IT Project Cost Estimation

I had expected to present my webinar,  “Best Practices for Cost Effectiveness Studies using TruePlanning” in early August. As you might know, I was planning to show a real world example from a recent engagement with a government customer. Unfortunately, since the Source Selection has not concluded with a downselect, I was not able to obtain the public release in time. However, for this month’s blog I will continue share some of the highlights of the webinar.

In last month’s blog we explored the uses of TruePlanning during Source Selection from the Supplier’s (or Contractor’s) perspective. This month, I would like to share with you some of the uses of TruePlanning cost estimating software from the Customer’s (or Government’s) perspective:

• Analysis of Alternatives (AoA) – Is proposed technical baseline cost-effective against other competing alternatives?
• Cost Realism – Are the performers bidding within an accurate range
• Data Driven Estimating – Are the performers bidding based on appropriate, traceable historical data points.
• Independent Cost Estimate (ICE) – Using the performer’s technical configuration, what does a completely independent look say about the performer’s bid?
• Risk Analysis – Is our bid over conservative, how much risk are we willing to take and how much cost exposure can we absorb?
  
• Schedule Estimating – Can we really do the job within the schedule constraints?
• Growth Estimating – What other configurations, materials or technologies might we consider?

While TruePlanning is useful in estimating project costs and all of the above types of analysis, I have found it most useful in developing AoAs. During Source Selection, TruePlanning provides a structured, repeatable framework that can rapidly develop cost estimates across a range of alternatives. These results are often incorporated directly into Operational Effectiveness models along with Measure of Effectiveness and Measures of Performance. In some cases, clients using tools such as Phoenix Model Center can directly link TruePlanning with optimization tools as well. 

I  recently moved and thought about the need to do a new household budget. This got me to thinking of the budgeting capability in TruePlanning. First, you can use TruePlanning to determine a budget. The time phased output, either monthly or annually, is ideal for establishing a budget and budget profile for your project. 

TruePlanning also splits the time phased costs into development, production, and operating and support categories. Be cautious, however, in using the Phase report. The System cost object costs are assigned by schedule duration, which may not necessarily reflect the actual project cost flow. A better choice may be the Activity Type report. Use the development and production costs from this report as calculated by TruePlanning and then split the System costs between development and production as appropriate for your project.    

Second, in the project Properties, you can enter your budget (if you already have one) and then compare the TruePlanning phased output to your budget profile. This will give you a heads up as to where you may have a budget shortfall or overage. This type of information well in advance can lead to a more successful and productive project. Happy budgeting!!!  

John Long
Solutions Consultant, PRICE Systems

Over the past several weeks several users have inquired about the best way to estimate costs associated with porting existing software to a new hardware environment. Normally for this situation some of the existing software will require some amount of adaptation to operate on a new server. However, a large portion of the existing software will only require integration into the new environment.  

Estimating software costs associated with the above will require the use of several cost objects:

- Systems cost object if program management, Quality Assurance, configuration, and    documentation costs are to be included in the estimate

- Assembly cost object to estimate integration costs

- Software component cost object to estimate software adaptation costs

- Software COTS cost object to model all existing software requiring only integration effort 

The main input parameter that should be reviewed with care in the system cost object is project complexity. The default value for this input is nominal. Recommend the low value be reviewed since the team size will be small.

The main input parameter that should be reviewed with care in the assembly cost object is system complexity. If the software is just be ported to the new environment, recommend a low value be selected, since the requirements definition system design has been completed previously. 

The software component input parameters will be treated in a normal fashion. All adapted software will be modeled as adapted new design, code and test. 

The main input parameters that should be reviewed with care in the software COTS cost object are software size, integration team maturity, and external integration. This cost object should be used for all software that will only be integrated in the new environment. Functional size should be used if the size is unknown. The input parameters for integration maturity and external integration must be reduced. The recommended value is 0.05, which is the lowest value accepted by the model. This value will account for much lower integration activity for the existing software.

If you have any further questions, please contact a PRICE Systems Support.

The late Norm Crosby’s “Quality is Free” taught us that an investment into quality is more than offset by prevention of defects based upon understanding of requirements. Only with the latter can lack of conformance (and subsequent costs) be captured and hence quality quantified. So how then is Parametrics relevant? 

