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AMERICA’S ARMY: THE STRENGTH OF THE NATION. Cost-Benefit Analysis (CBA) Four-Day Training Briefing Day 1 CBA Introduction and Overview. Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more https://cpp.army.mil. 25 June 2012. - PowerPoint PPT Presentation
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Cost-Benefit Analysis (CBA)Four-Day Training Briefing
Day 1CBA Introduction and
Overview
25 June 2012 Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more
https://cpp.army.mil
AMERICA’S ARMY: THE STRENGTH OF THE NATION
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Welcome
• The Army's senior leaders are committed in making resource-informed decisions by means of CBAs
• Army leaders have identified cost culture as one of the highest priorities in adapting to an increasingly resource-constrained environment.
AUSA National MeetingOctober 2010
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Mr. Stephen G. BarthDeputy Assistant Secretary of the Army(Cost & Economics)
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Class Participation Guidelines
Participants are expected to:• Attend all four days of training• Be punctual for each session• Participate in discussions• Relate his or her own experiences• Ask questions• Listen to others• Avoid disrupting the class (i.e., side conversations)• Refrain from using wireless devices during class:
– Turn cell phones to either “off,” “silent,” or “vibrate” – Unless an emergency, do not use cell phones
Please, wait until the break
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Evaluation
Each student will be assigned a final grade based on:
• Attendance• Participation in mini-case exercises• Performance on CBA Capstone Case Study• Performance on final exam: writing a 2-hour CBA*
* Individuals with an average grade (attendance, mini-case exercises, CBA Capstone Case Study) in the top 25% of the class will be waived from the final exam and may leave a day early.
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• Given a case study, individually perform and write a CBA (2 hours).
• The final product will be evaluated one-on-one by an instructor, and assigned a grade of A (“We think you’ve got it”), B (“Pass, but study more”), or C (“Not yet mastered CBA methodology”).
• Grade will determine access to class materials on AKO.
• Not grading for grading’s sake, but a chance for free one-on-one hands-on evaluation.
Final Exam and Grading Procedures
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Four-Day CBA Training Objectives
Objectives:• Provide an overview of the Army’s CBA policies,
regulations, methodology, and roles• Discuss CBA workflow automation tools• Offer additional tools to develop quality CBAs, such
as:– Analytical and graphical tools and techniques– Cost analysis methodologies, databases, and models– Financial and operational benefits analyses
• Review case studies and conduct exercises to illustrate the application of these tools and methodology
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• The aim of the class is NOT to give an introduction to Cost-Benefit Analysis. A four-hour class exists for that purpose, as well as a CBA Guide.
• The purpose of this course is to provide rigorous, analytical instruction, opportunities for hands-on application in performing Cost-Benefit Analyses, and one-on-one evaluation of work produced.
Purpose of the Class
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Four-Day CBA Training Schedule
CBA Introduction and Overview
Step 1: Problem/Opportunity and Objective
Step 2: Define CBA Boundaries and Parameters
Mini-case #1, 2, 3
Capstone Groups Assigned
Step 3: Define Alternatives
Step 4: Develop Cost Estimates for Each Alternative
Mini-case # 4
Step 5: Benefits
Mini-case #5, 6
Capstone Case Study Presentation and Review
Step 6: Alternative Selection Criteria
Step 7: Compare Alternatives
Step 8: Report Results and Recommendations
Mini-case Exercises: #7, 8, 9, 10
Capstone Case Study Groups Meet
Monday Tuesday Wednesday Thursday
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Day 1 Agenda
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• 1200 – 1330: “CBA Introduction and Overview”• 1340 – 1425: “Step 1: Problem/Opportunity and Objective”• 1435 – 1520: “Step 2: Define CBA Boundaries and Parameters”• 1530 – 1700: Mini-case exercises #1, 2, 3
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Key Learning Objectives
The goal is to understand:• What a CBA is• Guidance from senior leaders• Value of a CBA• Responsibilities of key players• Role of CBA in HQDA-level decision-making
process• Process of CBA (high-level perspective)• Structure of a CBA• Pre-CBA Considerations
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Although this course draws largely on policies and activities at Headquarters, Department of the Army, the content and guidance are readily transferrable to subordinate command and installation level.
A Note About Perspective
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POLICY GUIDANCE
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CBA Policies: OSD and the Army
• “each unfunded requirement and new or expanded program…be accompanied by a thorough cost-benefit analysis”
Department of Army Directive (Jan 07, 2011) (Dec 30, 2009)
The Secretary of Defense Directive (Dec 27, 2010) (Aug 16, 2010)
• “every new proposal or initiative will come with a cost estimate”
• “effective 1 Feb 2011, calculate costs associated with [studies & events]”
• “Require a cost estimate for all program and policy proposals”
• “use Cost-Benefit Analysis (CBA) or similar analytical approaches/tools to support resource-informed decision making”
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Impact of the Army Directive
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• USA/VCSA memo was sent to HQDA principal officials (see back-up section for complete list of addressees)
• As expected, the requirement is “trickling down.”
– HQDA officials are requesting CBAs from the field
– Subordinate commands are requiring CBAs internally
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Army Leadership ExpectationsLeadership Expectations:• Ensure the CBA results and efficiencies comply with Department of
Defense, Department of the Army, and congressional directives
• Allocate limited funding to achieve Army’s strategic priorities efficiently
• Collaborate with stakeholders to develop effective and efficient solutions
• Use CBA to:– Make resource-informed decisions– Deliver strong value proposition for the Army
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CBA DEFINITIONAND DESCRIPTION
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Cost-Benefit Analysis:• Is a structured methodology used to identify alternative solutions
to a problem, determine the costs and benefits of each alternative, define the appropriate decision criteria, and select the best alternative.
• Produces a strong value proposition – a clear statement that the benefits outweigh the costs and risks.
• In English:1. Define a problem or opportunity2. Identify alternatives3. Determine their costs and benefits4. Evaluate and select the best alternative
What is a CBA?
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• In any organization, “culture” is the beliefs and principles that guide the behavior of the people in that organization.
– For example: The Army’s military culture is based on mission accomplishment, selfless service, valor, and dedication. These concepts establish the foundation for how Soldiers and Civilians go about their duties.
• In a cost culture:– Cost is an integral part of every decision– Soldiers and Civilians strive to find better and cost effective ways to operate the Army
enterprise– Leaders at all levels engage in cost control and management activities, which are supported
by talented cost staffs
CBA and the “Cost Culture”
CBA is part of a high-priority initiative to inculcatea cost culture throughout the Army.
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VALUE OF CBA
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Purpose:• Supplement (but not replace) professional experience, subject
matter expertise, and military judgment with rigorous analytical techniques
• Make best possible use of constrained resources• When making resource decisions:
– Ensure that all decisions are resource-informed– Treat cost a consideration from the outset, not as an afterthought– Understand how much benefit will be derived– Identify billpayers– Consider second- and third-order effects
Why Do We Need CBAs?
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REQUIREMENT FOR HQDA-LEVEL REVIEW
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Unfunded requirements, new program proposals, or expansions being presented to the Senior Leaders of the Department of the Army.
Issues presented to HQDA forums/processes:
Issues that are important to the Army leadership, OSD, or Congress
CBAs Requiring HQDA Review
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– POM/BES– Army Campaign Plan (ACP)– Army Requirements and Resourcing
Board (AR2B)– Force Design Update (FDU)
– Army Requirements Oversight Council (AROC)
– Training Resources Arbitration Panel (TRAP)
– … and more to follow
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• The Cost-Benefit Analysis Review Board, or CBARB, reviews each CBA submitted to HQDA and makes a recommendation to the Deputy Assistant Secretary of the Army (Cost and Economics) as to whether the CBA is suitable to support decision making.
CBARB
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• CBA-RB reviews CBA:– Cost estimate– Analytical rigor– Assumptions– Methodology and logic
• DASA-CE decision, based on CBARB recommendation:
– Is the CBA suitable or adequate to support decision making?
– DASA-CE approval is not approval of the recommendation in the CBA
CBA-RB Role for CBAs Submitted to HQDA
CBA is submittedCBA-RB reviews CBA
and makes recommendation
DASA-CE approves CBA
Decision Maker uses CBA to make
resource-informed decision
• CBA-RB members:– Board chair - Division Chief– Standing members:
Army Budget Office (ABO) PAED G-3/5/7
– Other members, as needed based on the subject matter:
Appropriate DASA(CE) divisions PEG representatives (as determined by
PAED) ABO appropriation sponsors HQDA functional proponents Manpower specialist from G-1 Other functional proponent(s)
Commands and installations are encouraged to establish similar teams to review and validate CBAs
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Questions for Reviewers
Alternatives Development• Is each of the alternatives feasible?• Are the alternatives distinctly different?• Are there obvious alternative that are not presented?• Does the CBA adequately identify (with supporting
documentation) the costs and benefits of each alternative?
Accuracy• Is the CBA technically correct
(math, formulas, models, data sources, etc.)?
• Is the CBA functionally correct (facts, not opinions)?
Analysis and Conclusions• Are the decision criteria clearly identified?• Does the CBA use appropriate analytical techniques for the situation?• Is the recommended alternative compatible with the assumptions and constraints?• Does the analysis clearly explain how the recommended alterative is better than the others at satisfying
the decision criteria?• Does the recommended alternative satisfy the Problem Statement?• Have the risks been adequately expressed in the analysis and recommendation?• Does the decision briefing (or other final product) support the recommended alternative?
CBARB will determine whether the CBA is technically and functionally sound
Problem Statement, Assumptions, and Constraints• Is the Problem Statement clear, and does it accurately identify the issue?• Are the assumptions clearly stated and realistic?• Are all relevant constraints identified?• Is the Problem Statement, assumptions, or constraints structured in a manner that is clearly intended to
favor one alternative?
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METHODOLOGY OVERVIEW
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Surprisingly Simple
CBA is easy to do!It’s not rocket science.
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Eight-Step Methodology
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CBA Methodology Military Decision-Making Process (MDMP) *
Cost Benefit Analysis and the MDMP
* As prescribed in FM 5-0.
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CBA is Not a Linear Process
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Objective
Assumptions
Alternatives
SelectionCriteria
CompareAlternatives
Recommendation
Cost EstimatesBenefits
Estimate
Sensitivity Analysis
At any step in the process, the team’s findings and analysis might make it necessary to revisit previous steps.
Significant findings might require asking the decision maker for revised guidance.
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ESStep 1: Define the Problem/Opportunity
and Objective
• The Problem Statement clearly defines the problem/opportunity that:
– Requires a solution– Describes what the effort will accomplish
• The objective of the analysis:– Describes the role of the CBA: what is the decision
to be made, and how does the CBA inform and support it.
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Before beginning, determine whether the proposal is realistic and will be seriously considered.
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ESStep 2: Define CBA Boundaries and Parameters
The Boundaries and Parameters of a CBA are the specifications that make an analysis feasible and practicable. They are expressed by Scope, Facts, and Assumptions.
• Scope: Defines the range of coverage encompassed by an initiative or proposal along specific dimensions like time, location, and organization.
• Fact: A verifiable statement that is real and something that has happened or is happening.
• Assumption: A condition or situation over which we have no control but is essential to the success of our proposed solution.
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Step 3: Define Alternatives
• Alternatives:– Potential solutions to the Problem
Statement, given Scope, Facts, Assumptions, and Constraints.
– They must include the status quo or current state, if applicable.
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ESStep 4: Develop Cost Estimate for Each Alternative
Cost Estimates:• Capture the total cost of each alternative over
the appropriate period of analysis.
Types of Cost Estimates:• Historical• Parametric• Analogy• Engineering
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Document the cost estimate with data sources, computations, rationale, etc. as this is essential
to the review/validation process.
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ESStep 5: Identify Quantifiable and
Non-Quantifiable Benefits
• Benefits: “Benefits of a chosen alternative are results expected in return for costs incurred. They are the quantitative and qualitative results expected or resulting from the implementation of a project/initiative (which may include but are not limited to the following: equipment, facilities, hardware, systems, etc.).” (CBA guide, “Step 5”)
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Step 6: Define Alternative Selection Criteria Alternative Selection Criteria:• The standards upon which the decision will be
based– Criteria must be consistent with the Problem Statement
and the benefits
CBAs must: • Identify the recommended decision criteria• Elucidate how much each alternative satisfies
the criteria
Leadership Engagement: The Lead Analyst should work with the Functional Manager to ensure they agree on the selection
criteria, particularly if criteria will be weighted in the evaluation phase36
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ESStep 7: Compare Alternatives
Alternative Comparison: Compare alternatives using the selection criteria to identify the preferred alternative.Billpayer Analysis: Identify the billpayer if there is a bill associated with the recommended alternative.Effects Analysis: Identify the positive and negative impacts of the 2nd and 3rd order effects. What must be done to manage the negative impacts?Sensitivity Analysis: Determine the robustness of the conclusions. If anything changes (i.e., assumptions, costs, benefits) would the recommendation change?Risk Analysis: Identify the high-risk aspects of the recommended alternative and define appropriate risk mitigation measures.
