Code of Practice For Life Cycle Costing NATO RTO 2009
Code of Practice For Life Cycle Costing NATO RTO 2009
ORGANISATION
RTO PUBLICATION
SAS-069
Acquisition Cost
(R & D, Production)
Training
Cost
Supply Support
(Inventory &
Distribution)
Cost
t&
en ost
em C
tir sal
Re spo
Di
Cu
sto
m
( P e er S
rso ervic
Co nnel) e
st
Transportation &
Handling Cost
Poor Procurement
Decision
Facilities
Cost
Technical
Data Cost
RTO PUBLICATION
SAS-069
Acquisition Cost
(R & D, Production)
Training
Cost
Supply Support
(Inventory &
Distribution)
Cost
t&
en ost
em C
tir sal
e
R spo
Di
Cu
sto
m
( P e er S
rso ervic
Co nnel) e
st
Transportation &
Handling Cost
Poor Procurement
Decision
Facilities
Cost
Technical
Data Cost
www.rto.nato.int
Preface
The purpose of this document is to familiarise the reader on the application
and use of life cycle costing for a system of interest (including individual
weapon systems, system of systems, and military and business software)
from an early conceptual stage in the product life cycle through to disposal.
It provides illustrations on the types of life cycle cost studies that can be
conducted and examples to demonstrate the benefits of conducting life cycle
costing to inform the decision making process.
This handbook was prepared as part of the NATO Research
Technology Organisation, System Analysis and Studies Panel,
Task Group 069 and was based on the work conducted by
SAS-028, SAS-054 and AC/327 WG3 and is in accordance
with AAP-48.
Contributors included:
P. Paganis
M. Pica
S. Gulichsen
F. Ramaroson
G. Berg
P. Abegglen
T. Biedermann
M. Smit
M. Cakmak
I. Kolagasioglu
A. Koprulu
N. Uygunlar
A. Griffiths
D. Baggley
B. Flynn
ii
Greece
Italy
Norway
OCCAR
Sweden
Switzerland
Switzerland
Netherlands
Turkey
Turkey
Turkey
Turkey
United Kingdom
United Kingdom
United States
RTO-SAS-069
Table of Contents
Page
Preface
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RTO-SAS-069
Executive Summary
The objective of the SAS-069 task group was to produce a Code of Practice
that draws on the conclusions and recommendations of SAS-054 and to
produce a practical guide to the use of life cycle costing methods and models
in a succinct booklet form.
The purpose of this booklet is to familiarise anybody interested in life cycle
cost analysis on the application and use of life cycle costing for a system of
interest (including individual weapon systems, system of systems, and military
and business software) from an early conceptual stage in the product life cycle
through to disposal.
The booklet provides illustrations on the types of life cycle cost studies that
can be conducted and examples to demonstrate the benefits of conducting
life cycle costing to inform the decision making process.
RTO-SAS-069
ES-1
Synthse
Lobjectif du groupe oprationnel SAS-069 tait de fournir un code de bonne
conduite qui tire les conclusions et les recommandations du SAS-054 et
de fournir un guide pratique dutilisation des mthodes et des modles
dvaluation du cot global de possession sous forme dune notice succincte.
Lobjet de cette notice est de familiariser toute personne intresse par
lanalyse du cot global de possession avec lapplication et lutilisation de la
mthode de dtermination de ce cot pour un systme digne dintrt
(comprenant des systmes darmes individuelles, un systme de systmes et
des logiciels militaires et de gestion) tout au long de son cycle de vie depuis
le premier stade de la conception du produit jusqu son limination.
La notice fournit des illustrations sur les types dtudes de cot global de
possession qui peuvent tre effectues et des exemples afin de dmontrer les
avantages dune valuation de ce cot global de possession pour renseigner
le processus de prise de dcision.
ES-2
RTO-SAS-069
DESCRIPTION
% of LCC
80
LCC c om mitted
60
Cost incurred
40
20
RTO-SAS-069
Di
se
ng
ag
em
en
t
Life Cycle
In
-se
rv
ice
(P
p r re oj ) F
ec ea
t d si
e f bil
in it
iti y /
on
D
De esig
ve n a
lo n
pm d
en
t
Pr
od
uc
tio
n
The greatest
opportunity to
reduce life cycle
costs usually occurs
during the early
stages of a
programme
1.2
1.3
The method(s) and model(s) used to develop the life cycle cost estimates will
depend upon the availability of data, the purpose of the cost estimate and the
time available to conduct the work.
