Which of the Following Is Needed for a Milestone C Decision Review

INTRODUCTION TO Cost Analysis

Ellen Barber, CDFM-A, CCE/A, EVP

Groundwork

      All Department of Defence (DoD) Military Departments and Defence Agencies (herein referred to as "DoD Components") prepare life cycle cost estimates (LCCEs) in support of their acquisition programs.  A LCCE attempts to place all the costs of an acquisition plan, from its initiation through disposal of the resulting system at the end of its useful life and to properly stage, or spread, the costs for inclusion in budget submission documents.

      LCCEs for DoD systems serve 2 primary purposes.  Beginning, they are used at conquering program milestone and decision reviews to assess whether the system's cost is affordable , or consistent with the DoD Component'due south and DoD's overall long-range investment and force construction plans. 2d, LCCEs course the basis for budget requests to Congress.

      As in other aspects of acquisition direction, maximum use should be fabricated of the Integrated Product and Procedure Development (IPPD) concept and Integrated Product Teams (IPTs) in the development and review of LCCEs.

THE DEFENSE LIFE CYCLE Management SYSTEM

      New conquering programs arise from the existence of either warfighting deficiencies or opportunities to provide new capabilities as documented in an Initial Capabilities Document (ICD).  The ICD describes the broadly defined operational capability required to satisfy a deficiency and documents reasons why not-materiel changes (e.g., tactics or doctrine) cannot meet this need, thereby requiring a materiel solution (i.due east., an acquisition program).  These wide capabilities are then refined into organisation operational requirements consistent with the type of system proposed to remedy the mission need.

       Based on all known requirements, the program function prepares an initial LCCE for its acquisition program.  As the programme passes through its diverse phases and milestone conclusion points, the LCCE is updated by the program office and reviewed by decision makers.  In the cases of major weapon organisation and major automated information organisation (AIS) acquisitions, at least i additional LCCE must be prepared past an organization independent of the program role and the acquisition chain of control (see "Cost Estimating/Analysis Review Process" section after in this note.)

      For weapon system acquisition programs, the LCCE helps decision makers assess the affordability of the system.  For AIS conquering programs, the LCCE provides input for the required price-benefit analysis .  The cost-benefit analysis enables decision makers to appraise whether the AIS will produce satisfactory returns for the investment.

      LCCEs are prepared in terms of base of operations year dollars (also known as constant yr dollars ) for a selected base of operations yr (usually the year of program initiation or terminal major milestone review).  For budgeting purposes, the estimate is escalated to and so twelvemonth dollars (also known as current year dollars ) to reflect inflation and outlay patterns, and is used as the basis for input to the Planning, Programming, Budgeting and Execution (PPBE) process.  These estimates ultimately become the foundation for the program's funding request in the President's Budget submitted to Congress.

THE LIFE CYCLE COST MODEL

Life bicycle cost (LCC) can be divers equally the full cost to the government of a program over its total life, including costs for research and development, testing, production, facilities, operations, maintenance, personnel, environmental compliance, and disposal.  Each of the programme's stakeholders (Congress, program office, contractors, and DoD decision makers) prefers to view life cycle costs grouped in a style that reflects its particular perspective.  The three major means of grouping and viewing programme LCC are by:

1. Funding cribbing: DoD receives appropriations from Congress falling into five major categories: Research, Development, Exam and Evaluation (RDT&E), Procurement, Operations and Maintenance (O&M), Military Structure (MILCON), and Military Personnel (MILPERS).  Program life cycle costs are broken out along these lines for internal budgets, as well equally budget requests to Congress.
   
2. Work Breakdown Structure (WBS): A program WBS provides a framework for program and technical planning, toll estimating, resource allocations, operation measurements, and status reporting.  The WBS should define the total system to be developed or produced; brandish the total arrangement every bit a production-oriented hierarchy equanimous of hardware, software, services, data, and facilities; and relate the elements of work to one another, as well as to the end product.  Major acquisition plan offices shall tailor a program WBS in accordance with MIL-STD-881.  MIL-STD-881 contains appendices with a strawman WBS and dictionary for eleven types of systems down to at to the lowest degree WBS level 3.  Elements mutual to all organisation are contained in a divide "common elements" appendix. Price breakouts by WBS elements are useful to the program office and contractors in managing the program.
3. Life cycle price categories :  DoD 5000.04-Grand, Toll Analysis Guidance and Procedures, defines these cost categories (This certificate was rescinded past DODI 5000.73, but replacement guidance on LCC categories is nonetheless awaiting):

• Inquiry & Development (R&D) : Cost of all inquiry and development, from program initiation through the Low Charge per unit Initial Production decision (end of engineering science and manufacturing development).
• Investment :  Cost of the investment phase, including total cost of procuring the prime number equipment; related support equipment; training; initial and war reserve spares; pre-planned product improvements and military construction.
• Operating and Support (O&S) : Cost of operating and supporting the fielded system, including all direct and indirect costs incurred in using the system, east.m., personnel, maintenance (unit and depot), and sustaining investment (replenishment spares).  The bulk of life bike costs occur in this category.
• Disposal :  Cost to dispose of the system subsequently its useful life. This includes demilitarization, detoxification, long-term waste storage, environmental restoration and related costs.

