Cost Estimating is the process of developing a cost estimate. Cost estimating involves collecting and analyzing historical data and applying quantitative models, techniques, tools, and databases to predict a program’s future cost. More simply, cost estimating combines science and art to predict the future cost of something based on known historical data that are adjusted to reflect new materials, technology, software languages, and development teams. A cost estimate is the product of cost estimating.

Definition: Cost estimating is the examination and study of anticipated expenses, typically determined from comparing the price, performance, schedule, and technical information of comparable goods and services in the past.

A cost estimate is necessary for government acquisition programs for many reasons: to support decisions about funding one program over another, to develop annual budget requests, to evaluate resource requirements at key decision points, and to develop performance measurement baselines. Moreover, having a realistic estimate of projected costs makes for effective resource allocation, and it increases the probability of a program’s success.

Cost Estimating Categories

There are primarily two (2) main cost estimate categories:

1. Life-Cycle Cost Estimate (LCCE) that may include Independent Cost Estimate (ICE), independent cost assessments, or Total Ownership Costs (TOC), and
2. Business Case Analysis (BCA) that may include an Analysis of Alternatives (AoA) or economic analyses.

Cost Estimating Topics

The following topics should be known by Program Personnel and Program Managers (PM) about Cost Estimating. They  include:

• Program Office Estimate (POE)
• Independent Cost Estimate (ICE)
• Cost Analysis Requirements Description (CARD)
• Cost Analysis Reviews

Cost Estimating Methods

There are a number of cost estimating methods that can be used in estimating the costs of a future and current of a system.   The use of a specific approach will depend on how much information is available and where the system is in its development and lifecycle. A few of the most common cost estimating techniques are:

• Parametric: The parametric technique uses regression or other statistical methods to develop Cost Estimating Relationships (CERs).
• Analogy: An analogy is a technique used to estimate a cost based on historical data for an analogous system or subsystem.
• Engineering Estimate: With this technique (Also called Bottoms Up), the system being costed is broken down into lower-level components (such as parts or assemblies), each of which is costed separately for direct labor, direct material, and other costs.
• Actual Costs: With this technique, actual cost experience or trends (from prototypes, engineering development models, and/or early production items) are used to project estimates of future costs for the same system.
• Three-Point Estimate: This Program Analysis and Review Technique (PERT) style cost estimate has the project manager identifies three separate estimates.

Cost Estimating Needed Skills

Cost estimating requires good organizational skills, in order to pull together disparate data for each cost element and to package it in a meaningful way. It also requires engineering and mathematical skills, to fully understand the quality of the data available. Excellent communication skills are also important for clarifying the technical aspects of a program with technical specialists.

If the program has no technical baseline description, or if the cost estimating team must develop one, it is essential that the team have access to the Subject Matter Experts (SME); PM, system and software engineers, test and evaluation analysts—who are familiar with the program or a program like it.

The five (5) main Earned Value Management (EVM) variables:

• BCWS = Budgeted Cost of Work Scheduled
• BCWP = Budgeted Cost of Work Performed
• ACWP = Actual Cost of Work Performed
• BAC = Budget at Completion
• EAC = Estimate at Completion

AcqLinks and References:

• Defense Acquisition Guidebook (DAG)
• OSD Operating and Support Cost Estimating Guide – Sept 2020
• (Old) OSD Operating and Support Cost Estimating Guide – March 2014
• GAO Cost Estimating and Assessment Guide – Chapter 8
• NASA Cost Estimating Handbook – 2008
• DoD 5000.04-M, “DoD Cost Analysis Guidance and Procedures” – Dec 1992
• DoD Directive 5000.04 “DoD Cost Analysis Improvement Group (CAIG)” – 16 Aug 06
• 10 USC Sec. 2434 “Independent Cost Estimates; Operational Manpower Requirements”
• Website: CAIG Operating and Support Cost-Estimating Guide
• Website: OSD Director of Cost Assessment and Program Evaluation (DCAPE)

Updated: 4/26/2023

Rank: G14.3