Parametric estimating is more than cost modeling. Our craft represents an initial consulting function into the accuracy and completeness of program planning concepts. Our customers trust us to know when to ask and when to supplement. Yes, we are mathematical and financial modelers too. But I’d suggest that “Parametrics is also Free” when we deliver substantive systems engineering value as trusted advisors early-on in the development of project and program visualization. Spiral and 4GL paradigms notwithstanding, when we adequately act as “forcing functions” to get articulated requirements ready for primetime estimating, we have undeniably saved overruns and rework. 

A recommendation: ask early and often. And when in doubt (or they say “No, don’t need that” when you know better), model that object/activity and keep it ready. I’m the first to admit being on the receiving end of “You should’ve known to ask that” or “You’re here to fill in the blanks on what I don’t know to tell you.” No time for asking permission or forgiveness. Parametrics is a great job. But initiative and know-how are still the base ingredients to baking our quality cake.

John Swaren
Solutions  Consultant, PRICE Systems

The following is an extract from a paper written in 1978 from one of the founders of PRICE Systems: 

Two questions are often asked by those unfamiliar with TruePlanning’s approach to cost modeling: What is your CER (cost estimating relationship)? And what is your data base?

These questions are closely related.  Both are based on the assumption that the PRICE modeling approach is the same as that customarily used in developing cost estimating relationships.  This is not the case. 

The customary approach is to first gather as much relevant data as possible, then screen the data for consistency, reduce the data by formal statistical procedures and present the results in the form of one or more estimating relationships.

In contrast, the PRICE approach is process oriented rather than data base oriented. 
Models are designed to emulate the processes by which experienced managers, engineers and cost estimators assess the impacts of key cost and schedule drivers.

The strength of the classical approach is that it enables investigators to test hypotheses and identify significant factors that have affected past developments.  PRICE does not ignore these results.  Indeed, similar procedures are often used in preliminary model development.  As a consequence, there is nothing in the PRICE models that is inconsistent with classical results.  The difference is that these results are not an end in themselves.  When blended with quantifications of other subjective, but no less valid, perceptions by experience people, they contribute substantially to the PRICE methodology.

The weakness of the classical approach is that it is data base limited.  It does not extrapolate well when applied as a cost estimation procedure to new situations.  In fact, it usually does not even adequately describe the underlying data base.  Data definitions are often inconsistent, and data poorly recorded that fitted equations are questionable at best.  Extensive screening to eliminate inconsistent and unrepresentative data results in so few cases that the richness of single equation models is severely limited.  These models simply cannot account for all of the factors that drive costs.

The principal reason for the success of the PRICE model is that it does not depend on a single CER or on a single data base.  By focusing on the process of rational cost estimation, it preserves for the user the flexibility to tune the model to the particular data base most relevant to the estimate in question.  This will normally be cost histories of previous projects within the users’ own organization or product line. 

In effect, the PRICE model develops a new family of CERs to fit each specific application based on the data base it is tuned against.

Recently the Director of the Office of Management & Budget (OMB), Peter Orszag issued a directive that was posted on the OMB blog that outlined three specific actions for IT reform. The actions include a freeze on all new IT modernization task orders for financial systems, reviews of current high risk IT projects and require agencies to submit improvement plans to the CIO; thirdly, the OMB Deputy Director will develop recommendations within 120 days to improve the federal government’s overall IT procurement and management practices. Orszag states:

“While a productivity boom has transformed private sector performance over the past two decades, the federal government has almost entirely missed this transformation and now lags far behind on efficiency and service quality.  We are wasting billions of dollars a year, and more importantly are missing out on the huge productively improvements other sectors have benefited from.

Quite simply, we can’t significantly improve the efficiency and effectiveness of the federal government without fixing IT.”

My experience is that government IT project managers are very competent people and they want to deliver on time, on budget results.  However, as confirmed by this survey, 78% of government IT project managers feel that they are not equipped with the people, processes and tools to determine accurate project estimates and to conduct effective program affordability management.  The root cause of late, over budget IT projects are inaccurate, over-optimistic project estimates.  I and others at my company have worked hard to change this, and to ensure that government IT project management are educated about project estimating software but little has changed over the past ten years.  Fundamental change will only result from greater leadership focus on estimating accuracy throughout OMB and agency program management. 