      DoD decision makers and plan managers use cost categories to institute life cycle price objectives associated with the concept of Affordability (Older programs may still use Cost as an Contained Variable (CAIV)). (Note: The Investment category for CAIV management purposes can be split up into two parts: Procurement and Military Construction).

      Tabular array 1 shows some typical distributions of costs for major arrangement types based on cost estimates prepared by the military components cost analysis agencies.

System Type	R&D	Investment	O&S/Disposal
Space	18%	66%	16%
Fixed Wing Shipping	20%	39%	41%
Rotary Wing Aircraft	15%	52%	33%
Missiles	27%	33%	39%
Electronics	22%	43%	35%
Ships (note 1)	one%	31%	68%
Surface Vehicles	9%	37%	54%
AIS (note ii)		thirty%	70%

Source: Status of DoD'south Capability to Approximate the Cost of Weapon Systems: 1999 Update

Tabular array 1

Notes: (one) Most ship design costs are included in product cost of pb send of a class

            (2) Available data precludes divide of pre-O&S costs into R&D and Investment categories

Mutual Toll Terms

      DoD uses a number of different price terms in various PPBE documents, such every bit the Programme Objectives Memoranda (POM), Budget Estimate Submissions (BES), etc.; in acquisition plan reports such every bit the Defense Acquisition Executive Summary (DAES) and the Selected Acquisition Report (SAR); and in diverse Congressional information sheets.  The seven cost terms shown in Figure i have been standardized to ensure consistency in the defense acquisition process.  DoD 5000.04-Yard (this document was rescinded by DODI 5000.73, but replacement guidance on common cost terms is still pending) specifically defines what is included or excluded from each term and identifies relationships to WBS elements, funding appropriations and price categories.  Annotation that a WBS element can be funded by multiple appropriations.

Effigy 1

      In Figure 1, the appropriation(s) which may be covered by a item toll term are shown in bold and underlined at the summit of the cost term box.  The items shown beneath the appropriation(southward) draw the segments of the WBS that are included in that cost term.

• Development Cost is the cost of all research and development-related activities, contract and in-business firm, necessary to design and exam the system.  Information technology includes all WBS elements.  Prototypes and test manufactures are included in this cost category.  Development costs are funded with only the RDT&Due east appropriation and are included only in the R&D cost category.
• Flyaway Cost (Rollaway, Sailaway, etc.) refers to the price of procuring prime number mission equipment (e.g., an aircraft, ship, tank, etc.).  It is funded with Procurement appropriations and is part of the Investment toll category.  Effigy 1 shows that this term includes Prime Mission Equipment, System Engineering/Programme Management, Arrangement Test and Evaluation, Warranties, and Engineering Changes.  (Annotation: DoD 5000.04-K defines flyaway cost as being funded out of the RDT&E and Procurement appropriations, just in practice, but the Procurement-funded portion of flyaway is considered relevant by decision makers in DoD and in Congress. (This document was rescinded by DODI 5000.73, but replacement guidance on LCC categories is still pending))

• Weapon System Price is funded completely from the Procurement appropriations. It is the procurement counterpart of Evolution Cost in that it contains the same WBS elements as Development Cost. Weapon Organisation Toll consists of the Flyaway Toll plus the additional WBS elements shown in Figure 1.

• Procurement Cost is as well funded completely from the Procurement appropriations.  It includes Weapon System Price plus the WBS element of initial spares.  For Navy shipbuilding programs, outfitting and post-commitment costs are also included when these costs are Procurement-funded.

• Program Acquisition Price is a multi-appropriation cost.  Information technology consists of all costs associated with developing, procuring and housing a weapon system.  Because information technology consolidates evolution, procurement and military construction costs, RDT&E, Procurement and MILCON appropriations are included. This is the complete cost of acquiring a weapon organization - set to operate.

