Cost Engineering Health Check

How Good are Those Numbers?

Dale Shermon, Mark Gilmour

• Éditeur: Gower
• Année: 2016
• ISBN:
  9781317159032
• Édition: 1
• Sujet: Business
• Sous-sujet: Forecasting

High quality cost estimating gives a business leader confidence to make rational financial decisions. Whether you are a business leader or a cost estimating manager, you have a vested interest in understanding whether you can depend on your organisation's ability to generate accurate cost forecasts and estimates. But how can business leaders have confidence that the cost information that they are being provided with is of high quality? How can a cost estimating manager be sure that their team is providing high quality cost information?

QinetiQ's Cost Engineering Health Check is used as a capability benchmarking tool to identify improvement opportunities within their clients' cost estimating capability, enabling them to focus on areas that have the potential to increase their competitiveness. High quality estimating leads to accurate budgets, a reduced potential for cost growth, accurate evaluation of risk exposure, and the opportunity to implement effective earned value management (EVM).

The Cost Engineering Health Check employs a standardised competency framework that considers all aspects of cost estimating capability, and provides an objective assessment against both best practice and the industry standard. This framework is based on QinetiQ's long established, tried and tested, Knowledge Based Estimating (KBE) philosophy comprising Data, Tools, People and Process, with additional consideration given to cultural and stakeholder assessments.

1 Foreword

Public government perspective

By Dr Tim Sheldon, Head of Cost Assurance & Analysis Service (CAAS), MOD

The Ministry of Defence is charged with delivering a key component of the UK’s National Security Strategy, as recently updated through the publication of the UK Strategic Defence and Security Review 2015. A key aspect of the MOD’s role is the delivery of the UK Equipment Programme, valued at over £170Bn over the next decade, to provide effective military equipment and support to our Armed Forces. The Equipment Programme includes a range of challenging projects from new Armoured Fighting Vehicles through cutting edge fighter aircraft to new warships and nuclear submarines – a very diverse portfolio.

Understanding and effectively managing the costs of the MOD Equipment Programme remains absolutely critical, especially when one considers the macro financial challenge across the UK public sector. Set against this context, the MOD has made a significant investment over the past 5 years to modernise and strengthen its in-house cost management capability including cost forecasting, cost engineering, cost accounting and portfolio analytics. This book highlights the fundamental facets to achieve an effective cost management organisation, and as such I commend the approach, both in terms of ‘what good looks like’ and how that can be assessed to understand opportunities for improvement. I have learnt that this is a continuous process and one that requires constant focus to maximise the benefits to our customers, the UK’s Armed Forces.

Private industry perspective

By Steve Elwell, Managing Director, Advisory Services, QinetiQ

As a senior manager in QinetiQ I am personally responsible for making multiple financial decisions each week. These range from private venture investment opportunities to the price to be included in a bid and proposal. The decisions I make can have a direct influence on the business as a whole and the share price of the company; they are strategically important and the decision lies with me.

For the technical element I have advisors such as technical directors and subject matter experts who can advise me on the viability of the solution, concept or proposal technical volume. On the financial side I can reach out to the finance and accounting director to ensure the correctness of the figures. However, this does not represent an opinion on the quality of the estimate. Finance will confirm whether the correct labour rates have been applied, the right exchange rate used and a realistic cash flow, but they don’t know if the number of hours is justified. For this I use a cost engineering function, but how good are these guys?

The Cost Engineering Health Check (CEHC) gave me an independent analysis of the cost engineers in my organisation. It provided a benchmark against other organisations which work in our environment and identified areas for improvement and investment. I was able to see the return on this investment and the effect it will have on the decisions I will make.

The outcome? Well my cost engineers didn’t score 100%, but they are in the upper quartile when compared to similar organisations in our domain. We have identified a number of investment areas for improvement which they were able to justify and although they are not perfect, they are better than our competitors, which means I have the ability to make decisions of higher quality than my competitors, which as a decision maker is the best outcome I can have! [37]

2 Introduction

2.1 Background

High quality cost estimating gives a business leader confidence to make rational financial decisions. Whether you are a business leader or a cost estimating manager, you have a vested interest in understanding if you can depend on your organisation’s ability to generate accurate cost forecasts and estimates. But how can business leaders have confidence in the quality of the cost information that they are being provided? How can a cost estimating manager be sure that his or her team is providing high quality cost information? [25]

The Cost Engineering Health Check is used as a capability benchmarking tool to identify improvement opportunities within a cost estimating capability, enabling it to focus on areas that have the potential to increase the competitiveness. High quality estimating leads to accurate budgets being set, a reduced potential for cost growth, accurate evaluation of risk exposure and the opportunity to implement effective earned value management (EVM).

