Cost Estimating Investment Planning and Project Management Michael Lionais, Executive Director Costing Centre of Expertise, Office of the Comptroller General Treasury Board of Canada Secretariat

Agenda Cost Estimates Fundamentals Challenges Key Concepts Looking Ahead

HIGH QUALITY COST ESTIMATE Cost Estimates What makes a good cost estimate? HIGH QUALITY COST ESTIMATE Accurate Comprehensive Replicable Auditable Traceable Flexible Credible Timely Maintained Remember: Cost estimating is a process – not a number.

Cost Estimates Why are high quality cost estimates important? Ensure that investments provide value for money and ensure sound stewardship of resources High Quality Cost Estimates Realistic Budget Decisions and Contingency Allocation Executable Projects/Programs and Strong Contingency Management Improved Program and Project Outcomes

Foundation Improved Program and Project Outcomes The CCE completed an evidence-based gap assessment of the cost estimating capacity across government The four foundational elements upon which we are building: Process, People, Data, and Tools Improved Program and Project Outcomes High Quality Cost Estimates Process People Data Tools

Challenges in Cost Estimating Cost estimating cannot: Be applied with cookbook precision – it must be tailored to the situation/program (art and science); Produce results that are better than the input data; Be substituted for sound judgment, management, decision-making; or Predict political and/or non-cost impact. Good cost estimating facilitates understanding

Challenges in Cost Estimating A lack of contextual information often hinders decision-maker’s ability to fully understand the financial risks associated with a project Cost estimates are subject to change based on: Scope, framing assumptions, fluctuations in key input costs over time, implementation schedule, etc. Presenting cost estimates as a single value does not provide sufficient contextual information to support evidence-based decision-making There are many ways of presenting cost information Acquisition costs vs. life cycle costs Are the ongoing costs resulting from the investment sustainable?

Key Concepts: Life Cycle Costing Life cycle costs (LCC) are all costs associated with the useful life of a capital asset, i.e., planning costs, acquisition costs, maintenance and operating costs, and disposal costs (less residual value) Phases of LCC: Development - The main decisions about the system shape are taken in the development phase. - This phase requires collaboration between the main stakeholders engaged in the project. Acquisition - The asset is being purchased - Integration as an operational capability Operations and sustainment - Asset is being utilized Disposal - Asset is being withdrawn from service LCC vs TOC vs WLC: Phases provide the horizontal (or time) dimension of LCC. There is also a “density” component to LCC, that is what type of costs are included in each phase Direct and Indirect variable costs (fuel, maintenance, etc.) – are usually part of an LCC The inclusion of linked indirect costs (common facilities, common administration, etc.) often leads to what is called Total Ownership Cost (TOC) The inclusion of non-linked indirect fixed costs (medical services, housing, etc.) is usually referred to as Whole Life Cost (WLC)

Key Concepts: Life Cycle Costing Project management phases do not align with the phases of LCC If the costs after project close out are not considered, there could be significant financial pressure created Phases of LCC: Development - The main decisions about the system shape are taken in the development phase. - This phase requires collaboration between the main stakeholders engaged in the project. Acquisition - The asset is being purchased - Integration as an operational capability Operations and sustainment - Asset is being utilized Disposal - Asset is being withdrawn from service LCC vs TOC vs WLC: Phases provide the horizontal (or time) dimension of LCC. There is also a “density” component to LCC, that is what type of costs are included in each phase Direct and Indirect variable costs (fuel, maintenance, etc.) – are usually part of an LCC The inclusion of linked indirect costs (common facilities, common administration, etc.) often leads to what is called Total Ownership Cost (TOC) The inclusion of non-linked indirect fixed costs (medical services, housing, etc.) is usually referred to as Whole Life Cost (WLC)

A Construction Project: Key Concepts: Uncertainty and Risk Uncertainty and risk are major challenges for cost estimating Long term plans and projects (e.g., investment planning) inherently have increased uncertainty and risk For example, predicting the cost of something tomorrow vs. 5 years from now Project maturity and complexity also affect the level of uncertainty and risk associated to a cost estimate A Ship Purchase: 2007: 6-8 ships for $3.1B 2014: 5-6 ships for $3.5B A Construction Project: 2013 Business Case: $5.1B 2015 Business Case: $6.9B Decisions are being made with a limited understanding of the financial impact of risks

Looking Ahead Comptroller General of Canada: Process People Data Tools Priority to advance the work of the Comptroller General’s Costing Centre of Expertise by focusing outward to improve costing capacity in departments Updated policy instruments aligned with international best practices to strengthen cost information and increase transparency Process Tailoring training and professional development to align with varying audiences, including ICEAA certification People Collaborating with Financial Management Transformation to ensure that basic standard data is being captured Data Testing and providing training on tools to support cost estimating with varying degrees of complexity (e.g., PRICE® TruePlanning®, Crystal Ball, SEER, etc.) Tools