• Operating and Support Costs are funded primarily with the O&M and War machine Personnel appropriations.  However, RDT&E, Procurement, and/or MILCON appropriations may besides be used, every bit appropriate, based on the nature of the effort, after the weapon system has been deployed. This category includes all costs for personnel, equipment, and supplies associated with operating, modifying, maintaining and supporting a weapon system in the DoD inventory.  This includes all direct and indirect costs. These costs do not include any of the evolution costs, procurement costs or any other part of the programme acquisition costs for the weapon arrangement, nor do they include any disposal costs for the weapon system.  Considering the organization is already fielded, the MIL-STD 881 WBS does not apply to this cost term.
• Life Cycle Cost includes all WBS elements, all appropriations, and all toll categories.  As shown in Figure 1, it is the sum of Program Conquering Cost, Operating and Support Cost, and Disposal Cost for a system.
  

Time Phasing of Costs

      In add-on to looking at program costs aggregated in the various means discussed to a higher place (i.e., appropriations, WBS and life wheel cost categories), nosotros must likewise be able to decide when these costs will be incurred. Plainly, all costs of a program are not incurred during one financial year and, considering DoD requests and receives funding annually from Congress, we need to allocate the costs to the fiscal years when funds will exist required.  The time phasing of funding requirements is particularly of import in the PPBE process.  This topic is addressed in a divide education note entitled "Building the Plan Budget."

Risk

            Past its very nature, a toll estimate is uncertain.  A Plan Office Judge (POE) is a betoken guess of the ultimate cost of a future weapon arrangement.  A great deal of uncertainty is associated with the development of a new weapon organisation and the gauge of its price.  Quantifying this inherent uncertainty provides useful additional information to the decision maker.  Incertitude in cost estimates arises from many sources and may be grouped into three categories:  requirements, toll estimating, and technical.  Although these uncertainties occur simultaneously in practice, each is treated analytically independent of the other with sensitivity analysis or mathematical probability techniques.

TOTAL Ownership Cost

      In light of shrinking defense budgets, DoD is focusing on reducing the overall price of the DoD establishment and its major subdivisions (i.e., the DoD Components), with the goal of freeing upward funding for modernization and recapitalization of weapon systems.  Full Ownership Cost (TOC) is defined as the sum of financial resources needed to organize, equip, sustain, and operate the system, while meeting national goals, policies, and standards of readiness, ecology compliance, prophylactic, and quality of life concerns. The TOC for Defense systems consists of the costs to research, develop, acquire, own, operate, and dispose of weapon and support systems. The TOC of a Defense arrangement should be the same as its Life Cycle Price (LCC).

      LCC includes not only conquering plan directly costs, just also the indirect costs owing to the conquering program (i.eastward., costs that would not occur if the program did non exist).  For example, indirect costs would include the infrastructure that plans, manages, and executes a program over its total life and common support items and systems.

      Acquisition plan managers are charged with minimizing TOC through the continuous reduction of LCC for their systems.  DoD TOC reduction efforts are beingness implemented by all DoD Components.

SHOULD COST AND Volition Price

     These two terms came into being with the first set up of Better Buying Ability Initiatives (BBPI) issued in September 2010.  The requirement applies to all ACAT I-III programs.  Should cost is implemented past the program manager.  While "should cost" is implemented throughout the program, it is focused on early planning efforts to make sure we are using trade-off analyses to design a system that meets the warfighter requirements while being cost witting.  The PM identifies specific opportunities for reducing price.  "Should cost" initiatives are aggressively managed and tracked to determine the truthful savings.  Status of "should cost" initiatives are briefed at the quarterly Defense Conquering Executive Summary (DAES) Reviews and Defense force Acquisition Board (DAB) Reviews for all MDAP and MAIS programs.  The Component Acquisition Executive (CAE) volition determine reporting requirements for ACAT Ii and III programs.  "Should price" initiatives will vary betwixt programs.

     "Should cost" is not a new term, however the definition of should cost in the BBPI is dissimilar from the FAR definition of should cost.  The FAR definition of "should cost" relates to developing a negotiating position for production contracts.  The focus is on identifying inefficiencies in contractor production processes and overhead to detect areas that could exist streamlined or changed to save costs.  The BBPI definition applies to all life cycle costs and is about identifying ways to reduce program cost by looking at things such every bit challenging learning curves, dissecting overheads and indirect costs, and targeting cost reduction with profit incentive.

     "Will cost" is the cost estimate for the program of record.  It assumes "business concern every bit usual" for the acquisition plan and is used for budgeting purposes in the PPBE process.  Any realized savings from should cost initiatives are available to the service to reinvest in the plan or apply to other pressing needs.