“I know that you believe you understand what you think I said, but I'm not sure you realize that what you heard is not what I meant.” This is a famous quote by author and US. State Department spokesman Robert McCloskey (September 15, 1914 – June 30 2003) and was attributed to him by Marvin Kalb, a CBS reporter, in TV Guide 31 March 1984. This quote was in reference to a press briefing during the Vietnam War. What it really addresses is the ease to which the communication of the meaning / understanding of ideas can become confused or misunderstood.

I have found through-out my career that this is a constant danger. I think the danger is especially true in the area of cost estimation. What is really included in an estimate? Are we estimating the correct understanding of the project, system, or program? Did I understand the purpose of the item we are costing well enough to estimate it? Although many of you reading this would nod your head in agreement or even think well Duh! The act of communication, as part of the cost estimating process, is easily side-tracked. Because of this likelihood one must find the means to guard against confusion and to increase the probability of meaningful and accurate exchange of ideas.

To this end I have found a couple of techniques to be helpful. First and foremost, listen carefully to the person or group with which you are interacting. Ensure that you practice active listening by asking clarifying questions, providing appropriate feedback, or recording what is being said for further review later. Additionally, a picture really is worth a thousand words. Use visual products such as charts, diagrams or an interactive whiteboard session to clarify what is being discussed. BUT, don’t rely solely on pictures because each of us learn or communicate in different ways. Some do fine with visual communication others need to read it and even others are auditory and must hear the ideas out loud. Use a variety of interaction approaches to help increase the potential for good communication and the chance that you will provide a useful estimate will increase significantly.

While sitting in the operatory chair yesterday, my dentist said something that made me stop. He was complaining about an increasing rate of incompetence and apathy he observes in those delivering services to him. And while I do agree with him in principal, he and I are of the age where some folks label us as grumpy old men. So, it may not be as bad as we think. Regardless, the statement he said he made to the an unfortunate poor-quality service provider was, “If you don’t have the time to do it right the first time, when are you going to have time to fix what you did?” Apparently, the excuse offered by the provider was that he didn’t have the time to do the job the correct way, so he tried a short-cut.

Wow! This hit me right between the eyes. I immediately expelled all the material and apparatus he had placed in my mouth so I could tell him how impressed I was with his logic. Plus, I had never heard that expression before. But how true it is and in it I see a glimmer of hope for realizing a key initiative of WSARA (Weapons Systems Acquisition Reform Act of 2009) - getting things right from the start with sound systems engineering, cost-estimating. The path to getting this accomplished is through the people doing the work and not through DoD leadership. As I reflect on my experience with DoD Systems Engineers and Cost Estimators, most I know want to do the job right the first time. If every one of us involved in planning and estimating software, hardware, and IT projects pledges to never take short-cuts, we can make the difference.

There are two reasons for why I don’t think this is just rhetoric: 1. getting things right from the start can’t happen if we are not committed to it; 2. I am unable to conjure up a single example of anything I have experienced in any dimension of my life that started out wrong and turned out right.

"And me boss. And me boss. And me boss!"

Just like Bugs Bunny tricking the mob boss into an unfair share of the loot, who doesn’t want a piece of the action. In this case the “action” is the estimate you have just finished in TruePlanning and would like to share with your coworkers. No problem, just share your project.

Project sharing is a feature that is available to users who are using the Client/Server version of TruePlanning and it allows users to access projects that have been created on the centralized database by other users. If you are using standalone you will need to export your project to a tpprj file.

There are a few ways to set up sharing on a project. From the Project Manager dialog select a project, and then click the “Project Sharing” button on the left. In the Project Manager dialog you can also right click on any project listed and select Sharing from the right-click menu. If you have the project you would like to share already open, use File->Properties, then select the Sharing tab.

When sharing you can share your project to all users or you can share your project to specific users. If you would like to share to only specific users, select the “Share with the following users” radio button, then add them via the “Add” button.

Once a project has been shared, any user who has access to the project can open it and alter it. At this time TruePlanning does not support the concept of a ‘Read-only’ project. If a project is going to be shared, but the original estimate needs to be preserved, a copy of the original should be made and not shared.