The Cost Engineering Health Check employs a standardised competency framework that considers all aspects of cost estimating capability, and provides an objective assessment against both best practice and the industry standard. This framework is based on QinetiQ’s long established, tried and tested, Knowledge Based Estimating (KBE) philosophy comprising Data, Tools, People and Process, with additional consideration given to cultural and stakeholder assessments.

2.2 Purpose of this book

In these austere times decision makers are finding the financial impacts of their decisions coming under increasing levels of scrutiny by shareholders, chairmen, public accounts committees and other august bodies. But as decision makers typically do not generate the cost information on which they base their decisions, how can they be confident of the quality of the cost information that they are being provided to inform their decisions? Within the public sector there are a number of notable high profile events where the cost estimates being used to make decisions have been found to be significantly lacking in quality – for example in awarding the franchise for train operations on the UK’s West Coast Main Line [1]. How can such situations be avoided in the future and how can decision makers act to protect themselves and their organisations from cost estimates of questionable maturity?

In response to this situation, QinetiQ has developed the Cost Engineering Health Check (CEHC). The Cost Engineering Health Check has the express aim to aid decision makers such as project and programme managers, Managing Directors, Chief Executive Officers and so forth, to evaluate their organisation’s cost estimating capability. By evaluating their organisation’s cost estimating capability relative to both best practice and their industry peers, these individuals can gain confidence in the information that they are being asked to base their decisions upon, or, where their organisation’s capability is found to be deficient, to put measures in place to improve it.

2.3 Definition

There are a lot of flavours of cost engineering depending upon the industry and the environment in which you work. Terms used for individuals employed in the cost engineering function can include: Cost Engineer, Cost Analyst, Parametrician, Cost Forecaster and others, which are used interchangeably. In some organisations these terms have very specific and defined meanings. In this book the term Cost Engineer will be consistently used to describe a suitably qualified and experience person (SQEP) able to gather data, analyse it and generate a cost estimate. This is not intended to exclude staff who do not have the title Cost Engineer but is simply designed to make the writing of the book more consistent.

In a similar way there are both private industry and public bodies that deploy and depend upon cost engineering functions. For this reason this book will simply refer to the wider body as the organisation, as this Cost Engineering Health Check can equally apply to both the public and private domains.

Finally, there have been many initiatives to ensure that all costs associated with a project are considered. These have produced numerous terms including whole life cost (WLC), through life cost (TLC), life cycle cost (LCC), total ownership cost (TOC), cost of ownership (COO) and others. For simplicity in this book we have used the term whole life cost as a reference to the financial measure of resources consumed throughout a project’s life.

3 Knowledge Based Estimating (KBE)

3.1 Introduction

QinetiQ cost forecasts and estimates are underpinned by its philosophy of Knowledge Based Estimating (KBE). This promotes the application of knowledge, skills and understanding as the basis of all credible and justifiable costs (see Figure 3.1). The building blocks that form the foundation of this philosophy are Data, Tools, People and Process.

Within the context of the KBE philosophy, data is defined as any information, both cost and technical, concerning historical projects and services that will be used as the basis for future estimates, whilst also extending out to information in relation to the technical or schedule characteristics of future projects or services. Tools are defined as the software systems that help cost engineers to interpret historical data, such as statistical tools that can be used to create cost estimating relationships (CER), historical trend analysis (HTA) [28] or other tools that allow the application of such relationships to generate estimates. Parametric cost models could fall into that category.

People within KBE are required to interpret historical data and predict the concepts for the new projects and services that will satisfy the perceived capability or requirements. Cost engineers need the qualifications to justify their professionalism and the skills to elicit the data from finance, project and technical staff as well as the customer. Finally, processes are necessary so that the people conduct an estimate in a rational, repeatable way, ensuring that the outputs are traceable to source data and assumptions.