Price ANALYSIS REQUIREMENTS DESCRIPTION (CARD)

      Analysts need extensive information about an conquering program in guild to guess its cost to the detail required by the various display formats identified in the life wheel cost model. This information is provided in the document known as the Cost Assay Requirements Description (Carte du jour) . The CARD completely describes the system whose costs are to be estimated; it should define the program in sufficient item then that no confusion exists amid the many parties who may exist concerned with estimating the plan's cost.  DoD 5000.04-One thousand provides guidance regarding CARD preparation.  (This document was rescinded by DODI 5000.73, but replacement guidance on Bill of fare content is still pending)

       Per the DoD 5000 series, a CARD shall be prepared for all ACAT I and ACAT IA programs.  The DoD component sponsoring the acquisition program is responsible for grooming of the Menu, in coordination with advisable IPT members.  The Card should be considered a "living certificate," updated in grooming for all milestone and program reviews, if not annually.  The updates reflect whatever changes that have occurred, or new data that have become bachelor, since the previous milestone or program review.  DoD Instruction 5000.02 requires ACAT I and IA programs to update the Card at Program Initiation for Ships (which may begin during the Technology Maturation and Risk Reduction phase), at Milestone B, at Milestone C, and at the Total Rate Production Decision Review.  A draft version of the CARD is required 180 days prior to the milestone or determination review; the final version is required 45 days prior to the milestone or decision review.  Training of the Card should be coordinated with other program documents so that all last program documents are consequent with one some other.

Cost ESTIMATING/ANALYSIS REVIEW Process

Legal and Regulatory Requirements

• Title x, United States Code, Department 2434 requires that the Secretarial assistant of Defense consider an contained estimate of the life wheel cost of a Major Defense Acquisition Plan (MDAP) cost prior to granting Milestone B (Milestone II for grandfathered programs) and Milestone C (Low Rate Initial Product) approval. This LCCE is known as the "Independent Cost Estimate" (Water ice) .  This independent approximate must be produced by an entity outside the development and acquisition chain(s) of command.

• Championship 44, United States Code, Section 3506 and the Clinger-Cohen Act of 1996, Section 5122 require that cost-benefit analysis be performed for all Major Automated Data System (MAIS) acquisitions.

• DoD Instruction 5000.02 implements the legal requirements higher up and mandates additional cost estimating requirements for ACAT I (MDAP) and ACAT IA (MAIS) programs.  Requirements for grooming and review of LCCEs for these programs are summarized below.

• The Managing director of Price Cess and Program Evaluation (DCAPE) performs the ICE for all ACAT ID programs and for certain ACAT IC programs as requested by the USD (AT&L).  This Water ice is prepared for Milestone B, Milestone C  and the Full Rate Production Conclusion Review. Component price analysis agencies that are not part of the development or acquisition concatenation are tasked to complete the statutorily required independent LCCE for remaining ACAT IC programs.  The regulation likewise requires that the Program Office gear up a LCCE (known as the Programme Office Estimate (POE)) in support of program initiation.  The POE is to be updated for each subsequent milestone and decision review.  For ACAT ID programs with significant cost risk or high visibility, the Component Acquisition Executive (CAE) may request a Component Cost Gauge (CCE) exist prepared in add-on to the POE and the Cost Assessment Directorate ICE.

• For ACAT IA programs, neither police force nor regulation prescribes an ICE; notwithstanding, the DoD 5000 series does require the cognizant OSD Chief Staff Assistant or sponsoring DoD Component ensures that a CCE is created at Program Initiation and each time the MDA requests an Economic Analysis. The regulation also requires that the Program Part prepare a POE in back up of program initiation and all subsequent milestone and decision reviews.  Unlike an ACAT I POE, the ACAT IA POE must include life bicycle benefits as well as life cycle costs. The price/do good element structure must be agreed to past the program'southward IPT.

OSD Cost Assessment and Plan Evaluation

      The OSD Cape acts every bit the primary advisory body to the OIPT (Overarching Integrated Product Squad), the Defense Acquisition Board (DAB) and the Secretarial assistant of Defense on matters relating to cost.  The Cape has the post-obit functions related to toll analysis:

            (ane)    Conduct independent cost estimates and toll analyses.
      (2)    Prescribe policies and procedures for the conduct of cost interpretation and cost analyses in the DoD.
      (3)    Review all cost estimates and cost analyses conducted in connectedness with Major Defense Conquering Programs (MDAPs) and Major Automatic Information System (MAIS) programs.
      (4)    Bear cost analyses of defence force acquisition programs to be carried out using multiyear contract authority..
      (five)    Issue guidance for the treatment of risk and confidence levels in back up of preparation of cost estimates within the DoD.
      (vi)    Periodically assess and update cost indexes, including the labor and material inflation indexes used in the preparation of price estimates in the DoD.
      (7)    Initiate or participate in any discussions relating to program costs deemed appropriate by the DCAPE or the Under Secretary of Defense for Acquisition, Technology, and Logistics (USD(AT&L)).
      (viii)    Prescribe policies and procedures for reporting and drove
      (nine)    Issue guidance relating to full consideration of life-wheel direction and sustainability costs in MDAPs and MAIS programs.
      (10)  Prepare or approve contained toll estimates, pursuant to section 415a-ane(b)(2) of championship l, U.s.a. Code (Reference *f)), for joint DoD and intelligence community programs.

