GAO COst EstimAtinG And AssEssmEnt GuidE

[Pages:440]GAO

United States Government Accountability Office

Applied Research and Methods

GAO Cost Estimating and Assessment Guide

Best Practices for Developing and Managing Capital Program Costs

March 2009 GAO-09-3SP

Preface

The U.S. Government Accountability Office is responsible for, among other things, assisting the Congress in its oversight of the federal government, including agencies' stewardship of public funds. To use public funds effectively, the government must meet the demands of today's changing world by employing effective management practices and processes, including the measurement of government program performance. In addition, legislators, government officials, and the public want to know whether government programs are achieving their goals and what their costs are. To make those evaluations, reliable cost information is required and federal standards have been issued for the cost accounting that is needed to prepare that information.1 We developed the Cost Guide in order to establish a consistent methodology that is based on best practices and that can be used across the federal government for developing, managing, and evaluating capital program cost estimates.

For the purposes of this guide, a cost estimate is the summation of individual cost elements, using established methods and valid data, to estimate the future costs of a program, based on what is known today.2 The management of a cost estimate involves continually updating the estimate with actual data as they become available, revising the estimate to reflect changes, and analyzing differences between estimated and actual costs--for example, using data from a reliable earned value management (EVM) system.3

The ability to generate reliable cost estimates is a critical function, necessary to support the Office of Management and Budget's (OMB) capital programming process.4 Without this ability, agencies are at risk of experiencing cost overruns, missed deadlines, and performance shortfalls--all recurring problems that our program assessments too often reveal. Furthermore, cost increases often mean that the government

1Federal Accounting Standards Advisory Board, Statement of Federal Financial Accounting Standards No. 4: Managerial Cost Accounting Standards and Concepts (Washington, D.C.: July 1995).

2In the context of the Cost Guide, a program refers to all phases in a capital asset's life cycle--that is, concept analysis, technology definition, requirements planning, acquisition, and operations and maintenance.

3EVM is a project management tool that integrates the technical scope of work with schedule and cost elements for investment planning and control. It compares the value of work accomplished in a given period with the value of the work expected in that period. Differences in expectations are measured in both cost and schedule variances. The Office of Management and Budget (OMB) requires agencies to use EVM in their performance-based management systems for the parts of an investment in which development effort is required or system improvements are under way.

4Office of Management and Budget, Preparation, Submission, and Execution of the Budget, Circular No. A-11 (Washington, D.C.: Executive Office of the President, June 2006); Management of Federal Information Resources, Circular No. A-130 Revised (Washington, D.C.: Executive Office of the President, Nov. 28, 2000); and Capital Programming Guide: Supplement to Circular A-11, Part 7, Preparation, Submission, and Execution of the Budget (Washington, D.C.: Executive Office of the President, June 2006). omb/circulars/index.html.

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Preface

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cannot fund as many programs as intended or deliver them when promised. The methodology outlined in this guide is a compilation of best practices that federal cost estimating organizations and industry use to develop and maintain reliable cost estimates throughout the life of a government acquisition program. By default, the guide will also serve as a guiding principle for our auditors to evaluate the economy, efficiency, and effectiveness of government programs.

The U.S. Government Accountability Office, the Congressional Budget Office (CBO), and others have shown through budget simulations that the nation is facing a large and growing structural deficit in the long term, primarily because the population is aging and health care costs are rising. As Comptroller General David Walker noted, "Continuing on this unsustainable path will gradually erode, if not suddenly damage, our economy, our standard of living and ultimately our national security."5 New budgetary demands and demographic trends will place serious budgetary pressures on federal discretionary spending, as well as on other federal policies and programs, in the coming years.

As resources become scarce, competition for them will increase. It is imperative, therefore, that government acquisition programs deliver as promised, not only because of their value to their users but also because every dollar spent on one program will mean one less available dollar to fund other efforts. To get better results, programs will need higher levels of knowledge when they start and standardized monitoring metrics such as EVM so that better estimates can be made of total program costs at completion.

5GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, GAO-05-325SP (Washington, D.C.: February 2005), p. 1.

