Cost Analysis of Military Training

Cost Analysis of Military Training

Marcel C. Smit

SAS-095 workshop on

Cost-Benefit Analysis of Military Training

Amsterdam, The Netherlands

5-6 June 2012

Outline

Cost AnalysisApplications of Cost AnalysisCosting processFramework of Cost Analysis

Cost Breakdown StructureMethodsUncertainty & Risk

Cost Effectiveness, Cost Benefit analysisEconomic Evaluation of Alternatives

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Cost analysis

• Investment decisions are supported by weighing costs against benefits.

• A life cycle cost estimate, if done properly, is the single best metric for measuring the value for money of defence resources.

• Cost analysis can be done in each phase of the life cycle.

Insight in not only acquisition, but also O&S costs

Not an exact science: does not provide exact figure

Merely gives an insight into the major factors of influence

Highlights the magnitude of the costs

Identifies areas for potential cost savings

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The greatest opportunity to reduce life cycle costs usually occurs during the early stages of a programme

Application of Cost Analysis

Evaluating and comparing alternative solutionsAssessing the affordability Managing the budgetsDeveloping future expenditure profilesEvaluating cost reduction opportunitiesEvaluating area of financial risk and uncertainty

Benefits for stakeholdersBetter insight in all costs

Identifying key cost drivers

Assist the decision making process

Methodical and consistent estimating approach

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Costing Process

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Framework Cost Analysis

ObjectiveRequirementsIdentification of constraintsAssumptionsCost Breakdown StructureDataMethodsModelsUncertainty & RiskReporting & Presentation

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Cost Breakdown Structurefor Military Training1

initial investment

1.1 acquisition cost training devices

1.2 development cost course ware

1.3 acquisition cost initial logistics support

1.3.1 costs initial spare parts package

1.3.2 costs initial support equipment

1.3.3 cost of training instructors

1.3.4 costs initial documentation

1.3.5 costs computer equipment

1.3.5.1 computer equipment for training devices

1.3.5.2 cost of software

1.3.5.3 cost of secure network

1.3.6 construction costs

1.3.6.1 cost to build new infrastructure

1.3.6.2 cost to adapt infrastructure

1.3.7 preparation costs

1.3.7.1 costs of test and acceptance

1.3.7.2 project costs

1.3.7.3 costs pack/store/handle & transportation

1.3.8 other investment costs

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2 operating and support costs  

2.1operating costs  

2.1.1 cost of instructors  2.1.2 cost of using training devices  

2.1.3cost of refreshment training instructors  

2.1.4 cost of updating courseware  

2.1.5cost of updates operating documentation  

2.1.6operating costs new and adapted infrastructure  

2.1.7cost of consumables (fuel, electricity)  

2.1.8travel expenses students/personnel  

2.1.9accommodation costs students/personnel  

2.2support costs

2.2.1 cost of support personnel2.2.1.1 cost of maintenance personnel2.2.1.2 cost of technical personnel

2.2.2 cost of refreshment training support personnel

2.2.3 cost use of spare parts

2.2.4cost use of support equipment

2.2.5 cost of updates maintenance documentation2.2.6 cost use of computers and software2.2.6.1 cost replacements computers2.2.6.2 cost software licences2.2.6.3 cost of subscription courseware

2.2.7cost of data security

2.2.8 cost of outsourcing technical support2.2.9 cost of outsourcing maintenance

2.2.10costs to upgrade training devices

3decommissioning costs

3.1 cost of decommissioning training devices3.2 cost of decommissioning support elements3.3 cost of decommissioning infrastructure

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Estimating methods

Programme Life Cycle

Concept Development Production Utilization Support Retirement

Gross Estimates Detailed Estimates Gross Estimates

Analogy(It’s like one of these)

Parametric(This pattern holds)

Engineering(It’s made up of these)

Extrapolation(of actual costs)

Analogy(Similarities)

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Uncertainty and RiskRequirement to identify uncertainty in results cost analysis:

Estimates are uncertain!

Uncertainty about the future

No or missing data or information

Unclear data or information

Doubts about the accuracy of data or

information

Determine bandwidths for parameters with

uncertain values

Apply Monte Carlo Simlulation to determine

probability distribution

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Baseline Probability Distribution

Costs in Millions

Like

lihoo

d

μ1

Modeling UncertaintyMonte Carlo Simulation

For each stochastic CBS element, choose:

Type of probability distribution Parameters of the distribution (e.g., μ, σ²) Correlation with other CBS elements

Risk-Adjusted Probability Distribution

Costs in Millions

Like

lihoo

d

Modeling Uncertainty & RiskMonte Carlo Simulation

μ2

μ2 –μ1 = Cost Risk

Summary Framework

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Cost Benefit Analysis (CBA)

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Cost–benefit analysis (CBA), is a systematic process for calculating and comparing benefits and costs of a project.

CBA has two purposes:• To determine if it is a sound investment/decision (justification /feasibility)• To provide a basis for comparing projects. It involves comparing the total

expected cost of each option against the total expected benefits, to see whether the benefits outweigh the costs, and by how much.

However, the benefits can often not be expressed in monetary terms. Then Measures of Effectiveness (MoE) are developed and the CBA

converts into a Cost Effectiveness Analysis (CEA).In a CEA the effectiveness and the total LCC are compared.

Most common methodology for building MoEs and structuring a CEA is Multiple Criteria Decision Making (MCDM).

Source: Wikipedia

Economic Evaluation of Alternatives

Buyer sends out an economic RfP, with:All requirements and wishes to the systemAnd… an affordability assessment: optimistic, pessimistic and most-likely budget (funding) for the overall programme

Vendors submit their offer based on the different budget scenarios.Buyer can derive the response function.

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Economic Evaluation of Alternatives

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Source: Prof. Dr. Francois Melese, Naval Post Graduate School

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More information ?

TNOBehavioural and Societal SciencesStrategic Business Analysis

M.C. (Marcel) Smit, M.Sc.

Brassersplein 22612 CT DelftThe Netherlands

Phone: +31 88 866 39 09Mobile: +31 6 211 343 54Email: marcel.smit@tno.nl

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