June 23, 2013
June 23, 2013
June 26, 2013
23.339.1 - 23.339.7
Converting Point Estimates for Cost-Risk Analysis The estimating process for most cost estimates follows the approach of determining thecost of each step in the production process, which is considered the "most likely" cost, andsumming the cost of each of the steps, or "rolling up" the costs to estimate the total cost of theproduct. An amount of profit is then determined based upon the total cost to result in a quote tothe perspective customer. It is generally accepted that the actual costs are typically higher thancosts used in preparing the quote as the estimate is often low as some items have been omittedfrom the estimate, the estimating data used is not up-to-date, or the costs increase during the timebetween the estimate and the production of the product and delivery to the customer. A cost-riskanalysis would help the supplier to better evaluate the risk to achieve the cost utilized in thepreparation of the quote. The solution to the problem would be to perform a formal cost-risk analysis. The formalcost-risk analysis would require that probability distributions be developed for each step of theprocess, developing correlations among these distributions, and sum the distributions statisticallyusually via the Monte Carlo simulation process. This would be a very expensive undertakingand may be cost effective for the aerospace and defense contractors, but it would not be costeffective to most medium and small businesses. A simplified model was developed by Stephen Book for those who want the benefits of acost-risk analysis, but cannot afford the cost or time to perform a formal cost risk analysis. Themodel has been modified to develop a Cost "S" Curve from the traditional point estimate valuebased upon the triangular distribution and using three parameters, H/L ratio, the percentile valuefor the point estimate and the percentile value for the most likely cost. The results from themodel include the lowest cost, the most likely cost, the median cost, the mean cost, and thehighest estimate as well as the cost values over the entire range in five percentile increments.
Creese, R. C. (2013, June), Converting Point Estimates for Cost-Risk Analysis Paper presented at 2013 ASEE Annual Conference & Exposition, Atlanta, Georgia. https://peer.asee.org/19353
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