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ESStep 8: Report Results and Recommendations
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Results and Recommendations:• Summarize the analysis• Make conclusive statements about each of the
alternatives and how they were evaluated• Present specific recommended solution• Include documentation used in all steps
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Preferred document format is a narrative.• Narrative provides all the words that would accompany a briefing and
therefore is more clearly understood• Cost estimates are easier to document by including spreadsheets
Key elements for both formats:• Clarity:
• Does not contain vague, unsubstantiated statements/data• Presented in suitable terms for the intended recipient
• Analytical rigor:• Steps are supported by and consistent with the preceding steps
• Completeness:• Key deliverables are addressed at each step of the methodology
Packaging the Complete Product
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CBA examples of narrative and briefing forms are in “Appendix E,” CBA Guide, https://cpp.army.mil
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In Summary: CBA is Not Rocket Science
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At the conclusion of this class, if you continue to follow the methodology we
teach, you’ll find that a CBA is
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• Establishes the standard procedure for preparation of CBAs, located at https://cpp.army.mil under “Documents” tab.
• All preparers should refer to and follow the procedures set forth in the CBA guide. These are the standards against which all CBAs will be evaluated.
IMPORTANT: CBA Guide
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QUICK REVIEW
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CBAs:• Are becoming embedded in the Army’s decision-making
processes• Are based on a sound, logical approach to problem solving
Value of CBAs:• Supplement (but not replace) professional
experience, subject matter expertise, and military judgment
• Ensure the efficient allocation of the Army’s limited funds by enabling leaders to make better cost-informed decisions
Quick Review
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Expectations and Tips
What senior leaders expect:• Support of the Army’s strategic priorities,
directives, and regulations• Analytical rigor and innovative thinking• Collaboration with stakeholders to develop
effective and efficient solutions• Feasible alternatives
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To plan for success in your CBA role:• Form a capable CBA team with clear roles and responsibilities• Understand the CBA eight-step methodology and the key deliverables• Establish a timeline to monitor progress• Leverage available support (identified in the “Resources” section of
this briefing)
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RESOURCES
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Available Tools and Models for Cost Data
Tool/Model URL Purpose
FORCES Cost Models https://www.osmisweb.army.mil/forces/login.aspx Suite of models that provides quick and reasonable unit cost estimates to a wide variety of users
Army Military-Civilian Cost System (AMCOS)
https://www.osmisweb.army.mil/amcos/app/home.aspx Personnel costs for military, civilian, and/or contractor
ASA(FM&C) Website http://asafm.army.mil/Documents/OfficeDocuments/CostEconomics/rates/indices.xls
Inflation indices
Capabilities Knowledge Base
http://asafm.army.mil/Documents/officedocuments/costeconomics/guidances/ckb-ui.pdfhttp://asafm.army.mil/offices/CE/Ckb.aspx?OfficeCode=1400
Research, development, and acquisition costing for major weapon/material systems
Operating and Support Management Information
System (OSMIS)
https://www.osmisweb.army.mil/osmisrdb/login.aspx Operating and support information for major weapon/material systems
Some of the websites listed here require user accounts. In most cases, anyone with a dot mil address can obtain an account. You are encouraged to scan these sites and request an account to any site that you think will be useful to you. This will save time when you need to use any sites to support a CBA or other projects.
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Access links through the “Resources” tab in the CBA Portal at https://cpp.army.mil
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• Cost-Benefit Analysis Portal– Go to the Cost & Performance Portal (CPP) at https://cpp.army.mil– If you already have a CPP account, click Enter Site. If not, click Request a New
Account and follow the instructions to register your Common Access Card (CAC).– If you get the message, There is a problem with this website’s security certificate,
click on Continue to this Website.– On the next screen, in the upper-left corner
• For the CBA Guide, examples, and related tools, click on Cost Benefit Analysis (CBA) Portal.
• To submit or track the status of CBAs, click on CBA Workflow Tool.• Dedicated mailbox provides authoritative answers to all questions:
– NIPR: [email protected]– SIPR: [email protected]
References and Assistance
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• Pre-CBA Considerations:
– Ensure that a CBA is needed– Select a qualified CBA team– Ensure that the relevant decision-making forum is aware of
the CBA review, so that the work of the CBA and review is a “value-added” process.
Before Beginning a CBA
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Pre-CBA Considerations - Need for CBA
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• A CBA is appropriate whenever decision-makers can be aided by an objective and resource-informed analysis of problems and alternatives.
• When a CBA is required: VCS/USA Memo, 30 Dec 2009—“…each unfunded requirement and new or expanded program proposal submitted to the Secretary of the Army, Chief of Staff, Army, Under Secretary of the Army or Vice Chief of Staff, Army, [must] be accompanied by a thorough cost-benefit analysis (CBA).”
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CBA Team
Pre-CBA Considerations - CBA Team Identification
Validate the need for a CBA
• CBA is a team effort, not an individual effort
• CBA Lead Analyst: Integrates efforts of CBA team
• CBA Functional Proponents and Representatives: Provide data, assist in COA development, determine cost elements, validate/provide assumptions and constraints
• CBA team members should:– Attend CBA training or orientation
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Version 3.0 (Draft)Last Updated: 10 November 2011
Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more
https://cpp.army.mil
AMERICA’S ARMY: THE STRENGTH OF THE NATION
Cost-Benefit Analysis (CBA)Four-Day Training Briefing
Step 1: Problem/Opportunity and Objective
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Key Learning Objectives
CBA team members will:• Use tools and techniques to develop statements
describing:– Problem/Opportunity – Objectives– Background
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• The Background/Strategic Context– Provides the contextual information needed to understand the
problem, need, or opportunity addressed in the CBA.• The Problem/Opportunity Statement:
– Defines unfulfilled customers’/stakeholders’ needs and expectations– Defines an opportunity to optimize/improve the performance of a
product and/or service for the end user
• The Objective:– Describes the role of the CBA: what is the decision to be made,
and how does the CBA inform and support it. What is the purpose of the analysis?
• Background: – Discusses the circumstances that describe a need for the CBA
Step 1 Overview: Define Problem/Opportunity and Objective
Key Questions:– Does the Problem/Opportunity Statement provide a definition of the output performance issue/need?– Does the objective meet the leadership’s needs? What major stakeholders are likely to be impacted?
* Product(s) and/or service(s) are outputs with expected levels of performance (i.e., levels of efficiency and effectiveness) from a customer/stakeholder. When customer/stakeholder expectations are not met, then there is an issue/problem requiring an alternative/solution.
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• “The background and circumstances define and assess the current state/condition. They provide the contextual information needed to fully understand the problem, need, or opportunity addressed in the Cost Benefit Analysis” (CBA Guide, “Step 1” https://cpp.army.mil)
Background/Strategic Context
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• The problem/opportunity statement and objective should be accompanied by additional background information to help the reader understand various aspects of the problem– The context in which the problem exists– The guidance from senior leaders that establishes the importance of the
requirement– The history of how the current situation came to exist
• Background information should be substantial enough for all stakeholders to understand and support the Problem/Opportunity Statement.
Background and Strategic Context
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• If the status quo isn’t considered a valid solution, the background information should explain why. Guideline: The status quo might not be a valid option if the required performance is not being achieved. For example:– If the CBA addresses a new requirement – one that is currently not being
accomplished either well or poorly – there might not be a status quo.– If the CBA objective is to improve output to a level that far exceeds the
current level, there might not be a status quo. In this case, the implicit decision has already been made to select a COA beyond the status quo.
– If the status quo achieves the desired output but does so at a high cost, the status quo might not be considered a valid alternative.
Background and the Status Quo
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• “A problem statement clearly defines the problem, mission need, and required capability. When developing a problem or opportunity statement, the key is to state the problem or opportunity in terms of the organization’s mission that requires a solution to describe what the effort intends to accomplish.” (CBA Guide, “Step 1”, https://cpp.army.mil)
Problem/Opportunity Statements
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Problem/Opportunity Statement Key Questions
Define the problem/opportunity succinctly in terms of Who, What, When, Where, and Extent.
The Problem/Opportunity Statement should include this information.
Who is experiencing the issue? Who will receive the benefits from an improved product or service? Specifically, who are the stakeholders/process owners?
What required performance is not being achieved? What are the problems being addressed: defects, delays, rework, mistakes,
etc.?
When, how, and where does the problem/opportunity occur? When did it begin? This could be as simple as “as long as we know”.
What is the extent of the problem in terms of magnitude or trend (changes in magnitude)?
WHO
WHAT
WHEN/HOW/WHERE
EXTENT
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Determining Unfulfilled needs
Observations Problem/Opportunity
I am always transferred to three or more different people
Quality of Service: Sorting of incoming calls, assignment of the correct
assistant to customer
I’m getting my billat different times
of the month
Delivery of Service: Lack of consistent standard for delivery
date
It takes too long to process the application
Efficiency of Process:Loan Cycle Time
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• Problem stated as predetermined solution instead of as problem, as in the form, “We need more money.”
• Problem does not reflect the stakeholder concerns• Problem is based on anecdotal information
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1) The total operating budget at Fort Hampton (in then-year dollars) has increased at a rate of 2.5% per year for the past 8 years, while the inflation rate for the same period has remained constant at 3% per year. This fiscal year, the budget has been abruptly cut by 10% compared to the previous year. Two hundred HMMWVs manufactured each year are temporarily stored in a facility at Ft. Hampton, which will soon be under repair and unavailable for use. Determine the correct problem statement.
Problem/Opportunity Statement Exercises
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1) The total operating budget at Fort Hampton (in then-year dollars) has increased at a rate of 2.5% per year for the past 8 years, while the inflation rate for the same period has remained constant at 3% per year. This fiscal year, the budget has been abruptly cut by 10% compared to the previous year. Two hundred HMMWVs manufactured each year are temporarily stored in a facility at Ft. Hampton, which will soon be under repair and unavailable for use.
Solution: Because the current storage facility at Ft. Hampton will soon be unavailable for use, the Army must determine the best way to store HMMWVs.
Problem/Opportunity Statement Exercises
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2) The Commander, USCENTCOM has asked for a comparison of three alternatives for clearance of IEDs along a major supply route. Determine the problem statement and objective.
Problem/Opportunity Statement Exercises
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2) The Commander, USCENTCOM has asked for a comparison of three alternatives for clearance of IEDs along a major supply route in Afghanistan. Determine the problem statement and objective.
Solution: Problem statement—IEDs placed along major roads threaten the lives of coalition troops and the movement of critical supplies. Objective—to inform Commander, USCENTCOM decision on alternatives for IED clearance.
Problem/Opportunity Statement Exercises
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Defining the problem/opportunity is the first step in developing a CBA;
however, it is important to collaborate with CBA key players to ensure leadership agrees that the
CBA addresses the decision.
Validate the CBA Problem/Opportunity
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Typical Stakeholders by CBA
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CBA Title Stakeholders
“Detrick Earth Station Direct Communications Link In-sourcing Initiative”
Dept. of State, White House Communications Agency, OSD, U.S. Northern Command
“US Army Pacific G-2X (CI/HUMINT)” U.S. Army Pacific Command, TRADOC, Intel CoE, NETCOM
“Reserve Components Soldier Medical Support Center”
U.S. Army Reserve Command, G1, OSD, Dept. of Veterans Affairs
“Command Chief Warrant Officer Cost Benefit Analysis”
USAR, Operational & Functional Commands, Expeditionary Sustainment Commands
“Transition of the Combat Support Agency Command”
Combat Support Agency Command, Military Intelligence Readiness Command
“Stryker Cost Benefit Analysis” Army Capabilities Integration Center, FORSCOM, AMC, G8 FD, ASA(ALT)
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• The objective statement describes the role of the CBA: what is the decision to be made, and how does the CBA inform and support it? What is the purpose of the analysis?
Objective Statement
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• “To inform Congressional decision on funding for winter storage of HMMWVs at Fort Benning.”
• “To inform senior leader decision on the allocation of DAC, contractor, and military labor to perform the physical security function at Camp Victory.”
Objective Statement: Examples
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• In a rented garage at 58 Bagley Street in Detroit, Henry Ford completed his first gas-powered car on the morning of June 4, 1896. He had spent $250 FY1896 dollars on equipment to build the car, and $100 on labor. The garage cost $15 per month to rent. After the car was assembled, it was clear that it would not be able to fit through the door of the rented garage. The car was to be used as a model for the two-year long test-driving phase of his R&D process, with the final goal of arriving at a model for mass production and sale. Determine the correct problem/opportunity statement and objective.
Review Exercise: Henry Ford
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• In a rented garage at 58 Bagley Street in Detroit, Henry Ford completed his first gas-powered car on the morning of June 4, 1896. He had spent $250 FY1896 dollars on equipment to build the car, and $100 on labor. The garage cost $15 per month to rent. After the car was assembled, it was clear that it would not be able to fit through the door of the rented garage. The car was to be used as a model for the two-year long test-driving phase of his R&D process, with the final goal of arriving at a model for mass production and sale. Determine the correct problem/opportunity statement and objective.
Solution: Problem statement—the next phase of Ford’s R&D process cannot proceed without a drivable car. Objective—to inform Ford’s decision on how to obtain a car for test-driving.
Review Exercise: Henry Ford
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Version 3.0 (Draft)Last Updated: 10 November 2011
Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more
https://cpp.army.mil
AMERICA’S ARMY: THE STRENGTH OF THE NATION
72
Cost-Benefit Analysis (CBA)Four-Day Training Briefing
Step 2: Define CBA Boundaries and Parameters
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The Boundaries and Parameters of a CBA are the specifications that make an analysis feasible and practicable. They are expressed by Scope, Facts, and Assumptions.
• Scope: Defines the range of coverage encompassed by an initiative or proposal along specific dimensions like time, location, and organization.
• Fact: A verifiable statement that is real and something that has happened or is happening.
• Assumption: A conclusion drawn from facts and observations describing a status or condition that is not certain to exist.
