Step 7 “Develop Point Estimate and Compare it to an Independent Cost Estimate” pulls all the information together to develop the point estimate; the best guess at the cost estimate, given the underlying data. High-quality cost estimates usually fall within a range of possible costs, the point estimate being between the best and worst case extremes.

For more information see: GAO Cost Estimating and Assessment Guide – Chapter 11

The cost estimator must perform several activities to develop a point estimate: [1]

• Develop the cost model by estimating each Work Breakdown Structure (WBS) element, using the best methodology, from the data collected;
• Include all estimating assumptions in the cost model;
• Express costs in constant-year dollars;
• Time-phase the results by spreading costs in the years they are expected to occur, based on the program schedule; and
• Add the WBS elements to develop the overall point estimate

Having developed the overall point estimate, the cost estimator must then: [1]

• Validate the estimate by looking for errors like double counting and omitted costs;
• Compare estimate against the Independent Cost Estimate (ICE) and examine where and why there are differences;
• Perform cross-checks on cost drivers to see if results are similar;
• Update the model as more data become available or as changes occur and compare results against previous estimates

Cost Estimating Methods
The three (3) commonly used methods for estimating costs are: [1]

• Analogy:  uses the cost of a similar program to estimate the new program and adjusts for differences.
• Engineering: develops the cost estimate at the lowest level of the WBS, one piece at a time, and the sum of the pieces becomes the estimate.
• Parametric: relates cost to one or more technical, performance, cost, or program parameters, using a statistical relationship.

AcqLinks and References:

•  Defense Acquisition Guidebook (DAG) – Chapter 3
• 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: 7/29/2017