Once the scope (objective, requirements and constraints) of the life cycle
cost study has been established the overall cost estimating process can
commence. It may be necessary to undertake several iterations following the
first set of results due to the availability of more data, clarification of the
assumptions or just general refinement. The process is completed with the
presentation of the results, assumptions and financial implications.
This process is described in more detail in Chapter 4.
Data Sources
Parametric
Analogy
Ba yesian
Detailed design
Industry data
Reliability data
Logistic data
Generic NATO
CBS
All Line Items
Assumption
Generic
Specific
Financial
Program
Risk
Spreadsheet
Proprietary
Detailed level
Quantified
Risk Register
Optimism Bias
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1.4
In order to control the process a life cycle cost plan should be developed and
maintained throughout the life cycle of the system of interest. The purpose of
the life cycle cost plan should be to provide the stakeholders with a clear
understanding of the life cycle costing requirements and how it can be used
to support their life cycle management plan. The life cycle cost plan must
therefore provide sufficient detail on:
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NATO GUIDANCE
The NATO ALP-10 guidance [2] states that all multi-national programmes
must implement a life cycle cost programme. However, this should not be
considered a burden as it will provide full visibility of all the costs in the
overall programme and system of interest.
2.2
A life cycle cost estimate, done properly, is the single best metric for
measuring the value for money of defence resources. This metric, in turn,
is useful in wide range of applications including:
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2.3
BENEFITS
There are clear and unequivocal benefits to be gained by all the stakeholders
through undertaking a life cycle cost analysis on the system of interest.
These include:
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Project and programme managers who are concerned for the system
of interest to succeed;
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OBJECTIVE
4.2
REQUIREMENTS
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WHAT IS REQUIRED
TO CONDUCT LIFE CYCLE COSTING?
4.3
IDENTIFICATION OF CONSTRAINTS
The identification of the constraints is required as they will influence the life
cycle costing process. There are two types of constraints.
4.3.1
External Constraints
Though the benefits of life cycle costing are recognised, the approach for its
use and implementation could vary from Nation to Nation, due to:
4.3.2
Internal Constraints
10
Data availability.
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WHAT IS REQUIRED
TO CONDUCT LIFE CYCLE COSTING?
4.4
DATA
Assumptions for
application of
methods by
analogy,
parametric
Requirements
Concept
Development
Production
Assumptions
for utilisation,
support and
retirement
costs
Assumptions
for production,
utilisation,
support and
retirement
costs
Firm prices
from
manufacturer
Engineering
Fixed prices for
and logistic
on going spares
data (RAM&T)
and maintenance
CONOPS
Development
Production
Utilization
Support
Retirement
Assumptions for
retirement costs
Utilization
Viability,
Socioeconomical
considerations
, financial
aspects
Support
Level of assumptions
Concept
Retirement
The amount and quality of data available often increases in time with the
maturity of the system of interest, and the level of assumptions decreases.
As more data becomes available less assumptions have to be made, and more
detailed methods can be used to estimate costs.
Chapter 7 gives more details on data collection, data sources and data
normalisation.
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WHAT IS REQUIRED
TO CONDUCT LIFE CYCLE COSTING?
4.5
METHODS
Previous study findings have confirmed that almost all nations use a similar
process to develop life cycle cost estimates; that the quality of the available
data nearly always determines the method to be applied; and, in addition,
that the type of study also influences the process and the selection of the
appropriate method.
The figure below shows an example of the most common application of
methods in each stage of the programme life cycle. A more detailed
overview of appropriate methods can be found in the report of NATO RTO
SAS-054 [5].
Development
Parametric
(This pattern holds)
Analogy
(Its like one of these)
Gross Estimates
Production
Utilization
Support
Extrapolation
(of actual costs)
Retirement
Analogy
(Similarities)
Engineering
(Its made up of these)
Detailed Estimates
Gross Estimates
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WHAT IS REQUIRED
TO CONDUCT LIFE CYCLE COSTING?