Users who have been given access to TruePlanning via sharing have the ability to open, alter and save the project. They cannot rename, delete, or set sharing on projects they do not own. If a user would like to rename or alter sharing rights, they need to make a copy of the project. When a user makes a copy of a project that has been shared to them, they are the owner of the copy and can rename and alter sharing rights on the copy.

That’s it! You now have a piece of the action.

 Ed Merriman
Applications Engineer, PRICE Systems

Parametric modeling is excellent for all aspects of early-concept cost estimation, including go/no-go decisions downstream. So, in the spirit of bringing a transparency to (ethical) financial engineering…
why not apply our craft to pricing “real-options”?

The latter are essentially strategic opportunities for engaging resources (cost/schedule) into projects, ventures, investments, or even abandonments. The opportunity choice has value itself! 

Unlike static project Net Present Value (often, but not exclusively, approximated with Discounted Cash Flow) assuming pre-defined decisions, real-options reflect the merit of flexibility. If an R&D or proof-of-concept presents viability/ marketability learning, the option has positive value, above and beyond DCF. The more the flexibility, the higher the value. Likewise, a real-option appreciates with more uncertainty.

By now, you’re asking—“Wasn’t this a parametrics blog? I’m an engineering/ computing/ math/ science type, not a quantitative-finance geek. How could the above possibly help me any”?

Answer: In some situations, specifically go/no-go, the value of your flexibility created with the strategic choice to move forward (or not) can exceed its “option” cost. Not all options should be executed, just as all go/no-go decisions aren’t go’s. But, over time, continuing to pay less than their market value creates an opportunity to average out with total economic-value creation.

But, you say— “How do I find the cost of this flexibility/uncertainty option? It sounds great that I can make investment decisions based on buying/ executing (or not) these options, but do I really need to learn fancy finance stuff like Black-Scholes, Value Trees, Binomial-Risk Neutral Pricing… based on risk-free rates of return and (expected) discounted cashflows…. Yikes!”

Answer: (& bottom-line, for now) No. Use your parametric estimating tool! Concerned about the hardware cost of pilot-production/ tooling? “Buy” an option priced as the cost of preliminary design. 
{Note that the latter cost is your option’s premium, and the go-ahead cost is your option’s strike price.}
Interested in the nonrecurring cost of large-scale full software development? Buy an option for the
cost of first iteration increment. Concerned about COTS versus assembly? Estimate the development (and integration) of both scenarios. 

The point is take an economically-disciplined approach to valuing your strategic choices downstream. Parametric modeling works here and is “data-driven” defensible.  It is certainly applicable to strategic investment, capital -budgeting and new business decisions within both the public and private sectors. Transparency through mathematics is a good thing.

I have been working with several clients on data collection and repository creation this spring. One common theme that comes up is what data to collect and how to use it to make intelligent decisions about projects. And that’s the impetus for my little limerick above. 

The goal of data collection is wisdom. In the estimation world wisdom means knowing when it’s safe to bet your shirt on this new project you want to initiate. If you keep that perspective in mind it becomes much easier to identify what information you need to make wise decisions and what data you have to have to generate the necessary information. Every data item you collect costs time and money, transforming that data into information cost more time and money. So be frugal, figure out what you need to know to make you choices the correct ones and you will be that much closer to being happy and wise.

One of the great features of the TruePlanning cost management software is the fact that it makes it easy to handle complications of inflation and estimating projects performed in different countries and currencies. The costs associated with doing work in different countries, and the relative value of different currencies is constantly changing. To address this, the cost research team at PRICE does an annual economic update performed by the cost research team, and this blog will introduce some of basic concepts and research that goes into maintaining this feature every year.

The price of goods and services changes over time, and this value is measured by inflation rates (if prices have gone up) or deflation rates (if prices have gone down). These inflation/deflation rates are constantly updated for many different currencies by the International Monetary Fund (IMF). In TruePlanning, we use past and predicted inflation rates published by the IMF  to determine the cost in today’s currency of doing work in the future, for whatever currency you want to use. Within the TruePlanning tool, these factors can be applied to help produce a cost estimate of work that takes place over a long period of time, with the cost estimate shown in today’s currency values.