Defining CBA Boundaries and Parameters
73
The CBA should state the involved stakeholders, period of time that the analysis covers, and Stakeholders’ Needs not
addressed in the analysis.
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• Boundaries and parameters provide the limiting conditions that make a controlled analysis of alternatives possible. Consider:– Difficulty of analysis in an unbounded problem: how to achieve world
peace.– Possibility of analysis in a bounded problem: how best to neutralize the
threat of potential Iranian nuclear capability by the strategic deployment of a new missile defense system, given an annual budget allocation of $1.5B, and given that several potential deployment sites exist in Eastern Europe and the Middle East.
Boundaries and Parameters
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• In a CBA, the boundaries and parameters are expressed in the Scope, Facts, and Assumptions.
Boundaries and Parameters
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• “The scope of the analysis defines the range of coverage encompassed by the project along specific dimensions such as time, location, organization, technology or function. The CBA should state the involved stakeholders, period of time that the analysis covers, as well as organizations or requirements not covered or addressed in the analysis.” (CBA Guide, “Step 2”, https://cpp.army.mil)
Definition: Scope
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• The choice of scope is very significant, and can distort the analysis in favor of one or more COAs. Consider:– The cost of buying versus leasing a car
• over a period of one year • over a period of fifteen years
– O&M costs of Pentagon office space from the perspective of:• Individual DoD employee• Department of the Army• Department of Defense• Taxpayer
– Impact of 2008 Lehman Brothers bankruptcy on:• Lehman Brothers 2008 summer intern• Lehman clients• Barclays• U.S. and international financial markets• 2011 Occupy Wall Street protesters
Scope
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• Different scopes entail different cost estimates: For example, Flyaway, Weapon System, Procurement, Program Acquisition, and Life Cycle Costs all encompass different types of costs.
Scope
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• The scope chosen for the CBA– Must be the same across all COAs.– Must allow for a fair comparison
between the costs and benefits of all alternatives. “Normalization.”
• For instance, if the cost of COA1 starts off very high in the first year but drops off sharply in later years, and the cost of COA2 starts off low but rises sharply in later years, the time scope chosen should be sufficiently large to accurately capture the effects of both trends.
Scope
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• Properly scope the following CBA:– A comparison of two new weapons systems, Sys 1 and Sys 2, to be
procured by all FORSCOM units. Sys 1 has a lifecycle of 6 years, Sys 2 has a lifecycle of 4 years. O&S costs are shown in the table below. Give the appropriate length of analysis for this CBA.
Scope Exercise
80
FY1 FY2 FY3 FY4 FY5 FY6
Sys 1 $3M $0.5M $0.5M $0.2M $0.4M $0.7M
Sys 2 $1M $1M $1M $0.8M --------- ---------
Note: Fictional
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• Properly scope the following CBA:– A comparison of two new weapons systems, Sys 1 and Sys 2, to be
procured by all FORSCOM units. Sys 1 has a lifecycle of 6 years, Sys 2 has a lifecycle of 4 years. O&S costs are shown in the table below. Give the appropriate length of analysis for this CBA.
Solution: The appropriate time span is 12 years … the lowest common multiple of the four- and six-year lifecycles for the two systems.
Scope Exercise
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FY1 FY2 FY3 FY4 FY5 FY6
Sys 1 $3M $0.5M $0.5M $0.2M $0.4M $0.7M
Sys 2 $1M $1M $1M $0.8M --------- ---------
Note: Fictional
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• An office within HQDA is expanding by 10 people and requires additional desk space within the Pentagon. Since the office space is provided to the Army by DOD without charge, one analyst has suggested that all COAs within the Pentagon are cost-free, and therefore only benefits need to be considered. Determine if this reasoning is correct, and determine the appropriate scope for the analysis.
Scope Exercise
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• An office within HQDA is expanding by 10 people and requires additional desk space within the Pentagon. Since the office space is provided to the Army by DOD without charge, one analyst has suggested that all COAs within the Pentagon are cost-free, and therefore only benefits need to be considered. Determine if this reasoning is correct, and determine the appropriate scope for the analysis.
Solution: Scoping the cost to the Army, the cost of office space is not captured.The appropriate scope which captures the full cost is from the perspective of DOD.Note: These answers assume that the additional staff must be in the Pentagon. If
putting the 10 people in another building is a viable alternative, then the solution shown here would probably change.
Scope Exercise
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• An Army organization currently employs 1000 people, all DACs. This organization has prepared a CBA comparing the costs of converting 5 of the current DACs to 5 contractors (working the same number of hours). The annual cost to employ each DAC is $100K, and due to training expenses, the cost to employ each contractor is $110K. In the CBA, the cost of COA1 (all DACs) is listed as $100M, and the cost of COA2 (995 DACs, 5 Contractors) is listed as $100.05M. What is wrong with the scope of this CBA?
Scope Exercise
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• An Army organization currently employs 1000 people, all DACs. This organization has prepared a CBA comparing the costs of converting 5 of the current DACs to 5 contractors (working the same number of hours). The annual cost to employ each DAC is $100K, and due to training expenses, the cost to employ each contractor is $110K. In the CBA, the cost of COA1 (all DACs) is listed as $100M, and the cost of COA2 (995 DACs, 5 Contractors) is listed as $100.05M. What is wrong with the scope of this CBA?
Solution: The scope should be confined to the five positions that are being considered for conversion. The comparison should be between five DACs and five Contractors.
Scope Exercise
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86
Definition: Facts
Facts:• A verifiable statement that describes an objective
condition or event, something that has happened or is happening. The most relevant facts are those that constrain the CBA.
• Constraints are the “limits placed on resources to be devoted to the project. All managers are faced with certain constraints within which they operate. Constraining organizational policies or procedures, funding considerations, physical limitations, and time-related considerations need to be addressed in the CBA. These policies/considerations could stem from technical, environmental, ethical, or political constraints.” (CBA guide, “Step 2”, https://cpp.army.mil)
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Assumptions:• A condition or situation over which we have no control but is essential to
the success of our proposed solution.• Assumptions impose risk on the solution. The risks and risk mitigation
measures must be specified in the CBA.• Sensitivity analyses are performed by purposefully strengthening or
weakening individual assumptions, and noting the effect on the COA recommended. The best COAs are those that remain the optimal course of action over a wide range of assumptions.
Definition: Assumptions
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• Assumptions made for one COA should be made to the same degree in all other COAs as relevant. For instance: – It is not reasonable to assume in one COA that 20 people will required to
perform a task if in another COA it is assumed that only 15 people are required to perform the same task.
– It is not reasonable to assume in one COA that a particular resource will be available in 10 years, if in another COA it is assumed that it will be available only for the next year.
Assumptions
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• “Army War College S&P Department Expansion CBA”– Fact: Course demands through the Strategy and Policy Department at the
War College have increased by 65% over the past three years.– Fact: 60% of the S&P Department faculty will be 70 or older in the next
five years.– Assumption: Workload for department faculty will increase.– Assumption: More than one third of the S&P faculty will retire within the
next five years.– Assumption: After an initial training period, each new hire will be able to
perform as much work as the recently retired faculty member.– Fact/Constraint: the War College Dean has allocated no more than
$1.2M/year to pay the salaries of new faculty members.
Facts and Assumptions Examples
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• “U.S. Army Central Command Afghanistan Police Force Training”– Fact: President Obama has announced that all U.S. troops will withdraw
from Afghanistan by the end of 2014.– Assumption: Troop withdrawal will proceed as scheduled.– Fact: American troops provide for 80% of current domestic
counterterrorism force training in Afghanistan.– Assumption: demand for counterterrorism training will not decrease after
U.S. withdrawal.– Assumption: without coordinated assistance, security training resources
will be understaffed after U.S. withdrawal.
Facts and Assumptions Examples
90Note: Notional
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• You are preparing a Cost-Benefit Analysis to aid in the decision to sell or lease an older fleet of U.S. Army helicopters to the Iraqi Army. From the following facts listed, draw possible assumptions relevant to the analysis:– Fact: under the current agreement, a lease may be extended or concluded
at the end of every two years, at the discretion of the Iraqi Army. At the conclusion of the lease, the helicopters will be returned to the U.S. Army. The RAF will be accountable for any damages beyond normal wear.
– Fact: The fleet has been used extensively in Operation Desert Storm (Iraq, 1991). They will also be used by the Iraqi Army in a similar climate.
– Fact: Recent sales of used helicopters have been at “as-is” condition.
Facts and Assumptions Exercise
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• Possible assumptions:– Under a lease, the Iraqi Army will have less of an incentive to properly
maintain the fleet against “normal wear,” and the actual life cycle of the fleet may be reduced as a result.
– Since conditions of use are similar, future wear can be approximated by historical wear.
– By selling the fleet, the U.S. Army will not be responsible for further costs of maintaining the fleet (i.e. the buyer assumes the risk).
• Other facts to be determined that would aid the analysis: – Estimate of remaining lifetime of the fleet.– “Lease” and “Buy” prices at which Iraqi Army is willing to settle.– Remaining utility of fleet to U.S. Army.
Facts and Assumptions Exercise
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• In a rented garage at 58 Bagley Street in Detroit, Henry Ford completed his first gas-powered car on the morning of June 4, 1896. He had spent $250 FY1896 dollars on equipment to build the car, and $100 on labor. The garage cost $15 per month to rent. After the car was assembled, it was clear that it would not be able to fit through the door of the rented garage. The car was to be used as a model for the two-year long test-driving phase of his R&D process, with the final goal of arriving at a model for mass production and sale. Define the scope and identify facts and assumptions.
Review Exercise: Henry Ford
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• Following the President’s announcement of the scheduled deployment of three BCTs to Australia, it has been determined that a secure communications link must be established between the White House, Pentagon, State Department, and the new Australian base. SECDEF and CJCS have tasked Army WEBCOM with the extra responsibility of managing the new communications link. Currently, 35 Army civilian GS-11 employees in WEBCOM are assigned to U.S. Army Pacific. It is anticipated that 42,800 total work hours per year will be required to maintain the new communications link. Each of the 35 Army civilians currently works full time. For Army civilians, if less than 200 hours of overtime is worked per year, the pay rate for overtime is $60 per hour. If between 200 and 400 hours of overtime is worked per year, the pay rate is $80 per hour of overtime. If more than 400 hours of overtime is worked in one year, the pay rate is $120 per hour of overtime. Contractors may be hired. No vendor quotes are currently available, but from the GSA catalog it has been determined that hourly rates can be estimated to be $88/hr. for this type of contractor labor. Currently, WEBCOM has been placed under a hiring freeze for Army civilians only. Perform all 8 CBA steps to support a decision.
Mini-case Exercise #1
94
or “who, oh who should overtime bill?”
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• In preparation for BRAC, the Army plans to build 20 office buildings (20 acres per office building) for use at Fort Beatrix. Army planners have identified 400 acres of uneven land near Fort Beatrix that it owns, and it has been valued at $45K per acre The cost to the army of constructing the first building is $2.25M, and the cost of constructing each additional building increases by $.25M for each building built due to increasing marginal cost of developing the uneven land (i.e., the second costs $2.5M, the third costs $2.75M, and so on). Alternatively, a contracting company is willing to construct any number of office buildings at a flat rate of $3M each. Perform all 8 CBA steps to support a decision.
Mini-case Exercise #2
95
or “how much for one building?”
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• Due to the impending drawdown and changing mission requirements, the General Officer overseeing three forward operating bases in Iraq—FOB Ironman, FOB Danger, and FOB Python—has been tasked to come up with 200 soldiers as transportation and logistics specialists within the next six months. However, the GO has been given no new growth mandates. The 200 must be relocated to Baghdad, which is a distance of 100 mi., 200 mi., and 150 mi. from Ironman, Danger, and Python, respectively. Each FOB has provided a list of nonessential personnel available for transfer to Baghdad, along with salary data. Perform all 8 CBA steps to support a decision.
Mini-case Exercise #3
96
or “what’s the cheapest route to Baghdad?”
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Version 3.0 (Draft)Last Updated: 10 November 2011
Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more
https://cpp.army.mil
AMERICA’S ARMY: THE STRENGTH OF THE NATION
97
Cost-Benefit Analysis (CBA)Four-Day Training Briefing
Step 3: Define Alternatives
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Four-Day CBA Training Schedule
CBA Introduction and Overview
Step 1: Problem/Opportunity and Objective
Step 2: Define CBA Boundaries and Parameters
Mini-case #1, 2, 3
Capstone Groups Assigned
Step 3: Define Alternatives
Step 4: Develop Cost Estimates for Each Alternative
Mini-case # 4
Step 5: Benefits
Mini-case #5, 6
Capstone Case Study Presentation and Review
Step 6: Alternative Selection Criteria
Step 7: Compare Alternatives
Step 8: Report Results and Recommendations
Mini-case Exercises: #7, 8
Capstone Case Study Groups Meet
Monday Tuesday Wednesday Thursday
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Day 2 Agenda
• 0830 – 0915: “Step 3: Define Alternatives”• 0930 – 1200: “Step 4: Developing Cost Estimates
for Each Alternative” and Mini-case #4• 1200 – 1300: Lunch• 1300 – 1630: “Step 5: Benefits” and Mini-case
exercises #5 and 6
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Step 3: Define Alternatives
• Alternatives:– Potentially optimal solutions to the
Problem Statement, given Scope, Facts, Assumptions, and Constraints.
– They should include the status quo or current state, if applicable.
