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Breakout Session # 806 Douglas Zwiselsberger, Senior Associate, Booz Allen Hamilton Crystal Washington, Senior Consultan

Applying Best Practices Cost Estimation & Cost Analysis. Breakout Session # 806 Douglas Zwiselsberger, Senior Associate, Booz Allen Hamilton Crystal Washington, Senior Consultant, Booz Allen Hamilton Keith Fawcett, Senior Consultant, Booz Allen Hamilton April 24, 2007 3:20 – 4:20PM.

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Breakout Session # 806 Douglas Zwiselsberger, Senior Associate, Booz Allen Hamilton Crystal Washington, Senior Consultan

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  1. Applying Best PracticesCost Estimation & Cost Analysis Breakout Session # 806 Douglas Zwiselsberger, Senior Associate, Booz Allen Hamilton Crystal Washington, Senior Consultant, Booz Allen Hamilton Keith Fawcett, Senior Consultant, Booz Allen Hamilton April 24, 2007 3:20 – 4:20PM

  2. Agenda • Objectives • IGCE Best Practices and Formation • Cost Analysis Best Practices and Formation • Summary • Questions/Contact Information

  3. Objectives Discuss why the IGCE is a crucial tool for the Government to receive best value. Identify industry best practices for cost estimating and proposal cost analysis. Identify how to develop an accurate IGCE and conduct a comprehensive cost analysis.

  4. Independent Government Cost Estimate (IGCE) Overview • An IGCE is the Government’s estimated cost/price of the proposed acquisition. • Its purposes are: • To serve as a basis to reserve funds for the contract as part of the acquisition planning; • To serve as a basis for comparing costs or prices proposed by offerors; and • To serve as an objective basis for determining price reasonableness in cases in which one bidder or offeror responds to a solicitation.

  5. A well constructed and documented IGCE helps to ensure that the Government receives the services requested at a fair and reasonable cost and that any negotiations involved are kept to a minimum. IGCE Guiding Principles Depending on the requirement, IGCEs can be very simple or exceedingly complex.

  6. IGCE Best Practices • Form a Team Early • Provide functional and technical expertise. • Excellent source of historical data and projections. • Validates the IGCE. • Use a Structured Approach • Provides a baseline for acquisition decisions. • Ensures and verifies that resource requirements are included in the budget, information is accurate, defensible, and credible.

  7. IGCE Best Practices (cont.) • Fully Document Assumptions and Basis of Estimates • Alleviates poor cost estimates and misunderstandings between the estimator and other members of the acquisition team. • Captures how the estimate was built. • Understand and Apply the IGCE Results • Significant differences between the offeror’s price and the IGCE may be a “Red Flag.” • Gross disparity may prompt the Government to take further actions.

  8. Key Questions in Developing an IGCE

  9. IGCE Formation STEP 1 STEP 2 STEP 3 Define a Cost Element Structure Select Cost Estimating Techniques Understand the Program Requirements Step 7: Documentation of all Steps Sequentially STEP 6 STEP 5 STEP 4 Develop a Sensitivity and Risk Analysis Develop the IGCE Model and Populate with Data Identify and Collect Cost Data

  10. Project Expectations Determine Deliverables ID Key Parameters Define Baseline Program STEP 1 Understand the Program Requirements • Define the baseline program/system to be addressed. • Identify key technical and programmatic parameters. • Determine deliverables. • Project expectations. • Forms the foundation for the estimate. • Ensures proper scope for the estimate.

  11. Cost Elements may include: OperationsBuilding maintenanceMission personnelEnergy consumptionRepair partsConsumable materialsRepair trainingOverhaul systemReworkMachine maintenanceLogistics supportEngineering supportSoftware updatesLabor…And many others STEP 2 Define a Cost Element Structure • Create Cost Element Structure. • Consider compatibility with cost estimating models. • Enable aggregation of cost elements into major components and sub-components. • Cost Element Structure Dictionary formed. • Formal structure/format for identifying and estimating costs generated.

