Whether a new cost estimator or a seasoned professional cost estimator, we all need to continuously seek to improve the credibility of our cost estimates.  I can think of no better reference to assess our cost estimates than the March 2009 Government Accountability Office (GAO) Cost Estimating and Assessment Guide. 

The basic characteristics of effective estimating from the guide are listed below, were first published in 1972, and have stood the test of time as the yard stick for measuring the credibility of our cost estimates done for both government and industry.

1.       Clear identification of task

  • Estimator must be provided with the system description, ground rules and assumptions, and technical and      performance characteristics
  • Estimate’s constraints and conditions must be clearly identified to ensure the preparation of a well-documented estimate

2.       Broad participation in preparing estimates 

  • All stakeholders should be involved in deciding mission need and requirements and in defining system parameters and other characteristics
  • Data should be independently verified for accuracy, completeness, and reliability 

3.       Availability of valid data 

  • Numerous sources of suitable, relevant, and available data should be used
  • Relevant, historical data should be used from similar systems to project costs of new systems; these data should be directly related to the system’s performance characteristics

4.       Standardized structure for the estimate

  • A standard work breakdown structure, as detailed as possible, should be used, refining it as the cost estimate matures and the system becomes more defined
  • The work breakdown structure ensures that no portions of the estimate are omitted and makes it easier to make comparisons to similar systems and programs

5.        Provision for program uncertainties

  • Uncertainties should be identified and allowance developed to cover the cost effect
  • Known costs should be included and unknown costs should be allowed for

6.       Recognition of inflation

  • The estimator should ensure that economic changes, such as inflation, are properly and realistically reflected in the life-cycle cost estimate

7.       Recognition of excluded costs

  • All costs associated with a system should be included; any excluded costs should be disclosed and given a rationale

8.       Independent review of estimates

  • Conducting an independent review of an estimate is crucial to establishing confidence in the estimate; the independent reviewer should verify, modify, and correct an estimate to ensure realism, completeness, and consistency

9.       Revision of estimates for significant program changes

  • Estimates should be updated to reflect changes in a system’s design requirements. Large changes that affect costs can significantly influence program decisions

From my perspective as a senior reviewer of cost estimates for the Army, I have seen cost estimates come apart at critical times in the decision making process too often because one or more of these characteristics are not met.  While each characteristic is critical to the credibility of the cost estimate, in my experience the most common characteristics found lacking are:  clear identification of task, broad participation in preparing estimates, availability of valid data, provision for program uncertainties, and independent review of estimates. Not surprising, these are the characteristics that are most difficult to address. 

The takeaway from this blog is to remind ourselves of what it takes to develop a credible estimate and to redouble our efforts especially on those characteristics which are most often lacking in our cost estimating process. 

About the Blogger:

Bob Young has been with PRICE Systems as an Executive Director since 2004. Before joining PRICE, Bob was a Deputy Assistant Secretary of the Army for Cost and Economics where he was a senior cost advisor to Army leadership on all major Army acquisition, management and operations programs and decisions. He developed Army-wide cost and economic analysis policy. With 34 years of experience, Bob has also held many other Cost & Economic and Financial Management positions within the Army. Bob received several awards during his career recognizing his outstanding service, including the Meritorious Presidential Rank Award in 1996 and 2003, and the Society for Cost Estimating and Analysis (SCEA, now ICEAA) Lifetime Achievement Award in 2001.