1. 13 - 1 Cost Factors Chapter 13

2. 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. 13 - 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. 13 - 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. 13 - 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. 13 - 6 Example APG-180 Cost Performance Report

7. 13 - 7 Example For contracts that are not yet complete, use LRE costs. The PSE cost factor is calculated as follows:

8. 13 - 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. 13 - 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 estimator’s toolbox.