  12. STEP 3 Select Cost Estimating Techniques • Methodologies should be specific to each cost element. • A wide range of cost estimating methodologies may be applied to any one cost element. • Possible methodologies include: comparative, analogous, parametric, statistical, expert opinion, extrapolation, and historical. Example of the Parametric Methodology • Primary methodologies for each element of the Cost Element Structure are determined. • Alternative methodologies identified for selected elements.

  13. Sample Data Form Identify and Collect Cost Data STEP 4 • Cost estimating methodologies and data availability examined concurrently. • Data collection processes may involve multiple methodologies depending upon the data characteristics: • Examples include: surveys, targeted research, statistics gathering, compiling technical data, interviews, focus groups, reviews of historical documentation, and meetings • Robust data is available for populating cost estimating technique selected. • Duplication of effort is avoided. • Data is placed into logical and understandable categories.

  14. Develop Model and Calculate Costs STEP 5 PHASE 1: INPUT PHASE 2: COMPUTATIONAL ENGINE PHASE 3: OUTPUT The Model brings together all of the pieces from the previous steps. ESTIMATION TECHNIQUE Empirical Comparative Parametric Statistical IGCE: robust and encapsulates the entire cost structure Roundtable Extrapolation Expert Opinion Historical

  15. Cost Elements Variables Distribution of Outcomes Incorporate Sensitivity and Risk Analyses STEP 6 • A robust Sensitivity Analysis will demonstrate how variables may shift. • The results of the Sensitivity Analysis provide guidance with regards to how much cost risk is associated with the project. • Possible variance for cost elements are identified and documented. • The collective risk associated with all variables is identified and documented.

  16. Document Integration STEP 7 Possible Elements of Documentation: 1.1 Program Requirements 1.1.1 Definition 1.1.2 Technical Parameters 1.1.3 Project Expectations 1.2 Cost Elements 1.2.1 Compatibility with Possible Models 1.2.2 Composition of Cost Elements 1.3 Cost Estimating Technique 1.3.1 Type Utilized for Each Element 1.3.2 Reason for Choice of Technique 1.4.1 Data Sources 1.4.2 Data Validation 1.4.3 Data Type • Begin developing documentation at onset. • Detailed basis of report. • High level briefing. • All items are documented and clearly delineate the parameters of the estimate. • Documentation is available for all users of the IGCE and can be used for high level briefings or detailed reports. • All steps are brought together.

  17. Cost Analysis Overview • Cost analysis is the review and evaluation of the separate cost elements and profit in a proposal. • It is one of the major considerations in acquisition planning. • Costs considered should be both the initial acquisition cost of the product or service and the operating or use costs. • The amount to be paid to a contractor may not be the only cost of the products or services to the Government. It is important for the Government to consider more than the contract price in determining what award is most advantageous.

  18. Cost Analysis Guiding Principles • FAR 15.404-1(c)(1). Review and evaluation of the separate cost elements and profit/fee in an offeror's or contractor's proposal (including cost or pricing data or information other than cost or pricing data), and application of judgment. Used to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency. • FAR 15.404-1(a)(3). Use cost analysis to evaluate the reasonableness of cost elements when cost or pricing data are required.

  19. Cost Analysis Best Practices • Form a Team of Technical Experts Early • Provide functional and technical expertise (accountants, auditors, price/cost analysts, negotiators, engineers, and production specialists, as well as by the contracting officer). • Verify, evaluate, compare and review cost/price data. • Select Appropriate Cost Analysis Technique • Decision on which technique to use is dependant upon the nuances of the individual procurement. • More than one technique can be used in an integrated approach.

  20. Types of Cost Analysis • There are several different analysis techniques available. The appropriate methodology depends on the purpose of the analysis and the availability of the data. • Life-Cycle Cost: Best used with technology-based systems where operational cost is as high as the original acquisition cost. • Design-to-Cost: Best used when designing/developing a new product. • Should-Cost Analysis: Best used to promote improvements in the contractor’s economy and efficiency to reduce the cost to the Government.

