they have a tendency
to be event based, such as
failures or maintenance
opportunities.
• In-service cost can be duration-
related or task-related, but the
tasks will have a rhythm or
periodicity.
In-service costs
 Reliability
Infant
mortality
Wear out
System Life (Years)
Number of failures
Reduce optimise in-service cost:
• Anticipate obsolescence / regulatory requirements;
• Monitor fleet failures rates;
• Reduce usage through synthetic training;

06/06/2014
42
In-service costs
 Reliability
Midlife
update
System Life (Years)
Number of failures
In-service costs
• Reduce Required Spares Holdings
 Improve repair pipeline times
 Improve/optimise spares holdings
 Pool key assets between Nations
 Optimise storage and transportation
• Reduce Repair Costs
 Cost optimise repair capabilities, national vs international
 Improve utilisation of maintenance and fault data to improve maintenance
policies and anticipate
 Challenge industrial cost base
 Design out cost drivers

06/06/2014
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6.
Summary
Summary
• Reviewed cost and risk maturity
assessment – How good are your
numbers?
• Consider three estimating
methodologies to add confidence to
your cost predictions;
• Utilise parametrics cost modelling as a
source of independent cost estimating
(ICE) and prompt areas of cost saving;
• Identified some Austerity measures that
can be deployed to reduce potential
costs.

06/06/2014
44
Any questions?
QinetiQ
Building 240
The Close
Bristol Business Park
Coldharbour Lane
Bristol BS16 1FJ
United Kingdom
Tel +44 (0)117 953 8455
Mobile +44 (0)7785 522 847
dshermon@QinetiQ.com
www.QinetiQ.com/als
Dale Shermon
QinetiQ Fellow /
Head of Profession Cost Engineering
QinetiQ
Building 240
The Close
Bristol Business
Park
Coldharbour Lane
Bristol BS16 1FJ
United Kingdom
Tel +44 (0)117 953 8455
Mobile
+44 (0)7785 522 847
dsherm
on@QinetiQ
.com
www.QinetiQ
.com/als
Dale Sherm
on
QinetiQ
Fellow /
Principal Consultant
www.QinetiQ.com

Cost estimating in these times of austerity

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