A better cost-estimating tool: the key to not going over budget

Defense AT&L, July-August, 2008 by Mike Young, Ted Markley

Department of Defense weapons sytems and program developments have received considerable unwanted attention, not because of innovative design issues, but rather, because rising costs concern those who control the money. In fact, cost overruns in some programs have pushed the price well beyond the original estimates.

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Historical Lessons of High Costs

This is not a new phenomenon to DoD. Weapons acquisition throughout U.S. history experienced numerous cost-estimate errors. Among the first contractors bedeviled by cost problems was Joshua Humphreys, the creator of the Navy's first six frigates. These ships were designed to be heavily armed and able to outgun any European ship of a similar class, yet fast enough to outrun any larger ship in a light breeze. The big frigates had special construction requirements that required live oak timber for critical components. According to Ian W. Toll, author of Six Frigates: The Epic History of the Founding of the U.S. Navy, several hundred live oak trees were needed for each ship.

There was a problem, though. Live oak grows best in the coastal plains of the southeastern United States. At the end of the 18th century and the beginning of the 19th century, harvesting the enormous live oak trees was a painstakingly slow and expensive proposition because the coastal plains had few roads and an abundance of disease-carrying mosquitoes. So expensive, in fact, that in 1794, the U.S. House of Representatives appointed a special committee to investigate how $7,000 could be spent on timber in a single month, especially when the estimated cost was much lower. Pointed queries were made, egos were wounded, and political posturing abounded, but the program edged on to a satisfactory completion.

Reasons for Cost-Estimating Problems

Looking at this example and numerous other occasions in DoD's history in which new weapons systems resulted in significant underestimations of costs, three factors appear to be associated with costing errors:

* A new technology or concept is introduced. In Joshua Humphreys' case, the innovation was the design of the ship and the materials required.

* Changes in design after the system is in production. These changes invariably result in unintended consequences and additional costs.

* The contractor routinely accepts that the technology is mature and there will be no design modifications after the system is produced. This results in an initial low-cost estimate that is very often unrealistic.

At the beginning of the 21st century, problems with cost-estimate accuracy, a history of cost growth, and high visibility have caused DoD program managers to seek more detailed cost estimates with frequent updates. However, manic attention to cost estimating also has its price. Program management and engineering personnel throughout the defense industry expend time, energy, and resources in developing, validating, and certifying cost estimates. The unplanned workload and reporting requirements are placing a strain on an overburdened logistics system. In many cases, programs simply have inadequate staffs to manage the contracts.

Not Enough Time

There is a growing need to develop cost estimates to support a variety of managerial, programmatic, and engineering requirements, and get it done fast. That's another cost-estimating problem. Routinely, the technical community receives a proposal to improve a weapons system's performance to meet emergent requirements. Once the proposal is briefed to the chain of command, the project engineer is asked, "How much will it cost?"

While searching for a quick response, the project engineer is asked another question: "How soon can you get me a rough order of magnitude [ROM] on the cost?"

The project engineer does a mental retrieval and concludes that a full bottoms-up engineering estimate is needed, but that will take too long--about three to four months. The project engineer knows it has to be faster, so he throws a number out. "I need a month to develop a ROM."

"Give me a ROM in two weeks if you really want any chance of funding this initiative," is the reply.

The project engineer walks away thinking, "How am I going to develop a sound, engineering-based cost estimate in two weeks?" Of course, the project engineer is correct. It will take several months, or even longer, to develop a realistic cost model of a complex system or major system upgrade, as well as the logistics tail associated with any change to a fielded system (spares, technical manuals, allowance parts lists, planned maintenance systems, integrated logistics support plans, and so on).

The related scenario is typical of situations encountered daily in defense industry engineering efforts. A tool is needed to enable a robust, engineering-based modeling and simulation of system-level technical characteristics, including the required performance parameters and associated costs. It must be an automated tool that helps streamline the existing laborious process of collecting component data and projecting technical cost for performance trades, and that assists in determining schedule considerations and technology maturity.