Considering the Costs

Summary

The following learning objectives are covered in this unit:

• Given an Initial Capabilities Document (ICD) and a summary Analysis of

Alternatives,(AoA), select an appropriate concept, from the perspective of the
system developer, to meet the user's needs.
• Given a cost breakdown, determine Development Cost, Flyaway Cost, Weapon
System Cost, Procurement Cost, Acquisition Cost, and Life Cycle Cost.
• Select an appropriate method to estimate the cost of an acquisition program.
• Select an appropriate approach (e.g., Analogy, Parametric, Top-Down,
Engineering (Bottoms-Up), Actual, Delphi) to estimate the cost and schedule for a
software-intensive system.
• Relate the typical distribution of software lifecycle costs to the planning of an
acquisition program.
• Recognize the impact and interrelationship of logistics support and lifecycle cost.

1. An Analysis of Alternatives (AoA) is used to help select the best, most cost-effective
way to meet a capability need. An AoA:

• Is a study of operational effectiveness and life-cycle cost

• Is mandatory for all ACAT I and IA programs
• Provides objective feedback on cost and effectiveness of alternatives
• Is based on information from the Initial Capabilities Document (ICD), including
o Functional areas
o Range of military operations
o Time
o Key attributes defined by measures of effectiveness

The AoA can be used to justify starting, stopping or continuing an acquisition program
based on cost, performance and schedule factors.

2. Cost Estimation- An analysis of costs of hardware, software or services derived from

historical cost, performance, schedule and technical data of similar items or services and
performance, schedule, and technical data for the new system. Methods used to prepare
cost estimates include:

• Analogy A new system or component is compared with a similar, existing system

or component. Generally this type of analysis can be done quickly and
inexpensively. Analogy estimates are commonly used early in the acquisition
process, but are subjective and less precise than other methods.
• Parametric - Statistical analysis of a database of similar systems is used to
develop a relationship between cost and one or more performance or design
characteristics of the systems. The resulting Cost Estimating Relationship can
 then be used to estimate the cost of a new system. This method is inexpensive and
used relatively early in the acquisition process. The cost estimating relationship is
very useful in analyzing "what-if" scenarios, but it is only as valid as the
statistical correlation and the database used to create it.
• Engineering (Bottoms-Up) - Detailed analysis of all of the materials, parts and
labor required to produce a system is performed from the bottom up. This analysis
is very accurate and is more objective than other methods, but it can be expensive
and very time-consuming. Engineering estimates are typically used for elements
identified as cost drivers in the later stages of system development.
• Actual Costs - Costs of future efforts are extrapolated based on the previous cost
of identical or nearly identical systems. This method also refers to the use of
actual cost data from completed portions of the program to update the program's
life cycle cost estimate.

Methods used to prepare cost estimates for software development include the analogy,
parametric, and the bottom-up methods above, plus:

• Top-Down - a systems-level view of the project

• Delphi - a team of experts combine different approaches to arrive at a collective
judgment.

Generally, a life cycle cost estimate will use a combination of different methods. The
type of estimating method that is used on each of the cost elements that comprise the
estimate should be based on the type and accuracy of available data, the stage of the
acquisition life cycle, and the relative importance of the cost element. Each of these
methods can be used independently or in combination.

3. Cost Terms and Definitions are provided in DoD 5000.4-M, and include seven types
of acquisition-based costs:

• Development Cost Cost of all research and development-related activities that are
necessary to design and test the system. Funded with RDT&E appropriation.
• Flyaway Cost (a.k.a. rollaway)Cost of producing prime mission equipment such
as ships or tanks. Funded with procurement appropriations
• Weapon System Cost Sum of flyaway cost and cost of associated support
equipment and services (including initial training). Also funded by procurement
appropriations.
• Procurement Cost Sum of weapon system cost and cost of the system's initial
spares. Funded with procurement appropriations.
• Program Acquisition Cost All costs associated with developing, procuring and
housing a weapon system. Procurement, RDT&E, and MILCON appropriations
are used to fund this cost.
• Operating and Support All costs for personnel, equipment, supplies, software,
and services associated with operating, maintaining, supplying and providing
ongoing training for any DoD system. Most O&S costs are funded with the O&M
 and MILPERS appropriations, although procurement, RDT&E and MILCON
appropriations may also be used when appropriate.
• Life-cycle Cost Total cost of an acquisition program from beginning to end,
including program acquisition, operating and support, and disposal costs.

All of these costs are funded by specific appropriations, generally referred to as "colors of
money." As you recall from ACQ-101, the appropriations used by DoD generally fall
under five categories:

1. Research, Development, Test and Evaluation (RDT&E)

2. Procurement
3. Operations and Maintenance (O&M)
4. Military Construction (MILCON)
5. Military Personnel (MILPERS)

4. Distribution of Life Cycle Cost. Generally, costs related to the Operation and Support
of a system once it is fielded represent the largest proportion of its life cycle cost,
generally between 70-80%, although the specific percentage varies by system type and
service life. This holds true for software as well as hardware. The largest distribution of
software costs will be late in the program's cycle. The primary costs of software are
related to upgrades and the maintenance that it takes to keep the software running.