Component Cost Analysis Agencies

      All DoD Components have established their own agencies to serve equally their lead organization for price analysis and price estimating actions and to act as liaison between the component and the Cape.  Program office personnel involved with conducting or reviewing POEs should be enlightened of their respective Component's agency and contact that arrangement as appropriate on cost related problems. Figure two provides information about how to contact each of these component agencies, as well as the Cost Cess and Programme Evaluation (Cape).

Component	Arrangement	Telephone	Web Site
Army	Deputy Assistant Secretarial assistant of the Ground forces for Cost and Economics	(703) 692-1722 DSN  222-1722	https://www.asafm.ground forces.mil/offices/ce/
Air Strength	Air Force Price Analysis Agency (AFCAA)	(240) 612-5606 DSN  612-5606	https://km.saffm.hq.af.mil/community/views/home.aspx?Filter=OO-FM-CE  (site registration required)
Navy	Naval Eye for Cost Analysis (NCCA)	(703) 692-4899 DSN  222-4899	https://www.ncca.navy.mil
OSD	Cost Cess and Program Evaluation Directorate (CAPE)	(703)  695-0721 DSN   225-0721	https://www.cape.osd.mil/

Figure 2

The Toll Review Procedure

Figure three

Figure 3 displays the cost review process for obtaining a Secretary of Defense program decision for a major weapon system.  Each service prepares for the CAIG meeting differently.  In each service, the program squad prepares the POE with in-firm or contractor personnel.  However, non-regime personnel are not allowed at the CAIG coming together.  The CCE, if required, is prepared by the component's cost assay bureau, if one exists, or by another role independent of the acquisition and development chain of command.

Ground forces:  The Office Deputy Assistant Secretarial assistant of the Army for Toll and Economics prepares the CCE and briefs the results to the CAIG.  The Regular army Cost Review Board works with the Assistant Secretary of the Army (Financial Management & Comptroller) to develop the Army cost position briefed to the CAIG.

Navy:  The Naval Center for Cost Analysis (NCCA) prepares and briefs the CCE to the CAIG.  The Navy holds a reconciliation meeting prior to the formal CAIG coming together.

Air Force: The Air Strength Price Directorate, SAF/FMC, prepares the AF cost position, after reconciliation between the Arrangement Programme Office gauge and the AF Toll Analysis Agency'southward CCE.

      The CAPE report takes into consideration all the factors and data shown in the bottom portion of Figure iii.  There must exist price consistency among all documents.

SUMMARY

      Life bicycle cost estimates are essential sources of information for the materiel acquisition process.  They provide the cost information to support the acquisition milestone determination process too as the evolution of acquisition programme budget requests.

      Life cycle costs can be viewed from three different perspectives: funding appropriations, WBS and life cycle toll categories. Funding appropriations refer to the major categories of appropriations with which Congress provides DoD budget authority: RDT&E, Procurement, MILCON, MILPERS, and O&M.  The WBS breaks downwards costs into hardware-related categories and helps ensure that no costs are overlooked. The life cycle cost categories (R&D, Investment, O&S, and Disposal) are designed primarily for the utilise of DoD decision makers.

      At each milestone beginning with program initiation, as many as three life cycle cost estimates (the POE, the ICE and the CCE) may exist prepared to support the conquering decision process for a new organisation.  Except when specific estimates are required by law, the program's milestone decision authorization decides which estimates will exist prepared to back up each milestone and decision review.

REFERENCES:

https://www.dau.mil/guidebooks/Shared Documents HTML/DoDI 5000.02.aspx  - DoDI 5000.02, Operation of the Defense Acquisition System

http://world wide web.saffm.hq.af.mil/ – The Air Force Fiscal Management and Comptroller

https://www.ncca.navy.mil/ - The Navy's cost middle.

https://world wide web.asafm.ground forces.mil/offices/ce/ - The Army's toll center.

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Source: https://www.dau.edu/cop/ce/Pages/Overview.aspx

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