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Quality Cost Data Is Key to Making Better Management Decisions
Executives must distinguish between two important (and often confused) types of cost estimating.
Cost estimating may not be as exciting as the new baseball season or the competition on American Idol, but for anyone in management, it is absolutely vital, if somewhat less entertaining. Especially if you’re involved in program management, procurement or finance you rely on high quality cost estimates every day. Why? Because they provide the foundation for informed decision-making.
As such, it’s essential for managers to be able to distinguish between two important, but very different (and often confused) types of cost estimates: life cycle cost estimates (LCCEs) and independent government cost estimates (IGCEs).
Life cycle cost estimates take a comprehensive view of a program. They include all costs, whether incurred by the government or the contractor, including labor, materials, facilities, hardware, software and integration costs, and sometimes even imputed costs. Life cycle cost estimates can be for 30 years or more. For high dollar programs, LCCEs are required by many government agencies at various acquisition milestones. For example, on very large programs the Defense Department requires LCCEs at three milestones before projects can proceed. Given the scope and duration of LCCEs, they are treated as living documents that should be updated annually.
When the Government Accountability Office audits an agency to ensure that cost estimating best practices are followed, they are generally looking for LCCE best practices. The GAO Cost Estimating and Assessment Guide states that “A life-cycle cost estimate provides an exhaustive and structured accounting of all resources and associated cost elements required to develop, produce, deploy, and sustain a particular program . . . An LCCE encompasses all past (or sunk), present, and future costs for every aspect of the program, regardless of funding source.”
To put it another way, when a program manager is responsible for an LCCE, statements like “We don’t pay for that . . . don’t include it” or “That comes out of a different bucket of money” will generally lead us astray. “All costs, regardless of funding source” means that, for example, the costs to train staff on a new enterprise resource planning system are generally included, even if they come from a separate training budget. The costs of facilities used by the program are generally included, even if they come from a separate facilities budget. Most importantly, operating and support costs must be included. Cost estimators often focus only on acquisition-related contracts relevant to a program, but approximately 70 percent of major program costs are incurred in the O&S phase.
Independent government cost estimates, while less commonly performed by cost estimators, are perhaps more useful to program and project managers. They are specific to one project (or contract), and are typically created in the context of source selection. They are not life cycle oriented—they are limited by the scope and timeframe of the project or contract at hand. They include only those costs funded by the project or contract. In the context of source selection, they provide an independent cost baseline against which competing vendor proposals can be evaluated. An important consideration is that vendor cost proposals are generally not to be compared against each other. Instead, each proposal should be (independently) compared to, and evaluated against, the baseline requirements. In the context of cost estimating, the IGCE provides such a baseline.
Many Program Managers request LCCEs when what they really need are IGCEs. They want an independent estimate of how much a particular project, effort, or contract will cost, and wish to use that estimate as the basis for the project budget.
The table below compares and contrasts the two types of estimates, to help decision-makers determine which one(s) they need. Of course, many programs can and so make appropriate use of both. Both estimates, in the end, give us a number. But it’s vitally important that we understand What’s in the number?
LCCE OR IGCE? WHAT’S IN THE NUMBER?
|
ATTRIBUTE |
LCCE |
IGCE |
|
Orientation |
Program |
Project |
|
Number of Contract(s) |
Zero to several thousand |
One |
|
Includes Government Costs? |
Yes |
No |
|
Includes Sunk Costs? |
Yes |
No |
|
Includes Imputed/Opportunity Costs? |
Sometimes |
No |
|
Includes Contractor Costs? |
Yes |
Yes |
|
Sensitive to Contract Type? |
No |
Yes |
|
Informs Source Selection? |
No |
Yes |
|
Required at various Acquisition Milestones? |
Yes |
No |
|
Typical Timeframe |
30+ Years |
5 Years |
|
Who Performs? |
Program Office or Independent Cost Estimating Organization |
Source Selection Team |
Kevin Cincotta is technical director and cost estimating and analysis (CE&A) practice lead for ICF International. A Certified Cost Estimator/Analyst (CCE/A) and Project Management Professional (PMP), he is also Chapter, Regional, and International Training Coordinator for the International Cost Estimating and Analysis Association (ICEAA).
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