Here an estimate
is compared with
known previous
programme
outcomes to
provide
confidence in
the estimate.
4.6
ASSUMPTIONS
4.7
A Cost Breakdown Structure (CBS) is used to ensure that all relevant costs
related to the system of interest are considered. This may be defined as an
organised list of all cost items related to the life cycle of a system or
programme. A CBS must satisfy some requirements such as:
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13
WHAT IS REQUIRED
TO CONDUCT LIFE CYCLE COSTING?
By organisation:
Public/private company.
Most of these breakdowns are not mutually exclusive, and a CBS will
typically involve a combination of a number of these types of breakdowns.
More details about developing a Cost Breakdown Structure can be found in
the NATO RTO SAS-028 report [1].
It is quite common to develop or illustrate a CBS as a tree structure, as it is
in the example shown below. This gives an instant overview of a CBS,
based on stages and activities.
For large, complex and very detailed CBS structures, however, it is useful to
assign a numeric order code to each cost element in the CBS.
14
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WHAT IS REQUIRED
TO CONDUCT LIFE CYCLE COSTING?
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15
WHAT IS REQUIRED
TO CONDUCT LIFE CYCLE COSTING?
4.8
Life cycle cost estimates of any new system of interest will inevitably
contain uncertainty and risk. Much effort is required to accurately estimate
the system development and production costs, as well as future decades of
operation and maintenance costs. At the end of this estimation process a cost
estimate is produced which is stochastic rather than deterministic with
uncertainty and risk determining the shape of the distribution. The definition
of each term is given as:
2)
Conducting risk and uncertainty analysis on life cycle cost estimates of the
systems of interest is required to fully understand the possible variances in
programme estimates in terms of cost.
By conducting risk and uncertainty analysis decision makers can determine
what degree of risk may be acceptable (e.g. the probability of exceeding the
budget).
While there is a wide variety of methods and models for conducting risk and
uncertainty analysis on life cycle cost estimates, the principle for estimating
risk and uncertainty given in the figure below is highly recommended.
By using this process for the estimation of risk and uncertainty, decision
makers can budget a programme at a specific cumulative percentage level of
risk and they will be able to know the financial impact of specific risk events.
16
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WHAT IS REQUIRED
TO CONDUCT LIFE CYCLE COSTING?
Likelihood
Modeling Uncertainty
Monte Carlo Simulation
Costs in Millions
l i
ih h
l
2 1 =
Cost Risk
Likelihood
Costs in Millions
4.9
The results of cost studies are very important, as they should provide the
stakeholders with an answer to their question. It is therefore very important
that the results should be presented and reported in a manner that the
stakeholders can easily understand.
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17
WHAT IS REQUIRED
TO CONDUCT LIFE CYCLE COSTING?
(M)
DEVELOPMENT
PRODUCTION
50.0
SUPPORT
OPERATION
40.0
Example of a
Baseline Life
Cycle Cost
Spend Profile
30.0
20.0
10.0
0.0
FY96
(M)
DEVELOPMENT
PRODUCTION
SUPPORT
OPERATION
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
35.4 25.3
10.1 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2
7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1
Example of a Life
Cycle Cost Allocation
Support
30%
Development
22%
Production
29%
Operations
19%
Note: The cost allocation percentage shown in the example above should not
be considered as being representative of all life cycle cost estimates.
18
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WHAT IS REQUIRED
TO CONDUCT LIFE CYCLE COSTING?
The output of the life cycle cost study should be a report incorporating the
results and conclusions as well as a presentation on the basis of those results.
It should include a full definition of the aims and conduct of the study,
the definitions of the options studied, the costing boundary considered and
the assumptions underlying the cost elements.
The figures above represent single point estimates with no consideration to
the presentation of uncertainty and risk. The following figure presents a
recommended approach for communicating results of a life cycle cost
estimate to senior decision makers (see [6]).
The top line shows a three point range of estimates, and conveys the idea that
a cost estimate is not a single number but rather a continuum or distribution
of possible values.