Questions for the reviewer:- Have all feasible alternatives been considered to include alternatives that represent creative thinking?- Have the alternatives been defined and described clearly to a sufficient level of detail to support the development of a cost estimate?- Is the status quo included, or is its absence explained?- Do the alternatives span a reasonably wide range of potential solutions?
100
Use problem solving techniques to identify innovative and robust alternatives.
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Define the Status Quo
Status Quo (“As-Is” state):
• The status quo is the “baseline” program, process, or system: the solution that will exist if everything proceeds along the current trajectory.
• The CBA must be forward-looking, not historical. Therefore, the status quo is not always static—it must account for scheduled changes that might occur within the timeframe of the analysis.
101
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Assess the Status Quo for Viability
Is the status quo a viable alternative?• Ask this question: Can the status quo solve the problem, given the scope
and facts/constraints we’re dealing with?– Yes: Status quo is viable– No: Status quo is not viable
• For example:– Problem: A storage depot is given a new task to store sensitive items that
cannot be exposed to the weather– Fact: Existing storage facilities are concrete pads with overhead cover but no
walls– Conclusion: Status quo cannot solve the problem and is therefore not viable
102
If the status quo is not viable: It should still be costed and mentioned in the CBA. In the CBA, explain why the status quo was rejected
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• Beyond defining the status quo, there is no prescribed doctrine or methodology for developing other courses of action.
• So long as facts, assumptions, and scope are taken into account, any COA that falls within the boundaries and parameters thus defined can be a potential solution to the problem statement. Only COAs that are potentially optimal solutions should be included in the CBA.
Developing Alternative Courses of Action
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• The number of possible COAs generally increase with the number of decisions being made.
Developing Alternative Courses of Action
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• The set of COAs included in a CBA should– be potentially optimal solutions to the problem– represent the potential range of solutions
• COAs should not– be “anchored”: they should not be affected by a psychological bias
towards a favored alternative.– be subsets of each other—the COAs should not all be different “flavors” of
the same alternative.
Developing Alternative Courses of Action
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• For example, if the objective of a CBA is to determine what four-passenger car to buy, and if the selection criteria are cost and reliability:– Including just Mercedes and Porsche as the two COAs under consideration would
not cover the span of possible solutions. It can only be representative of those solutions that are both expensive and reliable.
– Including a COA that purchases a used car with 300,000 miles would also be unreasonable—this is not likely to be a reliable car and clearly not a potentially optimal solution.
– A set of COAs that spans a wider range of possible solutions and is also potentially optimal (i.e., spanning a wide range of costs and all reliable) might be COA1: New Porsche Panamera, COA2: New Toyota Corolla, COA3: Used Nissan Maxima with 80,000 miles.
Developing Alternative Courses of Action
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U.S. Army Central Command has secured $198M for the procurement of two different models of the “HIMARS 2” multiple rocket launcher—class X and class Y—for deployment to Afghanistan. The class Y HIMARS 2 costs $11M each and weighs 27,000 pounds. The class X HIMARS 2 costs $9M and weighs 12,000 pounds. After procurement, all the HIMARS 2 will be transported to Afghanistan by a fleet of ten C-130 Hercules aircraft, each with a maximum payload of 40,500 pounds.
Example: Finding Optimal Solutions
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How do you maximize the total number of HIMARS procured?
If you buy only Class X, you can afford 18.
If you buy only Class Y, you can carry 15.
So is “buy 18 Class X HIMARS” the optimal solution?
Example: Finding Optimal Solutions
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Example: Finding Optimal Solutions
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COA 1 (Status Quo)
COA 2
COA 3
COA 4
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You can procure 9 Class X and 11 Class Y HIMARS, for a total of 20.
Moral of the exercise: analysis is sometimes necessary to determine the optimal solution.
Example: Finding Optimal Solutions
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• DOTMLPF: A methodology used by JCIDS to brainstorm possible solutions within the dimensions of Doctrine, Organization, Training, Materiel, Leadership, Personnel, and Facilities.
• Consult Stakeholders, team members, and subject matter experts.
• Mathematical analysis and/or optimization.
Suggested Methods for COA Development
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Common mistakes• Proposing the hoped-for course of action along with several
obviously less attractive options in an attempt to force the decision in favor of one COA. In other words: presenting only one feasible option.
• Adding a course of action where the main difference is the funding solution
Courses of Action
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Developing Alternatives: Example 1
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SituationBecause of BRAC moves, the transportation office will have to process property shipments for three times the number of people that it normally supports. The current process is based on face-to-face meetings with individuals and manual preparation of forms. The increased workload level will last for 3-4 years.
Conventional SolutionSince workload is increasing by a factor of three, the solution is to triple the office’s manpower.
Innovative Problem Solving Don’t assume that existing policies, procedures, and standards cannot be changed. Consider wide range of solutions, such as:
Increase manpower staffing Outsource part of the process Automate the preparation of forms Reduce time for face-to-face meetings by enabling individuals to conduct part of the
interview online Challenge existing requirements for forms and data collection (i.e., the policies and
rules that govern the process)
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• Problem Statement: a review panel has determined that an annex facility in Arlington, VA housing an Army weapons costing division does not meet information security requirements.
• Possible alternatives:– Determine unmet requirements, and install the necessary modifications to
meet them.– Move the costing division to another facility that meets security
requirements.– Keep the costing division in its current facility, but only allocate work with
a non-sensitive classification.
Developing Alternatives: Example 2
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Due to BRAC, it is anticipated that demand for electric power at Ft. Hood will decrease by 40%. There are currently five separate power plants supplying electricity exclusively to Ft. Hood, with full operational capacities of 1.2 GW (gigawatts), 1.8 GW, 0.8 GW, 1 GW, and 1.5GW. Normal operational capacity is 75%. To run each plant, there is a fixed cost of $1M per month, and a variable cost of $0.5M per GW-month. If the objective is to reduce cost where possible, propose at least four alternative courses of action for this (fictional) scenario.
Developing Alternatives: Exercise
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• In a rented garage at 58 Bagley Street in Detroit, Henry Ford completed his first gas-powered car on the morning of June 4, 1896. He had spent $250 FY1896 dollars on equipment to build the car, and $100 on labor. The garage cost $15 per month to rent. After the car was assembled, it was clear that it would not be able to fit through the door of the rented garage. The car was to be used as a model for the two-year long test-driving phase of his R&D process, with the final goal of arriving at a model for mass production and sale. Define possible alternative Courses of Action.
Review Exercise: Henry Ford
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Version 3.0 (Draft)Last Updated: 10 November 2011
Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more
https://cpp.army.mil
AMERICA’S ARMY: THE STRENGTH OF THE NATION
Cost-Benefit Analysis (CBA)Four-Day Training Briefing
Step 4: Develop Cost Estimates for Each Alternative
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Key Learning Objectives
Objectives:• Obtain an introduction to cost estimating• Understand cost fundamentals• Understand the cost estimating process
– Prepare for the cost estimate– Establish a framework for the estimate– Establish the timeframe for the estimate– Identify data sources and collect data– Develop the estimate– Identify cost of second- and third-order effects– Prepare supporting documentation
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ESStep 4: Develop Cost Estimates for Each Alternative
119119
Cost Estimate:• Captures the total cost of each alternative over
its relevant life cycle
Cost estimate requires robust documentation to facilitate review and validation of the CBA.
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• Introduction and overview• Cost fundamentals – a brief primer• Principles and rules• Tools• Cost Estimating Methods• Summary and conclusion
Outline
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Introduction and Overview
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Cost:• The monetary representation of resources used, sacrificed, or liabilities
incurred to achieve an objective.– Example:
The resources expended in acquiring or producing a good The resources expended in performing an activity or service
Cost Estimating: • The process of collecting and analyzing data and applying quantitative
models, techniques, tools, and databases to estimate the future cost of an item, product, program, or task.
Cost and Cost Estimating Definition
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Cost estimating is thought by some to be difficult, but the skills and knowledge are logical and straightforward. It isn’t rocket science.
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• Enable managers to– Make resource-informed decisions– Develop and defend budgets– Identify specific cost drivers– Improve cost controls
• Translate system/functional needs associated with programs, projects, proposals, or processes into costs
• Determine and communicate a realistic view of the probable costs, which will be used to inform the decision-making process.
Purpose of Cost Estimating
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• Well documented – Includes source data and its significance– Clearly details calculations and results– Contains explanations for choosing a particular method or reference
• Comprehensive – Ensures a level of detail where cost elements are neither omitted nor
double counted
• Accurate – Avoids bias and overly conservative or optimistic estimates– Bases its assessments on most likely scenarios and assumptions
• Credible– Discusses any limitations of the analysis deriving from the uncertainty/bias
of the data or assumptions
Characteristics of a Good Cost Estimate
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Cost FundamentalsA Brief Primer
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• Cost estimates may be used in any decision-making process, but particularly in:– Contracts and acquisitions– Cost Benefit Analysis (CBA)
• Analysis of Alternatives (AoA)• Economic Analysis (EA)• Business Case Analysis (BCA)
– Independent Cost Assessment
Examples of Cost Estimates
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This discussion will focus on cost estimating to support CBAs
But … these types of estimates are not totally separate from each other. Concepts from other types can also apply to CBA.
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Costs may be:• Direct or indirect• Recurring or nonrecurring• Burdened or unburdened• Variable or fixed
Some Characteristics of Costs
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Direct Cost• Can be easily and conveniently traced to a specific cost element/objective
– Example: The cost of ammunition fired in a training event at the firing range
Indirect Cost• Cannot be easily and conveniently traced to a specific cost element/objective
– Example: Installation support to the firing range (utilities, upkeep, etc)
Direct vs. Indirect
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Recurring vs. Nonrecurring
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Recurring Cost• Cost that is incurred regularly in producing a product or providing a service
– Examples: Civilian and military personnel who conduct the activity, recurring sustainment of facilities, supplies, personnel training, utilities, equipment maintenance, janitorial service, office supplies
Non-Recurring Cost• Cost that only occur once or infrequently.
– Examples: Major items of equipment, major and minor construction, one-time training in new procedures, activities conducted in direct support of individual process improvement efforts
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Burdened vs. Unburdened
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Unburdened Cost• Cost of a product/service that does not consider other related costs necessary to
provide that product/service.– Examples: Direct compensation, cost of a gallon of fuel in a theater of
operations, etc.
Burdened Cost• Cost of a product/service plus an apportioned cost of other related costs necessary to
provide that product/service.– Examples: Salary plus the cost of benefits (health, retirement, etc.), facilities
support cost allocated to an activity or personnel– There are degrees of burden in a CBA. For example:
• Direct compensation for military and civilian personnel is always burdened with the cost of personnel benefits
• Facilities support cost is allocated to a COA only if it can demonstrated that the COA causes the cost to be incurred
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Variable vs. Fixed
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Variable Cost• A cost that varies based on the level of activity or output. This can be either a linear
relationship or a step function.– Examples: Fuel cost for vehicles varies in a linear fashion relative to the number
of miles driven. The number of instructors needed to teach a class can vary in a step function based on the number of students (e.g., 1 instructor for 25 students, 2 instructors for 26-50 students, etc).
Fixed Cost• A cost that does not vary based on the level of activity or output.
– Example: At an Army installation, the cost associated with the commander and his/her immediate staff is unlikely to vary as the installation population or other variables change.
100 200 300 4000
20
40
60
80
100
Fuel Cost as a Function of Miles Traveled
5 10 15 20 25 30 35 40 45 500
1
2
3
4
5
Instructors as a Function of Class Size
Variable Semi-Variable
5,000 10,000 15,000 20,000 0
200400600800
1000
Cost of Cmd Gp ($K) as a Function of Installation
Population
Fixed CostNote: Most costs are semi-variable
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Definition: Factors, activities, or events that cause costs to be incurred
Usually can be quantified/measured (e.g., number of hours spent on a task, supported population)
Analyst should identify and focus on the primary cost drivers that affect total cost
Helps to ensure the accuracy and reliability of the cost estimate Makes it easier to control costs within the organization
Examples: The labor cost associated with assembling a HMMWV at a the factory would
be driven by the quantity of vehicles produced Energy consumption at the PX is driven by the square footage of the
building and the operating hours The cost of printing budget documents for the Office of Management and
Budget is driven by the number of pages in each set and the number of sets needed
Cost Drivers
Organizations perform work activities to deliver products/services to a stakeholder.
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• The cost of second order effects—the effects of the COA under consideration beyond the immediate effects—must be taken into account in the cost estimate.
Second Order Effects
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• Adjusting for inflation is a specific form of normalization, an adjustment intended to make a given data set consistent and comparable with other data sets
• A frequent use of simple normalization is to adjust based on quantities. For example:– In a manufacturing process, COA 1 produces 17,000 widgets per year at a
total cost of $33,765 and COA 2 produces 14,500 widgets at a total cost of $28,725. It’s difficult to evaluate these COAs unless we normalize by computing a unit cost, which shows us that COA 2, with a unit cost of $1.95 per widget, is preferable to COA 1, which has a unit cost of $1.99.
Normalization and Inflation
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What is Inflation?
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Of all the topics discussed in cost analysis, none will be encountered more frequently than inflation.
Definition• A rise in the general level of prices• Measure of change in the dollars’ purchasing power• In other words
• A given dollar amount will have less buying power next year than it does this year
• To maintain consistent buying power, we must adjust this year’s dollars with the inflation factor from year to year
Common methods for normalization:• Discounting• Constant (Base) Year
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Inflated Dollars – Terminology and Uses
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Type of Dollar Other Terms When Used
Constant Base YearUninflated
Used in the cost estimate of a CBA to compare COAs and to make the decision
Current Then-yearInflated
Used to determine the POM/budget resourcing impact of a COA. For the approved COA, the current dollar estimate is the amount that must be funded in each year.Therefore, it is also used to determine the dollar amount of required bill-payers.