In addition to inflation/deflation rates for different currencies, we also recognize that the price of goods and services may be different from one country to the next (i.e. a U.S. Dollar exchanged and spent in India will buy more haircuts than a dollar spent in the United States). The degree of these price differences can be measured by looking at Purchasing Power Parity (PPP) data of a country. Standard PPP values are calculated or compiled and published by the Organization for Economic Co-operation and Development (OECD). The PPP rates published by the OECD are used in the TruePlanning tool to estimate costs of performing projects in different countries, as the cost of doing the same amount of work in different countries can vary significantly.

By automating the application of these and other economic complications of cost estimating, the TruePlanning tool helps create a process in which the effects of these economic factors can be applied consistently and correctly for all your cost estimates.

Earlier this week I conducted a webinar intended to make PRICE users aware of the Cost Research Services available to them as part of the license fee they pay to use PRICE products. I thought I would recap the highlights of this webinar for those of you who might have missed it.

At PRICE we understand that cost estimating tools, while useful and valuable, do not always present the complete solution. Every single cost estimation projects presents new and unique challenges.  We think it's important that in addition to solid, time trusted cost estimating models, our users have access to the many years of experience we have as seasoned costestimators, subject matter experts and operations researchers.

This service is nothing new.  For the 30 years that PRICE has been in existence, we have worked as partners with ourcustomers to optimize their use of our models and methodologies.  This was just an opportunity to formalize the offerings and remind the community what services are available.

So what does the Cost Research team at PRICE have to offer the cost estimating commmunity?  On average our researchers have more than 24 years of experience with hardware estimating, software estimating, operations research or some combination of the three. We are constantly engaged in cost research projects addressing market needs as they arise.  The results of these studies vary depending on the need they attempt to address.  In some cases, data collection indicates custom models should be developed.  These can be developed and deployed in TruePlanning, the flexible cost estimating framework.  Some results are published as updates to tables or calculators in the PRICE Software and Hardware cost estimation models.  White papers, webinars and the PRICE blog are all means we use to communicate the results of cost research studies.  

PRICE's Cost Research Team is available 24/7 to address users cost estimating question on an as needed basis.  Some issues require more attention than a single phone call.  Users are encouraged to schedule working sessions with one or more of our analysts to take a deeper dive into cost estimating issues that perplex or intrique them.

Some areas the team is currently studying include Total Ownership Costs, Joint Confidence Level, Performanced based models for technologies such as FPGAs and ASICs, semi-rigid cables, and  Operations and Support costs for space systems. 

The most important thing the cost research team at PRICE wants to do is make our clients better estimators while adding value to the cost estimating community as a whole.  We can't do this without input from our clients.  Share your cost estimating challenges with us.  Call, email or comment on our blog.  856-608-7201 or info@pricesystems.com


 

From my perspective as a cost researcher, the calibration tool is one of the most powerful analysis capabilities built into the TruePlanning cost management software . One way I can use this tool is to go back to an old estimate for a project that is now completed, and analyze the correctness of the previously entered input values. With this analysis, I can find ways to improve our methods of soliciting input values from the user to ensure the best values are entered the next time. This way, the TruePlanning models keep getting “smarter” as new information becomes available.

TruePlanning models calculate a cost estimate based on a set of inputs about the project being estimated. After the project is completed and we have actual cost data available to us, we can go back to TruePlanning and explore the various reasons why an estimated cost may have been different from the actual cost.

Let’s say we are estimating a project involving a brand new electronic technology, and we are uncertain of the values we selected to describe its complexity. The calibration tool allows us to enter the actual costs of the project, and reverse-engineer the value of an input we were uncertain about (i.e. manufacturing complexity for electronics) that would lead to the correct answer. This allows us to identify incorrect input values so we can identify problems, then review and refine our methods used to pick the value in the first place. 

Over the years, we have used this (and many other) TruePlanning analysis capabilities to further our understanding of our cost estimates and our cost estimating methods. There are many analysis tools built into TruePlanning, and many ways to slice and dice information about a cost estimate. This makes it quick and easy to standardize the cost estimation methods used, and continually review and refine our methods to get the most accurate cost estimate possible. With more analysis tools and more information becoming available all the time, TruePlanning will keep getting smarter.

I have been frequently asked to do crosschecks on other people’s software cost estimates which are potentially done in a variety of tools from spreadsheets to SLIM.