Low
Estimate
585M
500M
600M
High
Estimate
895M
Baseline Estimate
715M
700M
> Baseline estimate
800M
900M
Recommended Presentation of
Cost Estimating Risk Analysis
The top two shaded bars of the figure show the results of a historical trend
analysis on similar programmes and the results obtained from the risk and
uncertainty analysis reported at a given percentile. The bottom shaded
section, which should always be included in the presentation of the estimate,
shows the key assumptions or scenarios associated with the low, baseline,
and high estimates.
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19
WHAT IS REQUIRED
TO CONDUCT LIFE CYCLE COSTING?
The basic principle for multi-national life cycle cost estimates is the
definition of a common framework managed centrally by the entity in
charge of the management of the Programme. This entity could be a Pilot
Nation or an International Programme Office or a NATO Agency.
The common framework should include:
The selection of common life cycle cost models that allow an easy
interface with those defined at national level.
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WHAT IS REQUIRED
TO CONDUCT LIFE CYCLE COSTING?
Included in the cost estimates, some specific requirements such as fair return
on investment, deployment assumptions and the previously conducted
national cost estimate must be carefully considered.
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21
WHAT IS REQUIRED
TO CONDUCT LIFE CYCLE COSTING?
22
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Concept
5.1
Development
Production
Utilization
Support
Retirement
CONCEPT STAGE
The concept stage starts after the decision to fill a capability gap with a
materiel solution and ends with the requirements specification for this
materiel solution.
5.2
DEVELOPMENT STAGE
5.3
PRODUCTION STAGE
23
5.4
UTILISATION STAGE
5.5
SUPPORT STAGE
5.6
RETIREMENT STAGE
The retirement stage provides for the removal of a system of interest and
related operational and support services and to operate and support the
retirement system itself. This stage begins when a system of interest is taken
out of service.
5.7
24
ADDITIONAL ASPECTS
AAP-48 describes the stages and processes to be followed in developing
and procuring a new system in order to fulfil a capability gap. At some
point in the NATO life cycle, the decision has to be made either to
develop a new system or to procure an off-the-shelf system (e.g. make
or buy decision). If the decision is made to buy a system of interest the
following type of Life Cycle Cost studies can be performed:
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The utilisation stage starts at the same time as the support stage and
together they are often referred to as the in-service stage. The utilisation
stage ends when the system of interest is taken out of service.
Life cycle costing should not be considered as a one-off task, but should be
recognised as an ongoing activity throughout all stages of the life cycle.
Life cycle costing should, in each stage of a programme, support stakeholders
in making the best decisions on options presented to them. These options may
include evaluation of future expenditure, comparison between alternative
solutions, management of existing budgets, options for procurement and
evaluation of cost reduction opportunities. Life cycle costing is also used for
affordability assessment and determining the cost drivers associated with the
Key Performance Indicators or Key User Requirements.
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26
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INTRODUCTION
6.2
CONCEPT STAGE
The greatest opportunity to reduce life cycle costs usually occurs during the
early stages of a programme. The concept stage is where decisions are made
when the amount of supporting information is at a minimum.
The types of studies conducted at this stage are typically: high level balance
of investment, cost benefit analysis and cost-effectiveness plots utilising life
cycle cost as one of the key measures.
Since cost and performance data is likely to be immature care should be
taken to avoid new conceptual proposals being given unwarranted advantage
in comparison with those that have been more thoroughly explored. For this
reason, the processes employed to support and undertake conceptual studies
rely on:
6.2.1
Input
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6.2.2
Output
The LCC output from this stage should support the decision as to whether the
options being considered are feasible. The LCC output from this stage should
also support the requirements definition process.
6.2.3
Types of Studies
Some examples1 of the type of studies in the concept stage are Cost Benefit
Analysis and Cost Effectiveness Analysis. Cost Benefit Analysis is widely
accepted as a vital support tool for economic analysis on defence
programmes. The example shown below explores the benefits trade-off
between live flying, synthetic training environments and aircraft in-service
life in the provision of current and future heavy lift helicopter and light
utility helicopter, rotary wing capabilities.