Constant-dollar values must be accompanied by a base year: The fiscal year in which the program was initially funded or the analysis was performed.
Constant and current year data cannot be used in the same analysis.
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• Basic calculations:– (Constant Dollars) * (Inflation Factor) = Current (Dollars)– Inflation is compounded from year to year (i.e., multiplied, not added).
• Example: A loaf of bread in 1950 cost $0.25. In 2011, it costs $3.00. Supposing that the price of bread is a good indicator of the general price of goods, then FY1950 $0.25 is worth $3.00 in 2012. In other words, $0.25 could buy in 1950 what $3.00 buys in 2011—and between 1950 and 2011 there was 1100% inflation (12 x). The average annual inflation rate can be calculated to be about 4.1% (12 raised to 1/61 power, so that 1.041^61 = 12).
• If between 2007 and 2011 there was 3% inflation each year, then $1 in 2007 could have bought what $1 x 1.03 x 1.03 x 1.03 x 1.03 x 1.03 = $1.16 can buy in 2011.
Inflation Calculation and Examples
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• Data: We’ve calculated the annual cost for a given COA in FY12 constant dollars:– Civilian personnel: $145,000– Contract support: $100,000 (paid by OMA appropriation)
• Applicable inflation factors:– Civilian personnel: 2% per year– OMA appropriation: 3% per year
• Calculation for the first three years of the life-cycle:
Example—Current Dollar Calculation
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Cost Element
Const. Dollar Cost
Infl. Factor
Current- Dollar Calculation Current-Dollar Cost
FY12 FY13 FY14 FY12 FY13 FY14
Civ per 145,000 2% 145,000 145,000 * 1.02
145 * 1.02^2
145,000 147,900 150,858
Contract 100,000 3% 100,000 100,000 * 1.03
100,000 * 1.02^2
100,000 103,000
Total cost 245,000 245,000 250,900 256,948
To implement this COA in the POM/budget, the dollar amounts in the three right-hand columns would be used. To cost the COA in the CBA, the Const. Dollar Cost column should be used.
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Cost Estimating Principles and Rules
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• Use authoritative data sources• Ensure that cost estimates support “apples-to-apples”
comparison among COAs• Ensure the cost estimate is well-documented, comprehensive,
accurate, and credible• Constant vs. current dollars
– Use constant (uninflated) dollars for even comparison for COAs in CBAs– Convert estimate to current (inflated) dollars to determine POM/budget
resourcing requirements
Cost Estimating Principles and Rules
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• The timeframe for the cost estimate is the life-cycle of the COAs. For example:– If the CBA seeks the best solution for housing Soldiers at a CONUS
installation, one of the COAs might call for constructing a barracks with a 50-year useful life. In this case, the life-cycle timeframe would be 50 years.
– If the CBA addresses a requirement that will exist for only three years, the life-cycle timeframe would be three years.
– Must use the same timeframe for all COAs
• The timeframe for the POM/budget resourcing estimate is the full POM/budget period* or the life-cycle timeframe, whichever is shorter.
* The POM/budget period includes the year of execution (current year), the budget year (next year), and the POM period (four or five years beyond the budget year).
Cost Estimating Principles and Rules
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• Timeframe example:– Two weapons systems being compared in a CBA have different life-cycles.
The system in COA1 has a life-cycle of 5 years, while the one in COA2 has a life-cycle of 7 years.
– The timeframe should be the same for both cost estimates—in addition, it should include a whole number of life-cycles for both systems.
– The appropriate timeframe in this case is 35 years. This would allow for 7 complete life-cycles for COA1 and 5 complete life cycles for COA2.
Cost Estimating Principles and Rules
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5 5 5 5 5 5 5
7 7 7 7 7
COA1
COA2
35 years
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• After a CBA is submitted, the analyst who prepared the cost estimate might not be immediately available to answer questions.
• How supporting documentation is used:– A CBA reviewer should be able to use the supporting documentation, with
no additional input, and arrive at a cost estimate identical to that in the CBA.
– If an analyst must consult the estimate several months after it is finalized, the supporting documentation will eliminate the need to reconstruct the thought process, data sources, and calculations supporting the estimate.
– If the analyst is no longer available, subsequent analysts can use the documentation to understand how the estimate was prepared so that adjustments can be made if needed.
Include Supporting Documentation
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• Identification of all data sources• Rationale, assumptions, and the thought process that
produced the estimate• Points of contact for all data.
What to Include in Supporting Docs
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• List cost elements in a spreadsheet
• Include POCs for all preparers/analysts
• Hyperlink websites• Reference all data sources• Use comments to document
and explain costing methodology
• Cells that contain equations should be free of constants—link to other cells instead, so that it is clear what data is being used in the calculation.
Guidelines for Excel
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Tools
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Data Sources
Personnel EquipmentFacilities
Form 1391 – MILCON construction costs
Modeled costs
Unified FacilitiesCriteriaFacilities sustainment costs estimation
Army Equipping Enterprise SystemEquipment costs by LIN
Services, leases, and equipment
FORCESOPTEMPO, equipment, force structure, transportation, CONOPS
Electronic Document AccessContract data
Available Tools and Models for Cost Data
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AMCOS must be used for military and civilian
personnel compensation and benefits
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Available Tools and Models for Cost Data
Tool/Model URL Purpose
FORCES Cost Models https://www.osmisweb.army.mil/forces/login.aspx Suite of models that provides quick and reasonable unit cost estimates to a wide variety of users
Army Military-Civilian Cost System (AMCOS)
https://www.osmisweb.army.mil/amcos/app/home.aspx Personnel costs for military, civilian, and/or contractor
ASA(FM&C) Website http://asafm.army.mil/Documents/OfficeDocuments/CostEconomics/rates/indices.xls
Inflation indices
Capabilities Knowledge Base
http://asafm.army.mil/Documents/officedocuments/costeconomics/guidances/ckb-ui.pdfhttp://asafm.army.mil/offices/CE/Ckb.aspx?OfficeCode=1400
Research, development, and acquisition costing for major weapon/material systems
Operating and Support Management Information
System (OSMIS)
https://www.osmisweb.army.mil/osmisrdb/login.aspx Operating and support information for major weapon/material systems
Some of the websites listed here require user accounts. In most cases, anyone with a dot mil address can obtain an account. You are encouraged to scan these sites and request an account to any site that you think will be useful to you. This will save time when you need to use any sites to support a CBA or other projects.
149
Access links through the “Resources” tab in the CBA Portal at https://cpp.army.mil
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AMCOS
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AMCOS
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AMCOS ApplicationsAMCOS lite
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Capabilities Knowledge Base
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Capabilities Knowledge Base
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OSMIS
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OSMIS
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Cost Estimating Methods
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Available methods:• Analogy
• Parametric
• Engineering
• Actual Cost
• Expert Opinion
• Learning Curves
Available Cost Estimating Methods
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Most CBAs utilize all cost estimating methods.
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Cost Estimating Methods
Parametric
Analogy
Actual Costs
Engineering
GROSS ESTIMATES DETAILED ESTIMATES
Source - Acquisition 101 Lesson 8: Financial Management: Cost Estimation 158
The use of each method is based on the information available to support it.
Figure 1: A summary of the usual application of each technique.
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Cost Estimating Methods: Analogy Method
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Analogy Method:• Estimates the cost, based on historical data, of an analogous
system or subsystem• Utilizes a current fielded system that is similarly designed to the
proposed system• Adjusts historical cost of the current system to account for
differences– Adjustments should be made through parameters/scaling factors based
on quantitative data These adjustments should show validity of comparison
When is it used?• When an analogous case (that can be applied to a subsystem or
component level) exists
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Attribute Old System New System
Engine: F-100 F-200Thrust: 12,000 lbs 16,000 lbsCost: $5.2M ?
Q: What is the unit cost of the F-200?
A: $5.2M * (16,000/12,000) = $6.9M
Warning 2: An adjusted analogy is, by definition, estimating outside
the range of the data.
Warning 1: An adjusted analogy is like a regression, but the
slope is just a guess.
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Example - Analogy Method
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Element Old Sys1 Old Sys2 Old Sys3 New Sys
Airframe $500/lb $250/lb $750/lb 1.2 x Sys1
Engine 2M/Unit 3M/Unit 5M/Unit .8 x Sys3
Avionics $3K/lb $2K/lb $4K/lb 1.0 x Sys2
Payload 6M/Unit 8M/Unit 7M/Unit .65 x Sys1
Analogy Method Estimating with Factors
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𝑁𝑒𝑤𝐶𝑜𝑠𝑡=(𝑂𝑙𝑑𝐶𝑜𝑠𝑡 )∗(𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡 𝐹𝑎𝑐𝑡𝑜𝑟 )
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Parametric Method:• Uses regression or other statistical methods to develop a cost
estimating relationship based on observed patterns of how specific parameters influence total cost.
• Utilizes:• High-level Work Breakdown Structure (top down approach)• A database from elements of one or more systems
When is it used?• Historical data is available but not detailed• In earlier stages of the system or project life cycle
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Example - Parametric MethodHigh Mobility Wheeled Vehicles Database
Is ‘Cubic Ft Shipping’ a good predictor of cost?
Cost of Gross Curb Cubic Ft Net Vehicle First Unit Weight Weight Shipping Horsepower M274 $ 9,585 1,770 970 81.6 12.5M561 50,002 8,363 5,363 732.3 93M656 93,262 24,785 14,785 1,227 183 M520 147,889 36,590 10,500 2,368 176
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Example - Parametric Method (Cont’d)
0
50000
100000
150000
200000
0 500 1000 1500 2000 2500
Cost
of F
irst U
nit (
$K)
Cubic Feet of Shipping
Cost of First Unit vs. Shipping Capacity
We can estimate the cost of any vehicle given the shipping capacity using the above equation.
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𝐶𝑜𝑠𝑡 𝑜𝑓 𝐹𝑖𝑟𝑠𝑡𝑈𝑛𝑖𝑡=60.992∗ (𝐶𝑢𝑏𝑖𝑐 h𝑆 𝑖𝑝𝑝𝑖𝑛𝑔 𝐹𝑒𝑒𝑡 )+7957.2
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Engineering Method:• Breaks down the system of interest into lower level
components, each of which is estimated separately– Work Breakdown Structure
• Uses algebraic equations (bottom up approach)– Most detailed of all techniques
• Requires extensive knowledge of a system’s characteristics and the respective detailed data
• Is expensive and time consuming
When is it used?• All potential costs can be assumed or estimated
Types of Army data sources (AMCOS Lite, MILCON, SRM, historical ,execution, travel, etc.).
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• What the WBS does:– Ensures that all component elements are identified so that all costs are counted
once and only once– Provides a systematic, standardized way to collect data.
• Decompose to as many levels as needed• Example: The airplane cockpit can be decomposed into its subelements:
– Instrument panel• Primary flight instruments
– Directional gyro– Turn and bank indicator– Altimeter– Airspeed indicator
• Avionics controls– Communications– Navigation– Radar
Developing the WBS
– Flight control systems• Rudder pedals• Steering yoke• Trim tab controls
– Seats• Seat and shoulder belts• Cushions• Head rest
… and so on
A well-decomposed process flowchart that defines/describesthe COA is a useful tool in developing the WBS
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WBS – Another Example
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Actual Cost Method:• If historical costs from experience or trends from prototypes,
engineering development models, and early production items are available, they can be used to cost current goods or services.
• Extracts costs that were actually incurred on same system during an earlier period– Obtaining access to these actual costs may be difficult
When is it used?• The actual data from the same system is present
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Example – Actual Cost Method
a. The development process is nearing completion.b. The materials have all been procured at a cost of
$20M. c. The labor cost to date is $30M.d. According to earned value cost performance reports
(CPRs), the estimated cost at completion for the remainder of the labor is another $20M.
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Cost = $20M + $30M + $20M = $70M
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Cost Estimating Methods: Expert Opinion Method
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Expert Opinion Method:• Obtains opinions from experienced individuals or group
– Document the sources of opinions– List attributes of the sources
When is it used?• When availability of data is limited.
Delphi Technique1. Query expert opinion from group
2. Seek expert opinion from each group, and then summarize results to send in reports
3. Gather another opinion and summarize those results
4. Continue process until experts reach a consensus
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1. You hold interviews to explain the Stakeholders’ Needs, sizing level, and development process for your new system.
2. Each member of the group submits his/her opinion of the final cost.
3. If all expert opinions converge to or hover around the same figure, that may be taken as a good cost estimate.
Example - Expert Opinion Method
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Scenario: Three software engineers are recognized experts in ERP software development.
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1. The Army Corps of Engineers needs to estimate the cost of constructing a special type of portable, aluminum bridge. Data for past construction projects for an analogous type of bridge is given in the following table.
Give a cost estimate for a bridge of length 450 ft built with 8 cables.
