Module 2 - Costing Techniques

Question 1

What does the term costing refer to?

Answer 1

The practice of cost estimating

The term to cost means to estimate or determine the dollar value of something.

Question 2

Name the three primary costing techniques used in developing an estimate.

Answer 2

• Analogy
• Parametric
• Build-up

These techniques have different uses and degrees of applicability during a program’s life cycle.

Question 3

The Analogy technique in costing refers to what?

Answer 3

Comparing the cost of an item to be estimated to that of a similar item

Adjustments are often necessary based on various characteristics.

Question 4

What does the Parametric technique use to relate cost?

Answer 4

A mathematical relationship based on historical data

It relates cost to one or more technical, performance, cost, or programmatic parameters.

Question 5

The Build-up technique involves estimating costs at what level?

Answer 5

The lowest definable level

This technique typically applies to Industrial Engineering (IE).

Question 6

What is the purpose of the Expert Opinion technique?

Answer 6

To use subjective information from Subject Matter Experts (SMEs) to corroborate or adjust cost estimates

This technique helps in refining estimates based on expert insights.

Question 7

What does Extrapolation from actuals involve?

Answer 7

Using data from prototypes or complete units to project future costs

It may also use earned value data to develop an Estimate At Completion (EAC).

Question 8

True or false: Cost estimates are free from risk and uncertainty.

Answer 8

FALSE

Any estimate or prediction inherently contains risk and uncertainty.

Question 9

What is precision in cost estimating?

Answer 9

The spread of the range of outcomes that the estimate produces

A narrow range requires greater precision while a wider range requires less.

Question 10

What does accuracy convey in cost estimates?

Answer 10

Whether the range is centered on the true value

Accuracy is more important than precision in cost estimating.

Question 11

What is the Monte Carlo simulation used for in cost estimating?

Answer 11

To summarize uncertainty as a probability distribution

It helps in developing confidence intervals for estimates.

Question 12

What does risk refer to in the context of cost estimating?

Answer 12

The upward shift applied to the cost estimate range to account for systematic low estimates

This adjustment aims to improve the estimate’s accuracy.

Question 13

What is the Analogy technique primarily used for?

Answer 13

To estimate costs by drawing a comparison between the item in question and a similar item

It is often used early in the program life cycle.

Question 14

What are the advantages of using the analogy technique?

Answer 14

• Can be used before detailed program requirements are known
• Easy to use if a sufficient database exists on an analogous system

The stronger the analogy, the easier it is to stand up to review.

Question 15

What are the disadvantages of using the analogy technique?

Answer 15

• Tendency to be too subjective
• Difficult to find sufficient cost, technical, and programmatic data

Subjective adjustments can undermine the credibility of the estimate.

Question 16

What is the point of departure in analogy-based estimates?

Answer 16

The analogous system used for comparison

There is uncertainty in whether the chosen point is truly analogous to the new system.

Question 17

What does the Build-up technique rely on?

Answer 17

The concept that an item is the sum of its constituent parts

This technique aggregates costs from the lowest levels to derive the total cost.

Question 18

What is a Cost Element Structure (CES)?

Answer 18

A framework that relates costing techniques to the Work Breakdown Structure (WBS)

It helps in organizing and analyzing cost data.

Question 19

What is the role of historical data in cost estimating?

Answer 19

To support estimates and improve accuracy

The weight of historical data across similar systems is essential for reliable estimates.

Question 20

What is the relationship between precision and accuracy in cost estimating?

Answer 20

Precision captures the range of outcomes; accuracy indicates closeness to the true value

Both are important, but accuracy is prioritized.

Question 21

What is the cost estimating relationship (CER)?

Answer 21

A statistical relationship between known variables to infer cost values

It is a key component in the parametric technique.

Question 22

What is the parametric costing technique?

Answer 22

A mathematical relationship between certain characteristics and the system’s cost

It uses independent variables known as cost drivers, developed from data on similar programs.

Question 23

List the advantages of the parametric technique.

Answer 23

• Versatility
• Quick adjustments to cost estimates
• Capability for sensitivity analysis
• Statistical validity measures

Parametric estimates can be developed at any level when there is enough data.

Question 24

What is uncertainty in the context of cost estimation?

Answer 24

The range of possible outcomes of the estimate

It includes uncertainty in both the point of departure and the slope of the adjustment.

Question 25

Fill in the blank: The **point of departure** in an analogy estimate is the __________.

Answer 25

analogous system ## Footnote There is uncertainty in whether the chosen point of departure is truly analogous to the new system.

Question 26

What are some **risks** associated with estimates based on an analogy?