Training
Syllabus
Simulator
capability
Number required
for operations
Live/SE training
balance
(Functional Analysis
Framework)
Crew
ratios and
turnover
Live flying
hours
Fleet Size Calculator
SME
opinion
Simulator types &
hours usage for
training
Hours for
peacetime
operations
Peacetime
attrition
rate
Number of
aircraft to buy
Aircraft
Service Life
Trainer system
purchase,
operating and
support costs
Aircraft purchase
and support cost
estimates
Items in bold
text indicate
calculation
steps leading
to the whole
life cost
output. Input
data values
are shown as
regular text
28
Figures reproduced with kind permission from HVR Consulting Services Ltd.
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Costeffectiveness
plots are
more
commonly
used. The
size of
the bubble
show the
uncertainty
in the data
and method
used
6.2.4
Cost-Performance Comparison
12.0000
10.0000
8.0000
Figure of Merit
Op 7
Op 6
Op 5
Op 3
6.0000
Op 4
Op 2
4.0000
Op 1
2.0000
0.0000
12000.0000
10000.0000
8000.0000
6000.0000
4000.0000
2000.0000
0.0000
Cost
Estimating Methods
Typical methods used for developing a cost estimate at this stage are Bayesian,
Parametric, Analogous, Expert Opinion or Rule of Thumb techniques.
To overcome the lack of data found at this stage, life cycle cost estimates can
be produced using proprietary estimating tools containing embedded Cost
Estimating Relationships such as ACES, FACET, PRICE and SEER.
6.2.5
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Project Information
Complexity of the contract structure
Percentage
Total Cost Uplift
7%
7%
4%
5%
10%
17%
18%
5%
18%
Unknown Legislation/Regulations
5%
Immature Technology
18%
6.3
DEVELOPMENT STAGE
Input
At this stage much information from the concept stage should be available
together with in-house historical data, results from early tests and technical
demonstration.
In addition, the Concept of Operations document and the requirement
documentation should be used in conjunction with information provided by
the supplier to refine the life cycle cost estimates.
30
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6.3.2
Output
6.3.3
Type of Studies
Tender evaluation.
6.3.4
Estimating Methods
At this stage the life cycle cost estimates will be developed by using engineering
(bottom-up) estimates supported by analogy cost estimating, parametric cost
estimating, historical trend analysis.
6.3.5
6.4
PRODUCTION STAGE
6.4.1
Input
The input data and assumptions for life cycle costing from earlier stages will
be supplemented by data provided by industry through a response to an
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6.4.2
Output
The output of the life cycle cost analysis will support the negotiating process
by establishing a should cost or investment appraisal for comparison
with the industry quotation.
6.4.3
Type of Studies
6.4.4
Estimating Methods
The primary method to be used in this stage is the engineering (bottom up)
methods using the detailed Cost Breakdown Structure populated from actual
data from industry.
In order to provide confidence in the life cycle cost estimate a second method
should be performed using analogy or parametric methods.
32
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6.4.5
During the production stage all the risks will be reviewed and managed on a
regular basis. Mitigation plans will be put into action and their progress
monitored. This will be a comprehensive management and analysis activity
and will regularly report the possible outcomes in cost and schedule to the
project manager.
6.5
UTILISATION STAGE
In the utilisation stage the system of interest will operate at the intended
operational sites to deliver the required capability with continued operational
and cost effectiveness in accordance with the user requirements.
During the utilisation stage the system of interest is continuously monitored
for performance in accordance with user requirements, e.g. by In-Process
Reviews (IPR), to determine how the system can be made more efficient and
effective. Another way to monitor the performance of the system of interest
is to conduct a User Satisfaction survey to determine if the system of interest
performs accurately and reliable.
Operations with the system of interest continue as long as it can be effectively
adapted to respond to an organisations requirements. The need for a major
modification or upgrade of the system of interest may arise from a change in
the threat, a deficiency identified in the system, a recommendation from the
operators or an opportunity to reduce costs. When modifications or changes for
upgrade are identified as necessary, the system may re-enter the concept or the
development stage.
The utilisation stage starts at the same time as the support stage and together
they are often referred to as the in-service stage. The utilisation stage ends
when the system of interest is taken out of service.
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6.5.1
Input
6.5.2
Output
The main output of cost analyses in this stage is the cost of operating the
system of interest. These costs are primarily driven by the stakeholders
operational doctrine and the assigned mission, the operational environment
of usage, the operating rate (up-tempo), and the ability skills and the efficient
training of the personnel.
