Cost Estimation Models
Chapter 6 with verified
solutions
Purposes of using a life cycle cost model
1. Estimating the total ownership costs (TOC) to the stakeholder, and
assessing the affordability of the program.
2. Reducing and capturing TOC through LCC trade-offs in the systems
engineering and product development process
3.Estimating future expenditures
4. Controlling cost using LCC contractual provisions in procurements
5. Assisting in day-to-day procurement decisions
6. Understanding TOC implications to determine whether to proceed to the
next development phase
Data maturity assumptions needed for LCC analysis
Life cycle cost analysis (LCCA)
an economic evaluation technique that determines the total cost of
owning, operating, and disposing of a system over its lifespan.
Conducting LCC analysis requires understanding of
time value of money (including price escalation, inflation, cost of capital,
depreciation, and taxation) but also to capture the true TOC
When building a model for LCCA, there are two principal types of
uncertainty that LCC model builders are advised to consider
1. Uncertainty regarding the cost-generating activities
2. Uncertainty regarding the expected cost of these activities
Process for developing a LCC model
, Research, development, testing, and evaluation (RDT&E)
Encompasses development activities prior to production. Most difficult
costs to ascertain because the product architecture has not yet been
developed. Maturing technology for production is often impossible to plan
and cost
During concept exploration
70-75% of cost decisions are made
You cannot develop realistic LCC because the
subsystems and components of the system are not fully defined early in
the life cycle
We cannot get a good handle on realistic LCC costs until
late in the systems demonstration phase - once the costs are committed.
Operations and support (O&S) costs play a
secondary role in the trade space used during concept exploration
We focus on development cost because
1. Once we have stakeholder buy-in and the product is under
development, it can be hard to terminate the project
2. We simply do not know how to calculate LCC
3.LCC's are so overwhelming that many programs will never enter into
production if the TOC influences the decision process
Disposal or retirement costs
General costs for disposal, may be more complicated when special cases
are involved. (nuclear energy, funding retirement plans, drugs, asbestos,
etc.)
Billable rates
Determining billable rates is governed by complex rules and regulations
that vary depending on the customer. Depending on whether you are
trying to use cost recovery, market-based billing, value, or your ability to
charge for labor can vary greatly
Chapter 6 with verified
solutions
Purposes of using a life cycle cost model
1. Estimating the total ownership costs (TOC) to the stakeholder, and
assessing the affordability of the program.
2. Reducing and capturing TOC through LCC trade-offs in the systems
engineering and product development process
3.Estimating future expenditures
4. Controlling cost using LCC contractual provisions in procurements
5. Assisting in day-to-day procurement decisions
6. Understanding TOC implications to determine whether to proceed to the
next development phase
Data maturity assumptions needed for LCC analysis
Life cycle cost analysis (LCCA)
an economic evaluation technique that determines the total cost of
owning, operating, and disposing of a system over its lifespan.
Conducting LCC analysis requires understanding of
time value of money (including price escalation, inflation, cost of capital,
depreciation, and taxation) but also to capture the true TOC
When building a model for LCCA, there are two principal types of
uncertainty that LCC model builders are advised to consider
1. Uncertainty regarding the cost-generating activities
2. Uncertainty regarding the expected cost of these activities
Process for developing a LCC model
, Research, development, testing, and evaluation (RDT&E)
Encompasses development activities prior to production. Most difficult
costs to ascertain because the product architecture has not yet been
developed. Maturing technology for production is often impossible to plan
and cost
During concept exploration
70-75% of cost decisions are made
You cannot develop realistic LCC because the
subsystems and components of the system are not fully defined early in
the life cycle
We cannot get a good handle on realistic LCC costs until
late in the systems demonstration phase - once the costs are committed.
Operations and support (O&S) costs play a
secondary role in the trade space used during concept exploration
We focus on development cost because
1. Once we have stakeholder buy-in and the product is under
development, it can be hard to terminate the project
2. We simply do not know how to calculate LCC
3.LCC's are so overwhelming that many programs will never enter into
production if the TOC influences the decision process
Disposal or retirement costs
General costs for disposal, may be more complicated when special cases
are involved. (nuclear energy, funding retirement plans, drugs, asbestos,
etc.)
Billable rates
Determining billable rates is governed by complex rules and regulations
that vary depending on the customer. Depending on whether you are
trying to use cost recovery, market-based billing, value, or your ability to
charge for labor can vary greatly
