by Grady Noll
| January 16, 2018
Simply Estimating Air Force One
Do you remember a story from late 2016 that dealt with cost estimation, Air Force One and then President-Elect Donald Trump? At the time it appeared in Americans’ Twitter feeds, the tweet below caused a lot more confusion than it should have. Situations like this always pique the interest of PRICE staff because we understand how cost estimation affects the success of projects like the new Air Force One and why it’s important to use accurate and robust estimating software. Let’s talk about the repercussions of this controversial message and clear up misconceptions you might still have about project cost estimation.
The Cost Estimating Basics
First let’s cover the basics for those who don’t estimate cost for a living. All engineering projects carry costs that can be divided into three different phases. With the development of the Apple iPhone 7 as an example, you can see how each of the three phases are defined by certain actions taken throughout the lifespan of the project.
1. Research and Development (RDT&E)
a. Sketching out initial designs for the new iPhone
b. Testing out potentially new materials and components
c. Creating prototypes to ensure the design is sufficient for commercial use
a. Producing the parts and assembling the iPhone to send to distributors
3. Operations and Maintenance (O&M)
a. Buyer-determined maintenance and repairs needed until the next upgrade
Apple spent around $10.5 billion1 on their Research and Development phase alone and component breakdowns show that it took Apple $220.80 in actual material cost2 to make an iPhone 7. But as all cost estimators know, Apple doesn’t just charge customers for the material cost. Apple also has to charge for labor and other various fees for administrative costs and profit in order to keep them in the black and amortize the RDT&E cost with reimbursements from its large consumer base. This made the selling price of the iPhone 7 $649 in FY2016.2
Calculating Air Force One Costs
Due to the potential negative repercussions that could have been placed on Boeing, when Trump’s tweet surfaced, some news organizations initially invalidated the statement by deferring to a quoted $170 million contract that Boeing received for Air Force One. Let’s consider what we know about cost estimating and the facts given to us about the Air Force One project and its complicated funding situation:
Estimating with Real Boeing Numbers
Keeping all of the information above in mind, we can start our estimate by looking at the Boeing website. According to their product price listings, all 747-8 airliners cost around $390 million in FY2017. Unless Boeing changes its pricing strategy drastically or starts selling a ridiculous amount for a relatively low-demand product (not that many customers can house and maintain jumbo jets), this cost will likely increase if it changes at all. But before we do anything to change or upgrade the planes, depending on when building begins, we’ve already spent about $800 million – over four times the amount some news outlets reported in 2016.
The only way that the $170 million reference makes any sense at all is if it refers to part of the RDT&E costs, which there would be a lot of. Remember, Air Force One has to be a flying fortress. It must withstand and defend against enemy missile fire, jam enemy radar, have an avionics suite that will continue to function after electromagnetic pulses and possess a bunch of other bells and whistles. The Air Force has estimated they will spend $2.9 billion on RDT&E alone. This brings our current estimate to around $3.7 billion in FY2016.
Comparing Against a Credible Source
Now we should verify our estimate by comparing it against credible sources. A 2016 GAO report actually shows one of the most widely used estimates for the project. Under the official name of “Presidential Aircraft Recapitalization,” the current estimate for Air Force One is about $3.2 billion in FY2016. This is around what we would expect. However, the GAO has only $282 million allocated to the procurement of the two aircraft, which is strange considering we already established that the base commercial planes are $800 million. The budget also only extends from 2010 to 2020, yet the planes will not be ready until 2024, meaning required extra funding (cost overruns) is possible. Unless part of the planes’ procurement is budgeted as RDT&E, it’s safe to consider this estimate somewhat conservative in nature.
Taking all of this into account, we’ll continue using our $3.7 billion in FY2016 estimate while acknowledging the possibility of overruns. This makes Trump’s estimate appear not only legitimate, but fairly probable. It is for this reason that the Air Force is currently trying to procure existing 747-8s that were originally made for a now bankrupt Russian airline; without too many viable customers, Boeing has had difficulty selling these two aircraft. The O&M cost on any product is poison to a seller, so selling at a lower profit margin or even at cost could now be advantageous. If we assume 30% in additional fees, the rule of thumb for military projects, now our estimate will look like this:
$3.7 billion - $100 million per plane = $3.5 billion in FY2016
Using Expert Cost Estimating Software
Using PRICE Systems’ TruePlanning® 2016 software, I was able to evaluate Trump’s estimate within an hour of research. If you’re keeping up with all things PRICE, then you’re probably aware that the team has been working on cost estimating templates for nearly every type of military technology in existence, which have shown an average of 10% error on procurement cost on more than 200 projects thus far. An estimate using PRICE templates indicated a range of $3.096 to $4.072 billion in FY2016 for the program cost, depending on the profit and administrative fees charged. This means that our third step in calculating Air Force One costs through TruePlanning® aligned with the GAO, Trump’s claim, and my own sanity check.
The Big Takeaways from Trump’s Tweet
The controversy surrounding Trump’s tweet gives us a lot to think about when it comes to fact-checking and cost estimating. Making rough order of magnitude (ROM) estimates for military projects isn’t conceptually difficult; with straightforward math and economics, we’re able to go through the numbers ourselves, using do-it-yourself cost estimation to verify claims like the one Trump made in his tweet. We also took advantage of expert software and came to a similar conclusion about the merits of the $4 billion.
Still, for cost estimating professionals like myself, it was disappointing to see so few expert fact-checkers and enthusiasts bringing much-needed context to the claim, showing the public why the initial estimate wasn’t all that crazy. When we have access to the right tools and resources, we can make a real effort in our everyday lives to fact-check our news sources and sometimes even the misguided opinions we form for ourselves. As we work on our templates, the PRICE team will always make an effort to be everyday fact-checkers.
Check back on the PRICE blog when the next big military spending controversy happens – we’ll be sure to add our two cents and our expert opinions when it deals with what we love: cost estimating!
Are you interested in cost estimating solutions for your business? Contact PRICE Systems today for information or help getting started.
1. Apple's CFO explains the company's $10 billion R&D budget, Business Insider