This output will support decision makers to forecast future costs, manage existing
budgets and undertake options analysis where necessary. The forecasting of
future expenditure requires a sound knowledge of the actual utilisation profiles.
Actual costs can also be compared with earlier estimates.
When analysing this output together with the users satisfaction forms a cost
effective utilisation of the system of interest can be obtained.
6.5.3
Type of Studies
During the utilisation stage studies are conducted in order to refine or validate the
life cycle cost estimate of the systems in use by using actual recorded data. This
should always be in line with the Measure of Effectiveness obtained for a given
life cycle cost estimate.
Also at this stage, any change in the costs of operating the system of interest
can be analysed, as a result of a change in operational use. Furthermore,
the cost of deployment can be determined and analysed.
34
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6.5.4
Estimating Methods
Methods employed during the utilisation stage include system dynamics and
discrete event simulation to provide dynamic predictive outcomes.
Additionally, a parametric method could be used. In order to capture actual
costs methods such as activity based costing can also be used.
6.5.5
Risk and uncertainty analysis at this stage usually takes the form of a
sensitivity analysis around the major cost drivers related to the operation and
support of the system of interest.
6.6
SUPPORT STAGE
35
The support stage starts at the same time as the utilisation stage and together
they are often referred to as the in-service stage. The support stage ends
when the system of interest is taken out of service.
6.6.1
Input
In order to pursue a cost effective support of the system, input data is required.
This data will be derived from the operational requirements, the support concept
and information from earlier stages, such as the integrated logistic support study
(including data related to the supply chain, reliability, etc.), requirements related
to support or earlier conducted cost studies. Also information related to support
personnel, training support personnel, infrastructure/facilities, spare and repair
parts, documentation, test and support equipment and tools, Packaging, Handling,
Storage and Transportation (PHST) or contract data is required.
Furthermore for multi-national programmes, assumptions and data related to
common support solutions are required. Especially in multi-national operations
recording these inputs is vital to estimate alternatives for commonalities.
Finally, during this stage information and operating experience from support
personnel and other actual data information will be gathered.
6.6.2
Output
The main output of cost analyses in this stage is the cost of supporting the
system of interest. These costs are primarily driven by the stakeholders
support concept, the operational environment of usage, the operating rate
(op-tempo), and the ability skills and the efficient training of the personnel.
This output will support decision makers to forecast future costs, manage
existing budgets related to the support of the system of interest and to
undertake options analysis where necessary. The forecasting of future
expenditure requires a sound knowledge of the actual support costs. Actual
costs can also be compared with earlier estimates.
When analysing this output together with the users satisfaction a costeffective utilisation of the system of interest can be obtained.
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6.6.3
Type of Studies
During the support stage studies are conducted in order to refine or validate
the life cycle cost estimate of the support of the system of interest by using
actual recorded data. This should always be in line with the Measure of
Effectiveness obtained for a given life cycle cost estimate. The actual data
may also be used to validate earlier estimates.
At this stage also the change in costs of supporting the system of interest can
be analysed, as a result of any change in operational use or support concepts.
Furthermore, obsolescence and life extension studies can be conducted and
the cost of upgrades and modifications can be determined and analysed.
For multi-national programmes, alternatives for common support solutions
can be evaluated.
6.6.4
Estimating Methods
Methods employed during the support stage include system dynamics and
discrete event simulation to provide dynamic predictive outcomes. Additionally,
parametric methods can be used. Also optimisation methods can be used.
In order to capture actual costs methods such as activity based costing can be
used.
6.6.5
Risk and uncertainty analysis at this stage usually takes the form of a
sensitivity analysis around the major cost drivers related to the operation and
support of the system of interest.
6.7
RETIREMENT STAGE
This stage starts with an intention to retire the System of Interest. However,
the decision to retire a system of interest and the studies (including an
estimate of likely revenue and expenses) related to this decision may be
conducted at an earlier stage in the project life cycle.
A system may enter the retirement stage for several reasons, including:
a change in operational requirements, a change in the socio-political
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6.7.1
Input
It is expected that the life cycle cost analyst will be a recipient of the findings
from these studies to support the subsequent cost analysis.
6.7.2
Output
38
Disposal at cost.
