Obtaining Life-Cycle Cost-Effective Facilities in the Department of Defense

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Results of this examination are documented.

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From the Sensitivity Analysis a short report can be presented that can quickly demonstrate the analysis. This might be portrayed using a Tornado graph such as Figure This figure is a bar chart with five bars. The horizontal axis is labelled Costs, with the left half labelled lower costs and the right half labelled higher costs. These bars are of differing lengths, where the length indicates the plausible change. The bars are situated over, to the left or to the right relative to the mid-point of the horizontal axis.

Risk and uncertainty are related; uncertainty is the probability, while risk is the probability and consequence. Decision makers need to be informed of cost risks and uncertainties relevant to the cost estimates submitted for consideration. Quantitative risk and uncertainty analysis provides a way to assess the variability in the point estimate.

Clear and concise statements need to be made about these cost risks and uncertainties, the likelihood probability of occurrence and the potential impact on the LCC estimate number. This analysis can model such effects as technical changes, schedules slipping, missions changing, and proposed solutions not meeting user needs, allowing for a known range of potential costs.

Having a range of costs around a point estimate is more useful to decision makers, because it conveys the level of confidence in achieving the most likely cost. Risk management is considered a key consideration for Departmental investment planning as stated in the TB Policy Framework for the Management of Risk This TB Policy Framework contains general statements that include the responsibility for Deputy Heads to ensure that risk management principles and practices are understood and integrated into the various activities of their organization.

This is considered to be a floor requirement in comparison to leading practice. The DND Costing Handbook indicates that it is essential that the costing be assessed from the perspective of both risk and reasonableness to determine its validity. The DND Costing Handbook identifies the depiction of the estimate and its related uncertainty in the form of a cumulative probability distribution as one of the best methods to portray the uncertainty of an estimate.

In determining the communication of the cost estimate, the DND Costing Handbook notes that "by establishing a confidence interval for the best estimate, there is recognition that the actual cost is likely to fall within a range of values. With that in mind, the cost analyst can best quantify cost risk by assigning a probability to possible outcomes and quantify risks if they occur" In the process of assessing risk, the DND Costing Handbook states that the use of a consistent Risk Assessment Methodology, "so that factors that are less apparent in the areas of technical and performance related risk can be examined for their potential influence" A projects Life Cycle Cost estimate is a forecast of a future cost based on project information known at the time that the estimates are developed.

There are therefore, in these early stages, significant uncertainties and cost risk surrounding the LCC estimate.

In order for the NGFC Project to implement leading practices on cost risk and uncertainty analysis, the following should be implemented in the development phase:. This figure is a line graph where the x axis is labelled cost estimate from zero to unknown dollars and the y axis is labelled Percentage Likelihood not exceeding cost, ranging from zero to percent. GAO states that "no specific confidence level is considered a best practice, experts agree that program cost estimates should be budgeted to at least the 50 percent confidence level, but budgeting to a higher level for example,70 percent to 80 percent, or the mean is now common practice.

In his review of UK Defence Acquisitions 45 , Bernard Gray recommended funding at the 90 percent level to address the systematic under-forecasting during the early stages of a project. We also understand that NASA is required to fund projects at the 50 percent level, but the overall Program budget is to be set at the 70 percent level The annual budgets are set at the annual P level. The TB Guide to Costing indicates that Departments should document all assumptions, processes, and calculations used to produce the cost information As previously noted in this document, the DND Costing Handbook suggests that the cost estimate process should be clearly documented throughout the process, including documentation of:.

Documentation is a key requirement of a cost model. Documentation is an ongoing activity to help ensure that key decisions or assumptions are not lost.

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Documentation should be routinely examined by other members of the LCC organization to help ensure that it remains appropriately updated and fit for task. A key component of this work is to present the degree of uncertainty inherent in the estimate. The documented cost report includes the provision of an S Curve specifying the confidence level of the current baseline estimate and the current budget and the risk adjusted estimate. Other aspects of the report cover the detail necessary to present the report to outside stakeholders external to DND. As a standard component of the NGFC LCC , the model should be independently assured prior to any major milestone or in a manner consistent with the plan.

The primary purpose is to challenge the existing LCC estimate to ensure it is robust and reliable, taking into account the current life cycle of the project and knowledge of the system under investigation. The DND Costing Handbook states that all proposals must be put through a Cost Validation Process where an arms length review is performed to ensure that the following areas are reviewed:. An ICE is recommended to be undertaken for the NGFC as part of the review process due to its complexity, size and strategic significance.

Comparing JSF partner nations, we note that for Norway, F35 cost estimates are reviewed on an annual basis by an independent third party.

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The Netherlands also performs an independent review on an annual basis through the Defence Audit Agency. In addition, the Netherlands Court of audit publishes an annual independent report on the project. This aspect of the LCC Framework is focused on key decision makers and stakeholders who would, for the most part, have limited understanding of LCC principles or practices. The product considerations and resulting report s should be clearly focused on the purpose s , which would also drive a number of critical assumptions in the model.

The TBS Guide to Costing indicates that the purpose of the costing report is to produce information that supports the actions of managers and decision makers, assists TBS in assessing business cases, and enhances the reporting and public disclosure of information. Managers may also use the cost information to develop, for example, cost-benefit analyses, risk assessments, or cost recovery strategies.

As noted in section 4. Leading practice includes the use of a standard LCC analysis report structure which would bring out the key issues related to the costs presented in a concise, factual and easily understood manner.

It includes details pertinent to the decision at hand, including the cost confidence level, risks and uncertainties, summaries of analysis such as sensitivity, risk and affordability analysis, recommendations and conclusions. The report does not assume the reader has a detailed understanding of LCC principles and careful attention should be paid to the expression of uncertainty. The key focus of interest of senior decision makers from the LCC would be the actual cost, and the level of uncertainty that surrounds those costs.

