Cost estimation: more than an analytical tool

Abstract

The U.S. government has guided the defense industry into taking a more commercial approach in many areas of the acquisition process. From capability based system requirements documents to contract management approach, contractors have been placed in a role of greater responsibility with less oversight. With this added responsibility, cost estimation in all phases of the development and production becomes critically important, as the contractor assumes more risk in advanced system procurement with unexpected challenges. Unfortunately the 'Holy Grail' of analytical cost estimation and improvements to methodologies is not the key to solving program office budget overruns, it is only an estimating tool. Cost estimation faces many challenges including: access to historical data, validity and uncertainty of data, limited time to develop estimates and immaturity of requirements. These challenges are especially exacerbated for space systems. Military and commercial systems alike face these challenges, but methodology is driven by different factors. For commercial estimations, a sound business approach is the driving factor to produce an estimate that is not only stay within budget, but also produce a competitive risk-adjusted return. Military estimations are mostly concerned with allowing for enough error to stay within the boundaries of fiscally constrained resources while being flexible enough to allow for iterations of design and requirements. This paper intends to explore the different root causes of cost estimation error in government acquisitions, focusing on space programs: including the history of cost estimations, drivers of error and ways to close the gap between budgeted and actual costs.