Cost Estimating Exercises
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Bridge 1 Bridge 2 Bridge 3 Bridge 4 Bridge 5
Length (ft) 130 130 180 200 300
# of Cables used
5 7 7 9 3
Total Cost $275K $281K $381K $427K $609K
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2) A new type of MRE is being manufactured by a contractor, and the Army is looking for its own cost estimate in order to compare price quotes. A WBS reveals the following information: each MRE contains ¼ lb of dehydrated lobster, 1 lb of 90% lean beef jerky, ½ lb of pasta, ½ lb of dehydrated carrots, and a self-heating pouch. Historical costs of the heating pouch, pasta, and carrots are known: they are $1.50, $3/lb, and $1/lb, respectively. You have consulted 3 fisheries experts, who have given you estimates of $7.25, $6.80, and $7.05 for each pound of dehydrated lobster. Costs of beef jerky and labor, by certain parameters, are given below. Give an estimate of the production cost per MRE packet.
Cost Estimating Exercises
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Jerky 1 Jerky 2 Jerky 3
% lean 75 80 85
Cost/lb $1.50 $1.60 $1.70
MRE 1 MRE 2 MRE 3Edible weight
1 lb 2 lbs 3 lbs
Labor Cost/MRE
$0.50 $1.00 $1.50
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Summary and Conclusion
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• The cost estimate is a critical part of a CBA and is likely to receive significant scrutiny
• A cost estimate that is clearly presented, logical, and well-documented will help send a positive message to users of the CBA
• A wide range of tools is available to support the analyst.• Cost estimating requires logical thinking and a some
understanding of resource management concepts, but it’s not rocket science. Most people should be able to acquire the necessary skills and knowledge.
Closing Thoughts
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Cost Analysis is NOT Magic
Cost Analysis is not magic!
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An effective cost analysis is well documented, comprehensive, accurate, and credible.
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• In a rented garage at 58 Bagley Street in Detroit, Henry Ford completed his first gas-powered car on the morning of June 4, 1896. He had spent $250 FY1896 dollars on equipment to build the car, and $100 on labor. The garage cost $15 per month to rent. After the car was assembled, it was clear that it would not be able to fit through the door of the rented garage. The car was to be used as a model for the two-year long test-driving phase of his R&D process, with the final goal of arriving at a model for mass production and sale. After negotiating with the landlord, it was agreed that the garage door could be widened for a one-time payment of $25.
Review Exercise: Henry Ford
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• Provide a cost estimate for each of the following COAs:– COA1 (Status Quo): Leave the car in the garage, do nothing else.– COA2: Disassemble the car and reassemble it outside the garage.– COA3: Widen the garage door.
Review Exercise: Henry Ford
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• U.S. Army Special Operations Command has scheduled the procurement of seven “Longbow Apache 2” helicopters with a preliminary delivery date of 15 May 2013 (with 95% certainty). Normal procurement cost per Apache is $35M. Each of the new Apaches has been ordered with a classified modification to suit the customized mission requirements of USASOC, at an additional cost of $7M over the normal procurement cost for each Apache. All seven customized Apaches are necessary for mission effectiveness. It is known that to achieve the delivery date of 15 May 2013 at the given degree of certainty, the required production rate must far exceed normal capacity, and that this contributes as a cost factor. An analysis of past production performance has determined that the relation between cost and risk can be approximated by r = 0.09c2 – 1.24c + 4.32 (for values of c between 3.64 and 10) where r is the risk (expressed as a decimal between 0 and 1) that delivery will miss the deadline, and c is the cost in millions of dollars over the normal procurement cost per Apache. After setting the delivery date at 15 May 2013, USASOC receives an order from SECARMY restricting total procurement costs for the Apache procurement program to $280M. USASOC now needs to determine the optimal value of c. Perform all 8 CBA steps to determine alternatives and recommend a course of action.
Mini-case Exercise #4
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or “how much can I spend again?”
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• Due to a last minute change in mission requirements, the original modification has been scrapped in favor of one with a wider range of alternatives. As in part (a), a maximum of $5M per helicopter may be spent on the new modification. The modification can be customized according to two dimensions: survivability and lethality, each scored on a scale between 0 and 1 (1 being the best possible). The associated costs are $5M per point for survivability, and $10M per point for lethality. Suppose that the benefit score may be calculated as LxSy, where L is the score for lethality, S is the score for survivability, x is the weight (as a decimal) placed on lethality, and y is the weight given to survivability. To determine the relative importance of these two dimensions to the mission, you have conducted a survey within three separate populations: infantry, Apache pilots, and USASOC commanders. Among infantry, the consensus is that x = 0.8 and y = 0.2. Among pilots, the consensus is that x = 0.3 y = 0.7. Commanders believe x = 0.6 and y = 0.4. State the problem, objective, constraints, and determine alternatives and the recommended course of action.
Mini-case Exercise #4
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or “Apache Part II: who should I listen to?”
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Version 3.0 (Draft)Last Updated: 10 November 2011
Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more
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AMERICA’S ARMY: THE STRENGTH OF THE NATION
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Cost-Benefit Analysis (CBA)Four-Day Training Briefing
Step 5: Benefits
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Key Learning Objectives
Objectives:• Understand the nature of benefits• Understand the types of benefits
• Quantitative vs. non-quantitative• Objective vs. subjective
• Recognize what constitutes a well-crafted benefit
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Step 5: Benefits
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• “Benefits of a chosen alternative are results expected in return for costs incurred. They are the quantitative and qualitative results expected or resulting from the implementation of a project/initiative (which may include but are not limited to the following: equipment, facilities, hardware, systems, etc.).” (CBA guide, “Step 5”)
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Definition: Benefit
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• In the CBA, the most important benefits to include for each COA are the primary benefits: the benefits most relevant to the objective being sought.
• Primary benefits should answer the question, “How does this COA serve as a solution to the stated problem?”
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Primary Benefits
Problem Statement COA description Primary benefit of COA
Product manufacturing time exceeds the limit specified by mission requirement by 15%
Expand manufacturing facility and personnel by 20%
Product manufacturing time expected to be reduced to 10% under mission requirement limit
Current residential facilities insufficient to accommodate influx of 400 new soldiers due to upcoming BRAC
Move 400 civilians currently living in temporary on-base quarters to off-base housing.
COA will vacate living quarters for the 400 new soldiers expected on base.
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• When most or all of the COAs under consideration have nearly identical primary benefits then it will be necessary to consider and include Secondary benefits. Secondary benefits answer the question, “How well does the COA solve the problem?”– Secondary benefits can include: reliability, feasibility, amount of training
required, ease of acquisition, time required for implementation, and other “perks” like resale or reuse value.
• Secondary benefits receive less weight than primary benefits, but they may be used to distinguish between COAs that provide similar primary benefits.
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Secondary Benefits
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Identifying Benefits
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When identifying benefits, consider the following:
1. The CBA problem statement (from Step 1) usually states or implies a desired benefit (the primary benefit). Ask the question: How well does this COA achieve the benefit implied in the problem statement?
• CBA problem statement: Identify the optimum process to achieve timely, error-free submission of personnel performance appraisals.
– The clearly stated benefits or metrics are (a) timely submission and (b) error-free submission.
2. If a COA appears to deliver relevant benefits that are not encompassed by the problem statement, perhaps analysis should be modified.
3. Are the benefits objective, and can they be quantified?
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• Quantifiable vs. difficult to quantify– Quantifiable benefits can be measured
• Objective vs. subjective– Objective benefits are matters of fact– Subjective benefits are matters of opinion
• Note that difficult to quantify is not the same as subjective.– Some subjective benefits can be quantified
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Types of Benefits
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• The table indicates the possible array of benefits, with examples in each cell
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Types of Benefits (cont’d)
Quantifiable Difficult to Quantify
Subjective Customer satisfaction MoralityFlexibilityAdherence to policyLife, safety, health
Objective Order-ship timeCycle timeError rateVehicle speedWeapon survivability
N/A – All objective benefits can be measured, usually with a number or sometimes with a yes/no indicator.
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• Benefits should be– Relevant– Reasonable– Specific– Logical– Clear
• Try to identify benefits driving the decision
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Desired Characteristics of Benefits
Objective benefits facilitate the decision-making process, because they help to remove opinions and emotion from the discussion. They build the strongest case for the preferred COA.
Overstatement of benefits is the primary source of bias in CBAs. It is difficult to overstate objective benefits.
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Well-Crafted Benefits
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Benefits should be CLEAR.• Bad:
– COA 1 improves ARFORGEN greatly (or color code green).• Good:
– The improved system in COA 1 has 20% fewer required user inputs, an easier to read interface, and reduces the expected training/orientation time by 2 hours per user.
Benefits Best Practices
Problem Statement: “We need a more user-friendly IT ARFORGEN tracking
system.”
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Benefits should be SPECIFIC.• Bad:
– Alternative 1 increases Doctrinal Currency, Soldiers trained and current in their duties.
• Good:– Alternative 1 provides a trainer-student ratio of 1:10. This will
enable trainers to spend more time with each student and help them achieve the desired degree of proficiency.
Benefits Best Practices (Cont’d)
Problem Statement: “We need to achieve satisfactory levels of proficiency in job
related tasks.”
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Benefits Best Practices (Cont’d)
Benefits should be RELEVANT.• Bad:
– COA1 provides clear communications between infantry and armor units.
• Good:– The addition of an auto-loading 120 mm mortar in COA1 allows the
Main Battle Tank to fire beyond the line of sight, increasing the current range by 5,000 feet. This will enable an armor company to provide the indirect fire capability comparable to 3 infantry heavy mortar platoons, and with no measurable reduction in mobility.
Problem Statement: “We need an extremely mobile weapon platform that can provide
indirect fire support to assist in ground operations.”
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• In identifying benefits, address one COA at a time … comparison comes later.
• Benefits can be financial or operational / functional.• Objective benefits remove emotion and bias from the decision-
making process.• Develop benefits that are
– Relevant– Reasonable– Specific– Logical– Clear
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Summary
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Exercises
For the following COAs, what metrics would enable a good comparison of benefits and/or risks?:
1. Build a permanent steel bridge across the Amazon.2. Build a collapsible aluminum bridge across the Amazon.3. Ford the river.4. Use makeshift rafts to float supplies across.5. Turn around and head back to Sao Paulo, and charter a plane
across the Amazon.
Problem Statement: “Need to transport 4,000 lbs. of medical supplies from one bank of the Amazon River to another within 96 hours to
support an Army humanitarian mission in Brazil.”
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• In a rented garage at 58 Bagley Street in Detroit, Henry Ford completed his first gas-powered car on the morning of June 4, 1896. He had spent $250 FY1896 dollars on equipment to build the car, and $100 on labor. The garage cost $15 per month to rent. After the car was assembled, it was clear that it would not be able to fit through the door of the rented garage. The car was to be used as a model for the two-year long test-driving phase of his R&D process, with the final goal of arriving at a model for mass production and sale.
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Review Exercise: Henry Ford
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• Identify primary and secondary benefits for each of the following Courses of Action:– COA1 (Status Quo): Leave the car in the garage, do nothing else.– COA2: Disassemble the car and reassemble it outside the garage.– COA3: Obtain permission of garage landlord to widen the garage door.
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Review Exercise: Henry Ford
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• The Chief of Staff, Army has apportioned $1.2B for the procurement of customized “Longbow Apache 2” helicopters and “Abrams 2” tanks in support of the troop surge in Iraq. Each customized Apache helicopter may be purchased at a flat rate of $60M each. Due to increasing marginal costs of production, the price for the Abrams tank is semi-variable. The first 24 tanks produced can be purchased at a rate of $10M each; the next 40 tanks can be procured at a rate of $12M each; every subsequent tank purchased beyond these first 64 will cost $15M each. [Note: Fictional]
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Mini-case Exercise #5or “how many can I get for $1.2B?”
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• U.S. Army Central Command has secured $118M for the procurement of two different models of the “HIMARS 2” multiple rocket launcher—class X and class Y—for deployment to Afghanistan. The class Y HIMARS 2 costs $5M each and weighs 27,000 pounds. The class X HIMARS 2 costs $7M and weighs 12,000 pounds. The class X model is produced using a rare metal: no more than 14 may be procured. After procurement, all the HIMARS 2 will be transported to Afghanistan by a fleet of ten C-130 Hercules aircraft. The total weight constraint is 405,000 pounds.
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Mini-case Exercise #6or “where do the lines cross?”
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AMERICA’S ARMY: THE STRENGTH OF THE NATION
Cost-Benefit Analysis (CBA)Four-Day Training Briefing
Step 6: Alternative Selection Criteria
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Day 3 Agenda
• 0830 – 0930: “Step 6: Define Alternative Selection Criteria”
• 0940 – 1110: “Step 7/8: Compare Alternatives and Report Results and Recommendations”
• 1120 – 1200: Mini-case Exercise #7• 1200 – 1300: Lunch• 1300 – 1330: Mini-case Exercise #8• 1345 – 1430: Mini-case Exercise #9• 1445 – 1530: Mini-case Exercise #10• 1530 – 1700 : Capstone Case Study Working
Groups
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Key Learning Objectives
This segment analyzes these seven topics: • Define alternative selection criteria• Comparing costs with benefits• Risk assessment• Decision support tools and methods (bringing the
CBA together)• Sensitivity analysis • Billpayers• Developing a report for leadership
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Step 6 discusses four topics: • Alternative selection criteria
overview • How to develop selection criteria • Examples of selection criteria• Selection criteria exercise
Step 6: Define Alternative Selection Criteria
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Transition to Step 7:The analysis and calculations developed in this
step will be used with the comparison of alternatives in Step 7.