Both these elements would be significantly impacted by the purposes for which the decision maker has for using the information. As a general guide, decisions that are focused on budgets or funding approval would be most interested in the level of costs that they have direct authority over, and the time frame that is consistent with their budgetary responsibilities.

The NGFC has an approved budget. We believe that what is of most interest to decision makers is affordability.


Obtaining Life-Cycle Cost-Effective Facilities in the Department of Defense

If the current project budget falls below the 50 percent confidence level the project should be considered as having a high risk that it is inadequately funded. Based on the above analysis, and in consideration of the US , UK and Norwegian practices, a decision maker will draw increasing comfort from a budget at least at the 50 percent level or above. If desired, the decision maker could establish a prescribed confidence level that the project should provide options to achieve.

For example, they might prescribe a confidence level of 65 percent to reflect the overall conditions of the project at this stage in the cycle.

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In this case, DND would be required to bring two business cases. The first case would present an LCC that reflected the currently agreed requirements and another case that reflected the currently approved budget based on the prescribed confidence level. The time frame for the LCC analysis is aligned to the purposes of the decision maker. The life cycle cost time frame is from Development to Disposal. However, short periods are appropriate where the decision maker, or stakeholder, do not require such information.

Consequently, the time frame for presentation may vary between uses, but each LCC analysis is drawn from and reconcilable to a single consistent source of information. Selection of the appropriate confidence levels and reporting period for the various project phases should be based on management judgment, in consideration of factors including the purpose for which the cost estimate is to be used, quality of data available, and other relevant factors.

Below the line are three levels of blocks. There are two blocks at the second level that are followed by a two-ended arrow that runs the length of the axis. Below the mid point to the high point on the axis is another block labelled "Key risks that could lead to higher costs". Below the two-ended arrow is another block that also spans the length of the axis. Within the federal government, Ministers and deputy heads have authority to manage the people, resources and activities of their departments towards the objectives set out in legislative mandates and government policy.

The Treasury Board of Canada Secretariat, as the management board, has the authority to ensure that the government as a whole is managed in a coherent and effective manner. The government's management regime establishes minimum standards for how Ministers and deputy heads use their authorities and manage public resources. Research Question What process does the Department of Defense use to obtain life-cycle cost-effective facilities?

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Information, funding, and organizational issues create barriers to life-cycle cost-effectiveness for facilities. Requiring contractors to demonstrate life-cycle cost-effectiveness in proposals could raise costs and risks without guaranteeing commensurate savings. Improving standards and performance guidelines to include life-cycle cost-effectiveness elements into the planning, design, and construction processes remains an opportunity. Construction materials are largely dictated by building codes rather than by the services. Life-cycle cost benchmarking across services and with comparable institutions can assist decisionmaking.

To align life-cycle cost incentives, Congress could test the efficacy of providing MILCON; Sustainment, Restoration, and Modernization; and Base Operations Support funding in one single appropriation, with the ability to reprogram and optimize funding between these functions. DoD should analyze the life-cycle cost outcomes of the current very limited amounts of construction undertaken with Sustainment, Restoration, and Modernization funding to examine whether outcomes differ from MILCON programing.

The appropriate level of fire protection for DoD facilities is an important area for future analysis, but deviating from the current level of fire protection to reduce life-cycle costs would only be prudent if overall casualty risk from fires did not increase as a result. DoD should obtain design, construction, and contracting lessons learned from performance-based contracting approaches undertaken by other government entities used to incentivize building commissioning and verification of energy and other operating cost savings. Any proposed design standardizations should be adaptable to new technologies and provide opportunities for locally led efficiencies.

Army DD Form These products are generally tailored for a non-expert audience and often form part of a suite of documents being provided to support decisions. These products would also directly support the approvals needed for decision points such as Contract, Project and Expenditure approvals. This diagram is a three-dimensional cube having specific volumes associated with figures representing costs.

The dimensions of the cube are time length , work breakdown structure height and Votes depth. The Time dimension length has many partitions and along the axis is labelled Year 1, just less than half-way is labelled year 10 and at the end, is labelled Useful life. The Votes dimension depth has three partitions, labelled Vote 10, Vote 5 and Vote 1. The Work Breakdown Structure dimension height has many partitions but none are labelled.

The document figure labelled " LCC for Programming" is associated with approximately half the cube year 1 to before year 10, all work breakdown structure and all votes. The document figure labelled " LCC for Useful Life Analysis" is associated the entire cube all years, all work breakdown structure and all votes. The following section outlines the specific milestones or decision points in the coming years that would require the use of the NGFC LCC. These are based on the existing federal government approval processes including Departmental decisions and approvals, Treasury Board and Cabinet approvals and Parliamentary approvals.

During the Development Phase the LCC Estimate would be progressively improved through the inclusion of more reliable information and greater certainty around a number of aspects of the project.

Obtaining Life-Cycle Cost-Effective Facilities in the Department of Defense Obtaining Life-Cycle Cost-Effective Facilities in the Department of Defense
Obtaining Life-Cycle Cost-Effective Facilities in the Department of Defense Obtaining Life-Cycle Cost-Effective Facilities in the Department of Defense
Obtaining Life-Cycle Cost-Effective Facilities in the Department of Defense Obtaining Life-Cycle Cost-Effective Facilities in the Department of Defense
Obtaining Life-Cycle Cost-Effective Facilities in the Department of Defense Obtaining Life-Cycle Cost-Effective Facilities in the Department of Defense
Obtaining Life-Cycle Cost-Effective Facilities in the Department of Defense Obtaining Life-Cycle Cost-Effective Facilities in the Department of Defense

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