The Cost Engineering Health Check has two additional outputs for the full assessment: Culture and Stakeholders. Information concerning both is inferred from the questions sets for Data, Tools, People and Process as opposed to being asked directly. Culture refers to the environment in which cost engineering is taking place. Stakeholders refer to anyone who has a vested interest in the cost inputs or outputs.

When considering the development of a benchmarking capability the KBE philosophy was an ideal structure to draw from. If the maturity of an organisation can be measured against the KBE framework, then this will be a sound measure for comparison with other organisations.

3.2 Why cost engineering?

Cost engineering has recently had an increased visibility in the minds of a lot of engineers. With the age of austerity, the costs of projects, systems and services have come more into focus [35]. Cost engineers have technical backgrounds; they are not accountants. For cost engineers, their focus is not watts, newtons, volts, amps or kilograms, but dollars, euros and pounds.

Figure 3.1 The four foundational building blocks of a credible and justified cost estimate

There is frequently a grey and hazy distinction between the terms cost estimator and cost forecasters; they both require technical understanding to appreciate the magnitude and complexity of the hardware, software or service that they are considering. For the purposes of this book we will define them as a category of cost engineer:

• Cost estimators consider the costs associated with current immediate projects, systems and services; while
• Cost forecasters tend to consider the next generation of projects, systems and services, perhaps one or two decades into the future.

They have a number of purposes to their work; cost predictions are not the end in itself. It is always necessary to consider the answer to the question, “What is the requirement?” Potential applications of cost engineering [56] include:

• Financial analysis, budgeting, investment and planning
• Analysis of alternatives (AoA)
• Economic analysis (EA)
• Cost benefit analysis (CBA)
• Business case analysis
• Contracting and project management
• Design and trade-off decisions
• Acquisition analysis, for example technology insertion [58]

In the generation of costs to satisfy these potential cost applications, it is necessary to consider the limitations of the cost estimate being produced. There have been some occasions when costs have been used out of context or inappropriately. You cannot use an economic analysis with cost calculated in net present value (NPV) to set the budget for a project, system or service.

It is not commonly appreciated that there are a number of different types of cost prediction which can be deployed suitably to different applications:

• Rough order of magnitude (ROM)
• Independent cost estimate (ICE)
• Whole life cost (WLC) or life cycle cost estimate (LCCE)
• Budget estimate
• Commercially committing proposal estimate
• Discounted cash flow and net present value (NPV)
• Parametric top-down forecast
• Should cost / would cost / could cost
• Operating and support cost or through life cost (TLC)
• Activity-cased costing (ABC)
• Price-to-win acquisition estimates

Common to all these types of estimate is the need for cost estimating data. This data and information needs to be documented to provide a legacy and corporate memory of the cost estimate. When completed a robust cost engineering output has a number of benefits.

3.3 Benefits of cost engineering

When an organisation with a mature costing function produces a cost estimate, there are a number of benefits which occur as a consequence. Such a function is likely to support the bidding or budgeting process by accurately linking the requirements to cost through the utilisation of cost drivers. If the magnitude of the cost drivers changes, then this linkage will directly influence the cost estimate either upwards or downwards depending upon the cost estimating relationships. With a robust cost estimate you will be able to assess the reasonableness of a bid/budget and effectively defend the value that you have generated. In a governance and scrutinised environment you will be able to justify the estimated cost. In an organisation with a mature cost engineering function you will be able to quickly and precisely determine the impact of costs to the predicted budget due to the direct relationship to the cost drivers.

The mature cost organisation will enhance the profits of the business in the private domain or enable more projects for the same funding in the public sector. This will be achieved through the comprehensive understanding of the cost estimate and the reduced management contingency required for cost growth attributable to inaccurate estimation [2]. A mature cost engineering organisation will work to identify all the cost, schedule and performance risks in the project and conduct a transparent analysi...

Table des matières

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Glossary
• Acknowledgements
• 1 Foreword
• 2 Introduction
• 3 Knowledge Based Estimating (KBE)
• 4 What is the Cost Engineering Health Check (CEHC)?
• 5 The CEHC methodology
• 6 Data gathering, normalisation and application
• 7 Tool development and usage
• 8 People’s skills, professionalism and knowledge
• 9 Process existence and utilisation
• 10 Culture, leadership and management
• 11 Stakeholders’ engagement and acknowledgement
• 12 Conducting assessments
• 13 Summary
• References
• Index