  21. Life-Cycle Cost Analysis • Contains information on how life-cycle cost logic will be used in the procurement. • DoD requires that life-cycle costs be considered in all acquisitions of systems and equipment. • Focuses on lowering the total cost of ownership for the total period that the product will be used by the Government. • Considers operating, maintenance, and other costs of ownership as well as acquisition price, in the award of contract. Used when the cost of operating and maintaining the acquisition product represents a significant percentage of the original acquisition.

  22. Design-to-Cost Analysis • Used when the acquisition is for the designated development of a new product. • Often used in conjunction with life-cycle analysis. • Establishes costs elements as management goals to achieve balance between life-cycle costs, acceptable performance, and schedule. • The goal is to focus on the need to design an item that can be procured and used in the future at an affordable cost. Enhances the Government’s ability to focus the contractor on designing an item that can be used in the future at an affordable cost.

  23. Should-Cost Analysis • A specialized form of cost analysis used primarily on major procurements such as weapons systems. • Evaluates the economy and efficiency of the contractor’s existing workforce, methods, materials, facilities, operating systems, and management. • Different from conventional cost analysis because instead of challenging the Offeror’s projections, it challenges the necessity for the Offeror to incur proposed costs altogether. • Allows the Government to develop realistic objectives for negotiations. Encourages short and long-term improvements in order to reduce overall cost to the Government.

  24. Cost Analysis Formation Verify – Step 1 Evaluate – Step 2 Evaluate the effect of the offeror’s current practices on future costs Compare costs proposed by the offeror Verify cost Evaluate cost elements Comply – Step 3 Verify compliance with the FAR Determine data robustness Analyze the results

  25. Step 1 Verify – Step 1 Cost Analysis Formation • Verification of cost or pricing data and evaluation of cost elements. • Evaluate cost elements, including: • The necessity for and reasonableness of proposed costs, including allowances for contingencies; • Projections of the offeror's cost trends, on the basis of current and historical cost or pricing data or information other than cost or pricing data; • A technical appraisal of the estimated labor, material, tooling, and facilities requirements, and scrap and spoilage factors; and • The application of audited or negotiated indirect cost rates, labor rates, cost of money factors, and other factors. Step 1 – Ensures cost data is reasonable and accurate based on the requirement.

  26. Step 2 Evaluate – Step 2 Cost Analysis Formation • Evaluate the effect of the offeror’s current practices on future costs. • Compare costs proposed by the offeror for individual cost elements to the IGCE. Step 2 - Ensures that the effects of inefficient or uneconomical past practices are not projected into the future.

  27. Evaluate – Step 3 Cost Analysis Formation Step 3 • Verify that the offeror's cost submissions are in accordance with the contract cost principles and procedures in FAR Part 31 and any applicable Cost Accounting Standards Board Cost Accounting Standards. • Determine whether any cost or pricing data necessary to make the contractor's proposal accurate, complete, and current have not been either submitted or identified in writing by the contractor. • Analyze the results of any make-or-buy program review, in evaluating subcontract costs. Step 3 - Ensures regulatory compliance, cost reasonableness and cost realism.

  28. Summary • Requirements determine the simplicity or complexity of the IGCE and Cost Analysis process. • There are various methodologies for developing IGCEs and conducting Cost Analyses. • Often times, utilizing more than one Cost Analysis technique in an integrated approach will be necessary for a successful outcome. • It is important to select the appropriate methodology in order for the Government to obtain a fair and reasonable cost. • The success or failure of your procurement depends on the validity of your IGCE and Cost Analysis.

  29. Questions For additional information, please contact any of the following personnel: Douglas Zwiselsberger Senior Associate Crystal Washington Senior Consultant Booz Allen Hamilton Three Skyline Place 5201 Leesburg Pike Falls Church, VA 22041 Tel 703 824 3783 Zwiselsberger_douglas@bah.com Booz Allen Hamilton Three Skyline Place 5201 Leesburg Pike Falls Church, VA 22041 Tel 703 845 7109 Washington_crystal@bah.com Keith Fawcett Senior Consultant Booz Allen Hamilton Three Skyline Place 5201 Leesburg Pike Falls Church, VA 22041 Tel 703 845 7144 Fawcett_keith@bah.com

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