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Preface

GAO-09-3SP

Contents

Preface

i

Abbreviations

xv

Introduction

1

The Guide's Case Studies

3

The Cost Guide in Relation to Established Standards

3

The Guide's Readers

3

Acknowledgments

4

Chapter 1

The Characteristics of Credible Cost Estimates and a Reliable Process for Creating Them

5

Basic Characteristics of Credible Cost Estimates

6

A Reliable Process for Developing Credible Cost Estimates

8

Chapter 2 Why Government Programs Need Cost Estimates and the Challenges in Developing Them 15

Cost Estimating Challenges

17

Earned Value Management Challenges

23

Chapter 3

Criteria for Cost Estimating, EVM, and Data Reliability

25

Determining Data Reliability

29

Chapter 4

Cost Analysis Overview

31

Differentiating Cost Analysis and Cost Estimating

31

Main Cost Estimate Categories

31

The Overall Significance of Cost Estimates

36

Cost Estimates in Acquisition

37

The Importance of Cost Estimates in Establishing Budgets

38

Cost Estimates and Affordability

39

Evolutionary Acquisition and Cost Estimation

42

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Chapter 5 The Cost Estimate's Purpose, Scope, and Schedule Purpose Scope Schedule

Chapter 6 The Cost Assessment Team Team Composition and Organization Cost Estimating Team Best Practices Certification and Training for Cost Estimating and EVM Analysis

Chapter 7 Technical Baseline Description Definition and Purpose Process Schedule Contents Key System Characteristics and Performance Parameters

Chapter 8 Work Breakdown Structure Best Practice: Product-Oriented WBS Common WBS Elements WBS Development Standardized WBS WBS and Scheduling WBS and EVM WBS and Risk Management WBS Benefits

Chapter 9 Ground Rules and Assumptions Ground Rules Assumptions Global and Element-Specific Ground Rules and Assumptions Assumptions, Sensitivity, and Risk Analysis

Chapter 10 Data Data Collection Types of Data Sources of Data

iv

Contents

47 47 47 48

51 52 53 54

57 57 58 58 61

65 65 68 71 71 75 75 75 76

79 79 79 80 82

89 89 91 92

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Data Applicability

95

Validating and Analyzing the Data

96

EVM Data Reliability

98

Data Normalization

100

Recurring and Nonrecurring Costs

101

Inflation Adjustments

102

Selecting the Proper Indexes

103

Data Documentation

104

Chapter 11

Developing a Point Estimate

107

Cost Estimating Methods

107

Production Rate Effects on Learning

121

Pulling the Point Estimate Together

122

Chapter 12

Estimating Software Costs

125

Unique Components of Software Estimation

126

Estimating Software Size

127

Estimating Software Development Effort

131

Scheduling Software Development

133

Software Maintenance

134

Parametric Software Estimation

135

Commercial Off-the-Shelf Software

136

Enterprise Resource Planning Software

137

Software Costs Must also Account for Information Technology Infrastructure and Services 139

Unique Components of IT Estimation

139

Chapter 13

Sensitivity Analysis

147

Sensitivity Factors

148

Steps in Performing a Sensitivity Analysis

149

Sensitivity Analysis Benefits and Limitations

150

Chapter 14

Cost Risk and Uncertainty

153

The Difference Between Risk and Uncertainty

153

Point Estimates Alone Are Insufficient for Good Decisions

154

Budgeting to a Realistic Point Estimate

155

Developing a Credible S Curve of Potential Program Costs

159

Risk Management

175

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Chapter 15

Validating the Estimate

179

The Cost Estimating Community's Best Practices for Validating Estimates

179

Chapter 16

Documenting the Estimate

191

Elements of Cost Estimate Documentation

193

Other Considerations

195

Chapter 17

Presenting the Estimate to Management

197

Chapter 18

Managing Program Costs: Planning

199

Linking Cost Estimation as the Foundation for EVM Analysis

199

The Nature and History of EVM

202

Implementing EVM

204

Federal and Industry Guidelines for Implementing EVM

211

The Thirteen Steps in the EVM Process

215

Integrated Baseline Reviews

231

Award Fees

233

Progress and Performance-Based Payments Under Fixed-Price Contracts

234

Validating the EVM System

236

Chapter 19

Managing Program Costs: Execution

243

Validating the Performance Measurement Baseline with an IBR

243

Contract Performance Reports

249

Monthly EVM Analysis

255

Project Future Performance

265

Provide Analysis to Management

269

Continue EVM until the Program Is Complete

269

Chapter 20

Managing Program Costs: Updating

273

Incorporating Authorized Changes into the Performance Measurement Baseline

273

Using EVM System Surveillance to Keep the Performance Measurement Baseline Current 276

Overtarget Baselines and Schedules

284

Update the Program Cost Estimate with Actual Costs

293

Keep Management Updated

294

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Contents

GAO-09-3SP

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