Answer 26

* New technologies * Economic conditions (e.g., inflation) * Labor environment risks ## Footnote These risks may not have been captured in the costs associated with the old system.

Question 27

What does **CER** stand for in cost estimation?

Answer 27

Cost Estimating Relationship ## Footnote CERs include rates, factors, and ratios used for parametric estimating.

Question 28

True or false: A **parametric relationship** can only be a complex regression equation.

Answer 28

FALSE ## Footnote A parametric relationship can range from a simple rule of thumb to a complex regression equation.

Question 29

What is the **build-up method** in cost estimation?

Answer 29

A method that builds estimates for higher-level cost elements by summing detailed estimates for lower-level elements ## Footnote It is characterized by estimating at the lowest definable level where data exists.

Question 30

List the elements that can be used to develop estimates at lower levels using the **build-up method**.

Answer 30

* Standards development * Variance factors * Labor hours multiplied by labor rates * Detailed parts list or material costs ## Footnote Standards reflect optimal production environments based on time and motion studies.

Question 31

What is the **standard error** in parametric estimating?

Answer 31

Estimate of the standard deviation of the error in the parametric estimating method ## Footnote It measures the difference between estimated values and true values.

Question 32

Fill in the blank: A **Prediction Interval (PI)** is an interval estimate of a __________.

Answer 32

variable ## Footnote It predicts the distribution around the estimate when the true value of the regression line is unknown.

Question 33

What is the significance of **data normalization** in parametric estimating?

Answer 33

Ensures that the data used in the CER is consistent and robust ## Footnote It is crucial to avoid the black box syndrome in cost estimation.

Question 34

What is an example of a **cost driver** in parametric estimating?

Answer 34

Weight, thrust, or power ## Footnote Cost drivers are independent variables that influence the system's cost.

Question 35

What does the **build-up method** rely on for developing estimates?

Answer 35

Detailed information at a low level about an item ## Footnote It is applicable in a touch labor environment where the manufacturing process is well known.

Question 36

What is the **role of variance factors** in the build-up method?

Answer 36

Capture the company’s historical performance against the standard ## Footnote They are calculated based on measures of actual experience compared to the standard.

Question 37

True or false: The parametric technique can only be used for detailed contract negotiations.

Answer 37

FALSE ## Footnote It can be used in a wide variety of situations, including early planning estimates.

Question 38

What is the **build-up technique** in cost estimating?

Answer 38

A method that develops estimates at a low level, showing exactly what the estimate covers ## Footnote It helps determine if anything was overlooked and provides a detailed depiction of the production process.

Question 39

What are the **advantages** of the build-up technique?

Answer 39

* Shows detailed coverage of the estimate * Accurate depiction of the production process * Variance factors based on verifiable actual cost data ## Footnote It is unique to a specific program and manufacturer.

Question 40

What is a **disadvantage** of the build-up technique?

Answer 40

* Expensive to implement * Requires extensive data collection * Difficult to anticipate all actual costs ## Footnote Small errors at the touch labor level can lead to larger errors.

Question 41

In the build-up technique example for the **Joint Strike Fighter's** inlet nacelle, what is the estimated touch labor hours?

Answer 41

2,400 hours ## Footnote This is calculated using the standard 2,000 hours times the 1.2 variance factor.

Question 42

What does **extrapolation from actuals** involve?

Answer 42

Using actual costs from past or current items to predict future costs ## Footnote Variants include averages, learning curves, and Estimate at Completion (EAC).

Question 43

What is the **Delphi technique** in expert opinion estimation?

Answer 43

A method where experts provide answers anonymously to avoid influence ## Footnote Results are summarized and coordinated to converge on a single number or tighter range.

Question 44

What is the purpose of developing an **estimate**?

Answer 44

* Milestone decisions * Budget development * ROM estimates * Alternatives comparisons * Proposal development or evaluation ## Footnote Different types of estimates require varying levels of detail.

Question 45

What are the two main ways to structure a **cost estimate**?

Answer 45

* Top-down * Bottom-up ## Footnote Top-down is generally associated with parametric or analogy, while bottom-up involves detailed estimates for each element.

Question 46

What is a **Cost Element Structure (CES)**?

Answer 46

A hierarchical tree structure for breaking down estimates into manageable pieces ## Footnote It defines what is included in each element of the estimate.

Question 47

What should be included in the **documentation** of an estimate?

Answer 47

* Ground rules * Assumptions * Data * Calculations ## Footnote Documentation should allow another analyst to recreate the work based solely on it.

