Cost Risk as a Discriminator in Trade Studies

Abstract

Abstract Prior to formal program initiation, analysts typically undertake trade studies to investigate which of several candidate architectures or designs can best provide a desired capability at minimum cost. The various candidates, however, typically differ significantly in risk and uncertainty as well as in cost, but members of the government or industry trade-study team do not have the time and the candidate solutions usually aren't sufficiently detailed at this stage to allow a thorough risk analysis to be conducted. Yet, those differences in risk and uncertainty, as well as in cost, should be taken into account to the extent possible during the trade-study decision process. Because timeliness and simplicity are key requirements of analyses undertaken in support of trade studies, what usually happens is that a “point” cost estimate, or perhaps a 50%-confidence estimate, is established for each candidate, and the go-ahead decision is made based on that estimate. A nagging question remains: “What if Candidate A, the lower-cost option based on those estimates, faces risk issues that make its 80th-percentile cost higher than that of Candidate B?” In other words, Candidate B would be the lower-cost option if the cost comparison were made at the 80% confidence level. This situation is classic, where the decision maker must choose between a low-cost, high-risk option and a high-cost, low-risk option. This article offers a methodology that allows the program manager to take account of all risk scenarios by making use of all cost percentiles simultaneously, namely the entire cost probability distribution of each candidate not simply the point estimate or the 80% confidence cost. As it turns out, the expression of system cost in terms of a lognormal or simulation-generated probability distribution makes it possible to estimate the probability that each candidate will turn out to be the least costly of all the options, and probabilities of that kind are the basis on which an informed decision can be made.