Cost Estimating

Step 1 Define Cost Estimates Purpose and Scope

A cost estimate should document the purpose of the estimate, the program background and system description, its schedule, the scope of the estimate (in terms of time and what is and is not included), the ground rules and assumptions, all data sources, estimating methodology and rationale, the results of the risk analysis, and a conclusion about whether the cost estimate is reasonable.

For more information see: GAO Cost Estimating and Assessment Guide – Chapter 5

Tasks that should be accomplished include: [1]

  • Determine estimate’s purpose, required level of detail, and overall scope;
  • Determine who will receive the estimate

The purpose of a cost estimate is determined by its intended use, and its intended use determines its scope and detail. Cost estimates have two general purposes: [1]

  1. to help managers evaluate affordability and performance against plans, as well as the selection of alternative systems and solutions, and
  2. to support the budget process by providing estimates of the funding required to efficiently execute a program.

To determine an estimate’s scope, cost analysts must identify the customer’s needs. That is, the cost estimator must determine if the estimate is required by law or policy or is requested. For example, 10 U.S.C. § 2434 “Independent cost estimates; operational manpower requirements” requires an independent cost estimate before a Major Defense Acquisition Program (MDAP) can advance into system development and demonstration or production and deployment. The statute specifies that the full life-cycle cost—all costs of development, procurement, military construction, and operations and support, without regard to funding source or management control—must be provided to the decision maker for consideration.

Where appropriate, the Program Manager (PM) and the cost estimating team should work together to determine the scope of the cost estimate. The scope will be determined by such issues as the time involved, what elements of work need to be estimated, who will develop the cost estimates, and how much cost estimating detail will be included. Where the program is in its life cycle will influence the quantity of detail for the cost estimate as well as the amount of data to be collected. For example, early in the life cycle the project may have a concept with no solid definition of the work involved. A cost estimate at this point in the life cycle will probably not require extensive detail. As the program becomes better defined, more detailed estimates should be prepared.

Once the cost analysts know the context of the estimate or the customer’s needs, they can determine the estimate’s scope by its intended use and the availability of data.

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Updated: 6/18/2018

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