Question 48

What is the **Independent Cost Estimate (ICE)**?

Answer 48

A validation method that reflects increasing levels of detail and persuasiveness in corroborating a cost estimate ## Footnote It is more detailed than a cross-check.

Question 49

True or false: The build-up technique is unique to a specific program and manufacturer.

Answer 49

TRUE ## Footnote This uniqueness allows for tailored estimates based on specific standards.

Question 50

What is the **risk** associated with estimates developed using the build-up technique?

Answer 50

* Potential omissions * Historical growth of design specifications * Difficulty integrating lower level estimates ## Footnote These factors can lead to inaccuracies in the final estimate.

Question 51

What is the **purpose** of a cross-check in estimating?

Answer 51

To test the reasonableness of an estimate using another method ## Footnote It should yield similar results, at least in the same order of magnitude.

Question 52

What is the **top-down** approach in cost estimating?

Answer 52

An approach that uses known top-level requirements to develop an estimate for an entire system ## Footnote It is generally associated with parametric or analogy techniques.

Question 53

What is the **bottom-up** approach in cost estimating?

Answer 53

An approach that develops discrete estimates for each element and rolls them up for the entire system ## Footnote It is most closely associated with the build-up technique.

Question 54

What are **Below-The-Line (BTL) factors** also known as?

Answer 54

Cost-on-cost CERs ## Footnote BTL factors use the cost of another element to predict cost based on a simple multiplicative relationship.

Question 55

True or false: BTL factors are typically expressed in units.

Answer 55

FALSE ## Footnote BTL factors have no units and are often expressed as a percentage.

Question 56

What are BTL factors typically used to model?

Answer 56

* Support functions * Systems engineering * Integration and test * Program management ## Footnote Collectively referred to as SEITPM.

Question 57

What should BTL factors be based on?

Answer 57

* Historical information * Statistical methods ## Footnote BTL factors should vary based on the system or program being estimated.

Question 58

What is the purpose of modeling the risk associated with costs derived from BTL factors?

Answer 58

Using functional correlation in risk analysis ## Footnote The cost derived from a BTL factor has its own risk and uncertainty that must be taken into account.

Question 59

What is the significance of **schedule estimating** in project management?

Answer 59

Helps assess whether a program’s baseline schedule is realistic ## Footnote This affects both time-phasing of the cost estimate and the total cost for time-dependent elements.

Question 60

What technique uses historical information from a similar project to estimate a new project's schedule?

Answer 60

Analogy ## Footnote This method scales historical information to create the estimate.

Question 61

What does the **Schedule Estimating Relationship (SER)** involve?

Answer 61

Developing a statistical relationship between the schedule and the schedule-driving parameter ## Footnote This method uses historical information from multiple projects.

Question 62

What is the **build-up technique** in schedule estimating?

Answer 62

Summing the schedules of lower-level work tasks ## Footnote This method assumes valid basis for the durations of lower-level elements.

Question 63

What should be understood when using the build-up technique for schedule estimates?

Answer 63

The critical path of the schedule ## Footnote Understanding how it affects the estimate is crucial.

Question 64

What are **O&S costs** defined as?

Answer 64

All costs associated with operating, maintaining, and supporting a system ## Footnote O&S costs are a large portion of the total life cycle cost for a system.

Question 65

What percentage of total life cycle cost do O&S costs typically represent for certain systems?

Answer 65

70-80% ## Footnote O&S costs are often excluded or overlooked in the decision-making process.

Question 66

List some components included in **O&S costs**.

Answer 66

* Personnel * Consumable and repairable materials * Organizational, intermediate, and depot maintenance * Facilities * Sustainment ## Footnote These costs are necessary for Life Cycle Cost Estimates (LCCEs).

Question 67

What is the purpose of the **Operating and Support Cost Estimating Guide** published by OSD CAPE?

Answer 67

To provide guidance on estimating O&S costs ## Footnote The guide can be found at: https://www.cape.osd.mil/files/os_guide_v9_march_2014.pdf.

Question 68

How can an analogy be used in estimating **O&S costs**?

Answer 68

By scaling costs based on historical data from analogous systems ## Footnote For example, using Source Lines of Code (SLOC) to estimate software maintenance costs.

Question 69

What is a common approach to estimating software maintenance costs?

Answer 69

Determining the amount of code maintainable by each maintainer ## Footnote This ratio is based on historical data from comparable programs.

Question 70

What does the **build-up cost estimating technique** involve?

Answer 70

Rolling-up the costs of lower-level estimates ## Footnote Each lower-level estimate should have a strong basis derived from standard relationships and reliability data.