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Alternative Selection Criteria:• The standards used to rank the alternatives and make a decision• Reflect cost and the most significant benefits (quantitative and
qualitative)—how well and how efficiently the course of action achieves the stated objective
• Cover both financial and non-financial aspects– Financial results are essential to building a persuasive CBA
Alternative Selection Criteria Overview
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• Criteria may include:– Quality (performance)– Cost (resources)– Speed of delivery (schedule)– Safety/risk– Stewardship– Resource management
• Decision makers use criteria to:– Examine the most important information – Evaluate the impact of the alternatives on the mission/objective
How to Develop Selection Criteria
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In order to select the strongest value proposition, use stakeholder needs and
objectives to help develop criteria.
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Steps to create candidate selection criteria:1. Consider the problem statement and objective. The selection
criteria must reflect how well and how cost-effectively the objective is to be accomplished.
2. Comply with guidance provided by higher command, based on leadership priorities like cost efficiency, level of product quality, etc. (See Step 2)
3. Identify relevant cost issues (See Step 4) and benefits (See Step 5)
How to Develop Selection Criteria (Cont’d)
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• Prioritize selection criteria • Determine weights, if appropriate
Then
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Selection criteria should: • Reflect the costs and benefits listed in the analysis• Be concise and non-redundant • Provide a standard against which to compare alternatives• Expose uncertainty, risk, and/or tradeoffs• Not be unrealistically biased in favor of one alternative• Include enough information to make an informed decision• Be aligned with the goals of senior leadership
How to Develop Selection Criteria (Cont’d)
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Selection criteria might include: • Contribution to ARFORGEN• Contribution to combat effectiveness (readiness) • Compliance with laws, policies, and/or strategic planning documents• Items produced• Accuracy rates• Compatibility with current systems• Maintainability• Political considerations • Risk mitigation• Cost, cost avoidance, savings, revenue generation, cash flow/outlay,
etc.
Examples - Selection Criteria
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Financial Methodologies are only applicable in very specific cases where costs and/or benefits are precisely quantified. However, the principles and thought processes supporting these methodologies should be emulated in any CBA. Examples of such methodologies include:
• Normalization• Discounting• Net Present Value (NPV)• Break-Even Point (payback period)
Financial Methodologies
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Normalization:• The values of alternatives can easily be compared
– Costs of today with costs of tomorrow– Present with future benefits– Costs with benefits
• Appropriate method must be chosen from many choices• Costs and benefits may have to be recalculated based upon chosen method• Common methods:
– Discounting– Constant (base) year
Normalization of Value
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DiscountingDiscounting:• The process of calculating the present
value of future amounts• The opposite of compounding• Method of accounting for risk
– Puts more emphasis on present costs rather than future costs
3 Methods:• Base Year analysis• Present value analysis• Net present value analysis
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Net Present Value (NPV):• The difference between the present value of cash inflows and the
present value of cash outflows– Used to analyze the profitability of an investment
• This works only if values, costs (outflows), and benefits (inflows) are quantified into monetary terms
Net Present Value
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Net Present Value Formula
Net Present Value (NPV):• The amount of dollars that would have to be invested during the
base year at the assumed discount (interest) rate to cover the costs, match the revenues, or match the savings at a specific point in the future
𝑁𝑃𝑉= 𝑃𝑉ሺ𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠ሻ− 𝑃𝑉(𝑐𝑜𝑠𝑡𝑠)
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Pros• Most
fundamental analysis
• Very easy to compare results• Incorporates discount rate,
which can represent risk
Cons
• Limited use in the Army• Benefits are purely
monetary• Applying a discount rate
can be difficult
Present Value Merits
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Alternative B is the most efficient (from a time value of money
perspective).
Example - Present Value
This example was adopted from DA PAM 415-3 Economic Analysis: Description and Methods dated 10 August 1992. 218
The alternative with the lowest present value is
preferred.
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1. Which costs more?2. Present costs in base year 2000 dollars.3. Present costs in discounted present value.
Exercise - Present Value
Current/Then year $MM
2000 2001 2002 2003 2004 2005 2006 TOTALAlternative 1 (85) (21) (21) (22) (23) (23) (24) (218)Alternative 2 (150) (10) (11) (11) (11) (12) (12) (217)
Inflation: 3%Discount Rate: 5%
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Which costs more?
Answer Key - Present Value
Current/Then year $MM
2000 2001 2002 2003 2004 2005 2006 TOTALAlternative 1 (85) (21) (21) (22) (23) (23) (24) (219)Alternative 2 (150) (10) (11) (11) (11) (12) (12) (217)
2000 2001 2002 2003 2004 2005 2006 TOTALAlternative 1 (85) (20) (20) (20) (20) (20) (20) (205)Alternative 2 (150) (10) (10) (10) (10) (10) (10) (210)
Constant/Base year $MM
2000 2001 2002 2003 2004 2005 2006 TOTALAlternative 1 (85) (20) (19) (19) (19) (18) (18) (197)Alternative 2 (150) (10) (10) (9) (9) (9) (9) (206)
PV $MM discounted at 5% rate
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Break-Even Point:• Used when a given alternative has a significant investment
cost but is expected to experience cost reduction in future years
Break-Even Point
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This is also where (in current dollars):(savings) = (investment)
(Cost Reduction) = (Upfront Investment)
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Summary of Break-Even Point:- It’s the year where the savings become positive.- Using inflation indices, constant dollars are converted into current dollars.- Savings are the difference between cumulative costs.
Example - Break-Even Point
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• Given the following problem statements, suggest possible Selection Criteria:– “Need to transport 4,000 lbs. of medical supplies from one bank of the
Amazon River to another within 96 hours to support an Army humanitarian mission in Brazil.”
– “We need an extremely mobile weapon platform that can provide indirect fire support to assist in ground operations.”
– “Current residential facilities insufficient to accommodate influx of 400 new soldiers due to upcoming BRAC.”
– “Product manufacturing time exceeds the limit specified by mission requirement by 15%.”
Exercise: Defining Selection Criteria
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Version 3.0 (Draft)Last Updated: 10 November 2011
Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more
https://cpp.army.mil
AMERICA’S ARMY: THE STRENGTH OF THE NATION
Cost-Benefit Analysis (CBA)Four-Day Training Briefing
Step 7: Compare AlternativesStep 8: Report Results and
Recommendations
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Step 7: Compare Alternatives
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7a. Compare alternatives using the selection criteria to identify the preferred alternative.
7b. Identify the billpayer if there is a bill associated with the recommended alternative.
7c. Identify the positive and negative impacts of the 2nd and 3rd order effects. What must be done to manage the negative impacts?
7d. Determine the robustness of the conclusions.– If anything changes (i.e., assumptions, costs, benefits)
would the recommendation change?
7e. Identify the high-risk aspects of the recommended alternative and define appropriate risk mitigation measures.
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Compare alternatives by:• Concepts• Comparisons of costs with benefits • Decision support tools and methods (bringing the CBA
together) • Sensitivity analysis and Risk assessment
Step 7: Compare Alternatives
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• The CBA process is essentially comparing the costs with the benefits between all alternatives
• The preferred alternative provides the greatest amount of value• Risk and second- and third-order effects should be included in
the comparison of alternatives
Concepts for Comparing Costs with Benefits
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Value = Benefit – Costs
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Aid for Completing - Step 7a
Costs Benefits Selection Criteria
EqualUnequal Alternative that provides greatest benefits for given
cost
Equal Subjective reasoning and a fortiori analysis
Unequal
Unequal Alternatives ranked in order (based on benefit/cost ratio, net present value, or other relevant criterion)
Equal Least costly alternative
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Most likely CBA Scenario
CBA may not be appropriate
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Comparative Methods
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Method Description When Used
Net Present Value (NPV)
Converts future cash flows into present equivalent values and then adds them together
When alternatives have the same economic life
Benefit/cost ratio (BCR)
Compares present value (PV) of benefits with present value of costs
When competing alternatives have unequal costs and unequal benefits
Break-even Point Identifies point at which cumulative cost of two alternatives equal the cumulative benefits
When projects are high-risk, to show when investment costs need to be recovered quickly
Subjective reasoning Applies professional judgment as a complement to, or to the exclusion of, quantitative data.
When professional judgment is considered to be more important
Point System Applies objective values to subjective criteria. When decision makers wish to narrow the list of alternative solutions to the few that are most suitable
Decision Matrix Allows for multiple criteria to be used to compare alternatives
It is a very flexible tool that can be used under many circumstances. It can even account for other decision support methods described in this table.
A Fortiori Analysis Determines whether a strongly favored alternative is still the best choice even when assumptions are formulated that put that alternative at a disadvantage.
When generally accepted intuitive judgment strongly favors one alternative
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Practices:• Compare the incremental costs with the incremental benefits
• Compare the one or two most relevant benefits with the costs
• Find the “knee in the curve” or optimal value solution
Best Practices
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• “Over-averaging” for sake of simplification:– Example:
“Fort Hood data is representative of all bases.”
• Assuming away cost:– Examples:
“Year-end funds will be available,” when that’s not the case “Higher headquarters will pay for it.” “Other organizations will pay for it.” “Military personnel are free.”
• Assuming away the problem:– Example:
“Unused office space is available.” “Chief of Staff said we need this.” Adding a layer of oversight will increase process efficiency
Common Mistakes
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These are examples of flawed assumptions that should have been rejected in step 2.
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Cost ($M) Benefit
Status Quo 30 Good
Added capability (Alternative 1)
45 Very Good
Greatly added capability (Alternative 2)
55 Excellent
Common Mistakes: Over Simplification
Which alternative has the best value?
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• “Green (fill in blank, i.e., funding, status…) for $55M is the preferred alternative” is the value statement.
The Cost of a Green Chiclet
Cost ($M) Benefit
Alternative 1 55 Good
Alternative 2 45 Average
Alternative 3 30 Critical
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This should help in making a decision.
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• In some cases, new programs or requirements will be supported entirely by resources that are already funded. This could be described as “cost free” in the sense that there no additional costs in terms of the budget.• Nonetheless, a “cost free” analysis must still consider cost in terms of opportunity cost: what the already-funded resource could have been used for if it had not been applied to the new requirement.
“Cost Free” Analysis
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• Example: the Organization of the Joint Chiefs of Staff is planning a holiday party for itself. The Chairman of the JCS must assign three current employees to serve on the Holiday Party Planning Committee, which requires a commitment of 16 hours of work per member. CJCS is presented with two courses of action:– COA1: Appoint the Chief of Naval Operations, the Chief
of Staff, Army, and the Chief of Staff, Air Force, to the Holiday Party Planning Committee.
– COA2: Appoint Intern #1, Intern #2, and Intern #3—three GS-05 recent college graduates—to the Holiday Party Planning Committee.
• The additional budgetary cost of this new Holiday party requirement is equal for both COAs: it is “cost free” because the salaries of current employees will be paid regardless of whether the Holiday party gets planned. Determine which COA has the lower opportunity cost.
“ Cost Free” Analysis
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All COAs proposed within a CBA must be solutions to the problem/opportunity statement. Assumptions should not solve the problem.
Common Mistakes: Assuming Away the Problem
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Subjective Reasoning• Uses informal criteria to rank alternatives
A Fortiori Analysis• Used when intuitive judgment strongly favors an alternative
– Assumptions are the basis in choosing which alternatives are preferred
Non-Quantitative Methods
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Decision Matrix:• A tool that compares benefits with costs to produce a single
value score
Decision Matrix
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One of the best ways to elucidate the resource-informed decision to senior
leadership is to include a Decision Matrix in the Decision Brief.
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Pros
• Easy to use• Normalizes costs
and benefits• Is a familiar tool
• Flexible
Cons
• Error prone• Highly judgmental
• Loss of information via normalization
• Results not definitive• Scoring is subjective
Decision Matrix Merits
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Example - Decision Matrix
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COA-1 highest benefit COA-2 best value COA-3 lowest cost
Decision Matrix Rating or Ranking Benefit Criteria Weight COA-1 COA-2 COA-3
Lethality 30% 9 6 2
Safety 45% 4 6 6
Survivability 25% 6 5 3
Score : 6.0 5.8 4.1
Cost $M in BY-2011 $20 $16 $12
Cost = $ quantifiable cost – $ quantifiable benefit or saving
Benefit = $ non-quantifiable benefit and $ non-quantifiable risk
Cost per Benefit $3.33 $2.78 $2.96
COA-1 COA-2 COA-3
COA-1 COA-2 COA-3
Rating: 1 (worst) to 9 (best)
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Decision Matrix
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Note: If calculating Cost-Benefit index, the benefits criteria for each COA should be rated, not ranked.
Otherwise, the Cost-Benefit index calculated would be meaningless.
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1. How sensitive is the recommendation to possible changes in costs, benefits, assumptions, etc.?• If the recommendation is highly sensitive, can deeper analysis be done?
2. Which elements of the CBA require sensitivity analysis?• Only test elements with significant uncertainty or risk.
– Elements may include assumptions, constraints, costs, benefits, weighting of selection criteria, etc.
3. Address sensitivity from one or both perspectives:• What is the impact of a change of such and such magnitude?• How large a change can occur before the recommendation changes?
4. Have all probable risks and their respective impacts been identified?• Can the risks decrease future benefits?• Can the risks increase future costs?
Questions for Steps 7c and 7d
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The goal of risk assessment is to answer questions like:• What risks may occur? • What is the likelihood that risks will occur? • Are the source of these risks internal or external? • What causes these risks? • What are the consequences if the risks go unresolved?
– What assets, operations, activities, functions, etc. will be affected as a result?
• How much risk is tolerable? • What should be done to anticipate and limit risks?