6.7.3
Type of Studies
6.7.4
Estimating Methods
6.7.5
The identification of risk for this stage will be conducted at a very high level.
It is likely to be a combination of single line statements and will probably
contain a mixture of issues as well as risks. The cost analyst will need to
distinguish the difference between them in order to ensure that only those
appropriate risks are to be included in the cost risk analysis.
Where there is no risk register or risk record then another approach would be
to employ an optimism bias technique. Here it could be employed to redress
overly optimistic tendencies by making empirically based adjustments to the
cost estimates (see Sub-section 6.2.5).
At the very minimum, the life cycle cost estimate produced at this stage
should include or indicate the level of financial risk exposure and liabilities.
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7.1
DATA EVOLUTION
As a system progresses through the life cycle, the types of data available
evolve in a number of ways. The characteristics of the available data will
change as well as the progress of the life cycle. Early data will tend to be
softer and be in a more aggregated form, because hard numbers and detailed
information will not yet be available.
7.2
DATA SOURCES
Life cycle costing requires a wide variety of data and these must be collected
from an even wider variety of sources. When preparing a cost estimate,
analysts should consider all credible data sources. A distinction can be made
between internal and external data:
In order to collect data from external sources cost estimators and the
programme managers may use templates for a life cycle cost questionnaires
as part of an Invitation to Tender, Request for Information, Request for
Quotation or Request for Proposal.
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7.3
7.4
DATA NORMALISATION
Raw data for life cycle costing originates from a variety of sources. There is
generally a lack of uniformity in the data and therefore a certain amount of
normalisation is unavoidable. Generally, data normalisation covers changes
and adaptations to make it applicable for use in a cost model. The main areas
of data normalisation include:
42
Adjusting all data to a Base Year. This will facilitate the analysis of
the financial data on a comparative basis.
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7.5
DATA RECORDING
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INTRODUCTION
8.2
PORTFOLIO ANALYSIS
Selecting only those projects that meet the long-term, strategic goals
of the organisation.
For the private sector, the value of a project is typically measured by return on
investment (ROI), or discounted projected net earnings divided by investment
funds. On the other hand, in a national defence setting, ROI might be expressed
in terms of future flows of military capability divided by life cycle costs.
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FUTURE DEVELOPMENTS
USING PORTFOLIO ANALYSIS
TECHNIQUES IN DEFENCE APPLICATIONS
8.3
METHODOLOGY
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FUTURE DEVELOPMENTS
USING PORTFOLIO ANALYSIS
TECHNIQUES IN DEFENCE APPLICATIONS
High
1.8
In S&T
In Acquisition
Operational
1.6
1.4
Reference
= $100M
2
9
Risk
1.2
49
11
0.8
80
0.6
0.4
18
0.2
60
18
Low
0.2
0.4
Low
8.4
0.6
0.8
1.2
1.4
1.6
1.8
High
BENEFITS
Armed with the results of the life cycle cost estimates and capability
assessments, data are displayed to illustrate portfolio balance, systems value
and strategic fit. Ideally, results can be generated near real-time so that decision
makers can conduct what-if questioning with answers provided in short order.
Portfolio analysis promises to give stakeholders valuable metrics, including the
risks and uncertainties of costs, capabilities, and requirements, with which to
make more informed decisions on the allocation of scarce defence resources.
As noted above, life cycle cost analysis is a critical component of this work.
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FUTURE DEVELOPMENTS
USING PORTFOLIO ANALYSIS
TECHNIQUES IN DEFENCE APPLICATIONS
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Chapter 9 BIBLIOGRAPHY
AND USEFUL WEBSITES
9.1
REFERENCES
[1]
RTO TR-058 / SAS-028, Cost Structure and Life Cycle Costs for
Military Systems, RTO-SAS-028 Task Group Technical Report,
September 2003.
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10] IQPC, Through life Capability conference, IQPC London, June 2007.
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9.2
USEFUL WEBSITES
www.rto.nato.int
www.scea.org
www.scaf.org.uk
www.ispa-cost.org
www.dodcas.org
www.aof.mod.uk
www.gao.gov
www.nao.org.uk
www.ncca.navy.mil
www.vivaceproject.com
9.3
FURTHER READING
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