One of the common operator errors I see from other users is not understanding what activities and resources are included in the outputs of the particular tool that they are estimating with.

This is akin to deciding between two cars and not knowing if both come with the same sets of features (stereo, AC, heated seats).   With software estimation tools you need to know what work is getting estimated by the tool. (Requirements, Design, Code, Test, Documentation, System Test) and what resources are included in the effort estimates to accomplish those task/activities. (Programmers, Analysts, Architects, Systems Engineers, Testers, Tech Writers, Project Managers, QA and CM)

A common mistake I see is generating an estimate with a tool then adding in Program Management effort and cost when the tool utilized already includes those activities and resources in the estimate.

That’s why I drive a pearl black TruePlanning 2 door coupe.

With so many acquisition programs over budget and behind schedule, the term “Cost Realism” is suddenly very popular. In my experience as an estimator on many major acquisition programs, two things have remained certain over years (besides death and taxes). First, the probability of the program ever achieving the original cost estimate is exactly zero and second, the more information that is known about a program, the more it will exceed its original cost estimate.   

With that said, the move to Cost Realism is so important because it recognizes these two fundamental facts. Much of the interest in Cost Realism is driven by the Weapon Systems Acquisition Reform Act of 2009. According to US Senator Carl Levin “Report after report has indicated that the key to successful acquisition programs is getting things right from the start with sound systems engineering, cost estimating, and developmental testing early in the program cycle. The WSARA also calls for a “Director of Independent Cost Assessment to ensure that cost estimates for major defense acquisition programs are fair, reliable, and unbiased.”

If we go a bit further and look at definition of Cost Realism in the Parametric Cost Estimating Handbook we find  that “no one expects a cost estimate to precisely predict what a hardware or software project costs or a time and material service will cost. So, cost realism is not about the exact cost estimate. It's about the system of logic, the assumptions about the future, and the reasonableness of the historical basis of the estimate. That is, it's about the things that make up the foundation of the estimate.”

So while we recognize that at its core cost estimating can never be exact, cost realism seeks to ensure estimates are closely tied to the fundamental realities of the program as we know them at the time, without regard to politics or undue optimism.   As I finish this blog, I’m struck by the line in a Few Good Men “You can’t handle the truth!” As estimators, we need to always reflect the truth, and that is what cost realism is all about.

Software project falures coupled with rapidly changing business needs are forcing organizations to revisit the way they go about buiilding software.  Agile development has emerged as one possible solution to the woes of the software industry.  Agile enthusiasts claim significant increases in productivity and quality, while detractors cite instances where the reverse is true.  It seems to me that probably both are right  - some of the time anyway. 

Agile means many different things to different organization.  There is a long list of agile tenets but not every method of agile applies all of them.  And some organizations have cultures which adapt well to agile methods while others don't.  All of these things affect the 'success' of applying agile practices to your organization.

Personally I don't think that most agile practices inherently improve productivity.  The long term application of agile within a cohesive development team should definitely improve their productivity but this would probably be true of the same team if they were applying some other philosophy.

I do, however  think there are agile practices specifically focused on improving the quality of the software that is delivered.  My list follows.....

Test Driven Development  No code is written until there is a test.  Business Analyst build tests that coders use to determine if the code meets the requirement.  Only enough code is written to make the test pass.  As code is refactored (improved) over time, the test remains to ensure that subsequent changes do not degrade the initial requirement.

Continuous Integration and Automated Testing  Builds are run with each change to the code base or at regulalry scheduled intervals during the day.  Suites of automated tests are run against each build.  When tests fail making them pass because a number 1 priority of the test

Pair Programming  All production code is written by two coders  one at the key board and the other navigating, correcting and thinking of better solutions.  Sort of like just in time peer reviews.  Pairing occurs regularly throughout the development - with no set pairs but rather pairs that make sense at the moment.  Driver and navigator roles should shift often. 

Customer involvement  Customers (or their surrogates) actually participate on the development team helping the business analysis develop the right tests and testing and reviewing the frequently released versions of the software

While these practices are included as tenets of agile, a shop need not be 'agile' (in the purest sense of the word) in order to incorporate one or more of these quality focused practices into their software development processes.

To read more about Agile practices and software quality check out my article in Software Tech News