Risk Assessment and Mitigation
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Always measure the risk by the potential adverse impacts on alternatives.
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Business/Programmatic Risk:• Affect the budget and viability of a programOperational Risk:• Affect the ability to perform a missionProcess Risk:• Associated with failing to meet standards and performance benchmarks in a
newly established processTechnical Risk:• Associated with failing to develop or implement technologySchedule Risk:• Associated with allocating time to perform and manage tasksOrganizational Risk:• Associated with management changes
All risks need to be reflected in Costs and/or Benefits of COAs
Risks must factor into the decision-making process
Types of Risks
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• Methods of measuring and/or addressing risk in a CBA include, but are not limited to:
– Effective Mean– Cost of Risk Mitigation– Sensitivity Analysis
Ways to Measure/Address Risk
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• The effective mean, or expected value, of a measurable quantity is the sum of all possible outcomes multiplied by their corresponding probabilities.
• Example: if the cost of a new ground combat vehicle is judged to be $1.4M with 50% probability, $2M with 25% probability, and $1.2M with 25% probability, then the effective mean (expected cost) is $1.4M x 0.5 + $2M x 0.25 + $1.2M x 0.25 = $1.5M.
• Example: if inter-theater transit time for a sustainment brigade is projected to be 5 days with 90% probability and 4 days with 10% probability, then the expected transit time is 5 x 0.9 + 4 x 0.1 = 4.9 days.
Effective Mean (Expected Value)
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Cost of Risk Mitigation
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If a cost can be associated with reducing risk, then risk can be measured by that monetary value.
Example: If for $22K extra, the risk of a schedule over-run can be reduced from 15% to 3%, then $22K can be a measure for the difference in risk.
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Sensitivity Analysis:• Done mainly on the most important and least certain selection
criteria, assumptions, and cost estimates• Addresses the impacts of risks comprehensively • Identifies the impact on a recommendation when elements of
the analysis change, such as:– Assumptions– Costs– Benefits– Constraints– Scope– Weighing of selection criteria– Risk probabilities
Sensitivity Analysis
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1. Divide analysis into two groups of factors: – Those outside an agency’s control (i.e., assumptions)– Those agencies that have a degree of influence or control
2. Choose several elements (costs, assumptions, benefits, etc.) that have greatest impact and are most likely to change– Vary each element over a reasonable set of values while holding the
other variables constant relative to each other
3. Determine the impact of these changes on:– Total cost– Total benefit– Ranking of alternatives
• Some factors that may warrant sensitivity analyses are:
• The effects of a shorter or longer economic life.
• The effects of variation in the estimated volume, mix, or pattern of workload; for example, the production rate or learning curve.
• The effects of potential changes in requirements resulting from either congressional mandate or changes in functional responsibilities.
• The effects of potential changes in requirements resulting from changes in organizational responsibility at the site, installation, base, or Army command/direct reporting unit/Army service component command level.
• The effects of changes in configuration of hardware, software, data communications, prime support equipment, and other facilities.
• The effects of alternative assumptions on areas such as project operations, inflation rate, residual value of equipment, and length of development.
• The effects of changing the fielding strategy.
250
Suggested Steps to Conduct Sensitivity Analysis
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• Crystal Ball software may be used to perform sensitivity analyses.
• In the example to the right, “Cost of Revenues %” has the greatest effect on Net Present Value, while “Year 4 Units Sold” is the least sensitive.
Example: Sensitivity Analysis
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• Perform a sensitivity analysis on the weight of Lethality in this Decision matrix. Test for weights of
– 16%– 44%– 58%– 86%
Determine if the recommended COA changes.
Exercise: Sensitivity Analysis
252
COA-1 highest benefit COA-2 best value COA-3 lowest cost
Decision Matrix Rating or Ranking Benefit Criteria Weight COA-1 COA-2 COA-3
Lethality 30% 9 6 2
Safety 45% 4 6 6
Survivability 25% 6 5 3
Score : 6.0 5.8 4.1
Cost $M in BY-2011 $20 $16 $12
Cost = $ quantifiable cost – $ quantifiable benefit or saving
Benefit = $ non-quantifiable benefit and $ non-quantifiable risk
Cost per Benefit $3.33 $2.78 $2.96
COA-1 COA-2 COA-3
COA-1 COA-2 COA-3
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Defense funding is a zero-sum game: every dollar awarded to one program comes at the expense of another competing program that will not be funded.• The CBA team rarely will have the authority to identify a bill-payer. This is a
task for the organization’s comptroller/resource manager (the G-3 for most organizations)
• Don’t offer a “gold watch” as a bill-payer … a program that is so important to the Army that it’s certain higher headquarters will reject it.
• Alternatives will compete with other developments for funding if no billpayers are identified
Paying for Alternatives
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Note: This does not guarantee funding.
Identify billpayers to fund alternatives!
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• Comparing the costs with benefits of each alternative is a required part of the CBA methodology.
• Sensitivity analysis is a technique that analyzes whether changes in assumptions, quantitative values, or priorities will affect the recommendation.
• Billpayers are the sources that will fund the costs of alternatives.
Quick Review
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• In a rented garage at 58 Bagley Street in Detroit, Henry Ford completed his first gas-powered car on the morning of June 4, 1896. He had spent $250 FY1896 dollars on equipment to build the car, and $100 on labor. The garage cost $15 per month to rent. After the car was assembled, it was clear that it would not be able to fit through the door of the rented garage. The car was to be used as a model for the two-year long test-driving phase of his R&D process, with the final goal of arriving at a model for mass production and sale.
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Review Exercise: Henry Ford
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• Identify selection criteria and compare each of the following Courses of Action:– COA1 (Status Quo): Leave the car in the garage, do nothing else.– COA2: Disassemble the car and reassemble it outside the garage.– COA3: Obtain permission of garage landlord to widen the garage door.
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Review Exercise: Henry Ford
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CBA Decision Package:• Preferred format is a narrative or PowerPoint• Accompany with a decision briefing• Write it in such a way that a layman can understand the topic
Results and Recommendations:• Summarizes the analysis• Makes conclusive statements about each of the alternatives
– The recommended alternative should follow• Results address how the alternatives were ranked using the
criteria developed in Step 6• Document all data and information used in Steps 1-8
– Provide supporting information so reviewers can understand how Steps 1-8 were developed
Step 8: Report Results and Recommendations
Questions for the Reviewer:- Does the package contain all key elements that are accompanied with supporting documentation?- Does the recommended alternative address the problem, and is it consistent with the assumptions and constraints?- Does the analysis explain how the recommended alternative is the best one to satisfy the selection criteria?
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The CBA’s quality and comprehensiveness may be enhanced by the following supplementary content:
• Glossary– Defines unfamiliar abbreviations, acronyms, and terms used in the
CBA
• Timeline– Displays key dates and actions associated with the CBA in terms of its
development and/or implementation
• Coordination Sheet– Identifies who will need/have to review the CBA
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Key Elements for Documentation
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Briefing Format:• This is a suggested but not required format.
– This is just a suggestion. The actual briefing for a CBA (or any briefing, for that matter) should be determined based on the briefer’s style, the known preferences of the individual being briefed, and the subject matter.
– An example has been provided in the CBA guide
• It is not a substitute for a well documented CBA in narrative form.– The CBA coordinator, the decision makers, and stakeholders
should collaborate to determine the content and format of the CBA decision brief as they will have differing preferences.
Briefing the Results of the CBA
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End
Requirements Approval
Resource Approval
• Requirement approval forums use CBA to:
• Make resource-informed decisions
• Validate and approve requirements
• Resource approval forums use CBAs to make resource- informed decisions
• Identify tradeoffs and billpayers
• Decide funding approval decision
• Proponent organizations:
• Register CBA online• Develop and submit
CBAs online with value proposition linked to command’s strategic priorities
• Proponent leadership endorses submission online
• Organization validates the CBA methodology
• Accuracy and completeness
CBA Workflow Automation Tool
260
Draft Submitted Lead AnalystReview
CBARBReview
FinalReview
Completed
CBA Registration,
Development and Submission
CBA ValidationStart(Capability Gap)
https://cpp.army.mil/
Register and submit your CBA online
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https://cpp.army.mil/
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CBA Workflow Tool
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• Document the CBA narrative and share the results with stakeholders for approval.
• CBA templates are optional tools that can be used to brief the results of the CBA.
• Include all documentation and calculations in back up.
• Ensure that the CBA clearly describes the value proposition, and highlight how the benefits outweigh the cost, risks, and trade offs.
Quick Review
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FOUR DAYS
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• U.S. Army Special Operations Command maintains a specialized communications link between the Commander, USASOC, the Chief of Staff and Vice Chief of Staff, Army, and Team Leaders in the field during highly sensitive counter-terrorism missions. The link provides video and voice transmissions that are typically delayed by 30 seconds. Currently, $2M per month is spent on operating and maintaining the communications link: mostly consisting of payments to the National Security Agency for “satellite bandwidth.” The NSA has recently launched into orbit a new satellite that promises shorter transmission delays: typically 10 seconds, but with a 20% risk of 20 second delays. The satellite takes advantage of recently developed technology: costs to the Army for the first month are set at $10M, and are projected to decrease based on an 85% learning curve ($10M for the first month, 0.85 x $10M per month for the next two months, 0.85 x 0.85 x $10M per month for the next four months, 0.85^3 x $10M per month for the next eight months, 0.85^4 x $10M per month for the next sixteen months, etc.), though there is a 40% risk that costs will only decrease according to a 90% learning curve.
• Because time delay is the overwhelming factor in communications for counter-terrorism operations, Army planners have assigned a 100% benefit weight to signal delay time. The benefit score will be determined by the function , where t is the expected time delay in seconds.
Mini-case Exercise #7
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or “can you hear me now?” or “what’s the expected value?”
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• Currently, a contractor provides 12 translators to a SIGINT battalion, each contracted for 1885 hours annually, on a government contract costing $1.2M per year. The battalion commander would like to evaluate the option of insourcing the labor to Army civilians. The total burdened cost per civilian is $85,209 and the estimated annual productivity is estimated at 1740 hours each. Determine whether insourcing would be more cost effective than the status quo.
Mini-case Exercise #8
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or “to insource or not to insource, that is the question”
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• OA22 has invited a contracting team to the Pentagon to inspect its centralized HVAC system. Following the inspection, the contractor reported minor damage to the HVAC system, and offers to replace it. Despite the damage, the HVAC system continues to function at the same capacity, although with risk of damage to the building. You assess that in any one year, there is a 15% chance of damage being done. In the event that there is damage, you assess that the average amount of damage will be $200K if occurring within the first year, $300K if occurring during the second year, $400K if occurring during the third year, etc. (increasing by $100K each year). If you decide to replace the HVAC system, the contractor has offered a payment program of $256K for the first year of ownership, $128K for the second year, $64K for the third year, etc. (reduce by 50% each year). The expected life cycle of this HVAC system is 6 years. Alternatively, you may buy the same HVAC system from a separate contractor at a cost of $100K for the first year, and $90K for every subsequent year. Under this special program, the contractor will replace the HVAC system at the end of its life cycle without any additional material cost (operations & maintenance, replacement costs not included). All costs are given in constant FY12 dollars. Perform all steps of the CBA process to support a course of action.
Mini-case Exercise #9
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• The Captain of the Pequod has ordered a cost-benefit analysis to determine the optimal number of rowboats to deploy to pursue a whale sighting. As defined by the Commander, the selection criteria are manpower, stealth, and ease of sustainment, with weights of 0.5, 0.3, and 0.2, respectively. You have been told as a rule of thumb that the total mission cost can be estimated at $2200 for each rowboat involved in the hunt. Each rowboat can transport 15 fishermen.
Mini-case Exercise #10
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Cost-Benefit Analysis (CBA)Four-Day Training Briefing
Day 4CBA Capstone Case
Presentations
25 June 2012 Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more
https://cpp.army.mil
AMERICA’S ARMY: THE STRENGTH OF THE NATION
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• 6 groups of 3-4 students each• Groups A (3 people), B (3), and C (3) will be
assigned to Case 1• Groups X (4 people), Y (4), and Z (4) will be
assigned to Case 2• Each group will present once and serve as CBARB
reviewer twice. Groups will receive grades for their performance in their presentations as well as their reviews.
Instructions
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• Prior to presentation, upload PowerPoint file and all supporting documents to the classroom share folder.
• Each member of the group must participate in the presentation.
• Questions will be fielded throughout and after the presentation.
Instructions for Presenters
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• Questions may be raised throughout the presentation.
• At the conclusion of the presentation and Q&A session, each reviewing group convenes to write a CBARB memo which should address– Whether or not the CBA is sufficient to support
decision making.– Comments on the accuracy of cost estimates– Descriptions of benefit comparison among the COAs– Other considerations that could affect the CBA, and
to what degree of sensitivity.
Instructions for Reviewers
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• When a reviewing group has completed both of its reviews, it will assign a final evaluation to each presentation: high pass, low pass, or fail. Each reviewing group can only give one high pass and only one low pass, and there are no limits on the number of fails.
• After all groups have presented, each group submits a total ranking of every other group.
Instructions for Reviewers
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Time Presenter Reviewer 1 Reviewer 2
0900 - 1000 Group A Group B Group Z
1010 – 1110 Group X Group A Group Y
1120 - 1220 Group B Group C Group X
1330 - 1430 Group Y Group B Group Z
1440 - 1540 Group C Group A Group Y
1550 - 1650 Group Z Group C Group X
Schedule of Presentation
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