Cost%20Factors

1
Cost Factors

• Chapter 13

2
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)

3
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.

4
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.

5
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.

6
Example
APG-180 Cost Performance Report
7
Example

• For contracts that are not yet complete, use LRE
  costs.
• The PSE cost factor is calculated as follows

8
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?

9
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 estimators toolbox.