Table Of ContentManufacturing and industrial EnginEEring
Farr
Systems Life Cycle Costing
Economic Analysis, Estimation, and Management
S
Although technology and productivity have changed much of engineering,
y
many topics are still taught very similarly to how they were taught in the
s
1970s. Using a new approach to engineering economics, Systems Life
t
Cycle Costing: Economic Analysis, Estimation, and Management
e
presents the material that a modern engineer must understand to work as
m
a practicing engineer conducting economic analysis.
Organized around a product development process that provides a
s
framework for the material, the book presents techniques such as engi-
neering economics and simulation-based costing (SBC), with a focus on L
total life cycle understanding and perspective, and introduces techniques
i
for detailed analyses of modern complex systems. The author includes f
e
rules of thumb for estimation grouped with methods, processes, and
tools (MPTs) for conducting a detailed engineering buildup for costing. He
C
covers how to estimate costing of complex systems and software and
then explores concepts such as design to cost (DTC), cost as an indepen- y
dent variable (CAIV), the role of commercial off-the-shelf technology, the c
cost of quality, and the role of project management in life cycle cost (LCC) l
e
management.
No product or services are immune from cost, performance, sched-
C
ule, quality, risks, and tradeoffs. Yet engineers spend most of their formal
education focused on performance and most of their professional careers o
worrying about resources and schedules. Too often, the design stage s
becomes about the technical performance without considering the down- t
stream costs that contribute to the LCC of a system. This text presents i
n
the methods, processes, and tools needed for the economic analysis,
g
estimation, and management that bring these costs in line with the goals
of pleasing the customer and staying within budget.
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Systems Life
Cycle Costing
Economic Analysis,
Estimation, and Managment
Engineering Management
Book Series
Series Editors
Timothy George Kotnour – Associate Professor
Waldemar Karwowski – Professor & Chair
Department of Industrial Engineering and Management Systems
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Published Titles:
Systems Life Cycle Costing: Economic Analysis, Estimation, and Management,
John Vail Farr
Transforming Organizations: Strategies and Methods
Timothy George Kotnour
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Systems Life
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Economic Analysis,
Estimation, and Managment
John Vail Farr
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Contents
Preface.......................................................................................................................xi
Acknowledgments...................................................................................................xiii
Author.......................................................................................................................xv
Chapter 1 Overview.of.Systems.Life.Cycle.Costing.............................................1
1.1. Introduction.to.Systems.Life.Cycle.Costing...............................1
1.2. Systems.Life.Cycle.Costing........................................................2
1.3. Economic.Analysis.....................................................................4
1.4. Cost.Estimation..........................................................................5
1.4.1. Parametric.Cost.Estimation...........................................5
1.4.2. Analogy.Cost.Estimating..............................................6
1.4.3. Engineering.Buildup.....................................................7
1.5. Cost.Management.......................................................................7
1.6. Summary....................................................................................9
Questions.............................................................................................10
References...........................................................................................10
Bibliography........................................................................................11
Chapter 2 Introduction.to.Engineering.Economy................................................13
2.1. Introduction..............................................................................13
2.2. Capital.Budgeting.Decision......................................................14
2.2.1. Basic.Concepts.in.Capital.Budgeting..........................14
2.2.2. Benefit.and.Cost.Development....................................15
2.3. Time.Value.of.Money...............................................................16
2.3.1. Interest.........................................................................16
2.3.1.1. Simple.Interest.............................................17
2.3.1.2. Compounded.Interest...................................18
2.3.1.3. Interest.Compounded.Other.
than Yearly...................................................21
2.4. Amortization............................................................................22
2.5. Investment.Measures................................................................26
2.6. Inflation/Deflation....................................................................29
2.7. Summary..................................................................................30
Question..............................................................................................30
Problems..............................................................................................31
Reference.............................................................................................37
Bibliography........................................................................................37
v
vi Contents
Chapter 3 Advanced.Economic.Analysis.of.Alternatives....................................39
3.1. Introduction.to.Advanced.Cash.Flow.Analysis........................39
3.1.1. Depreciation................................................................39
3.1.2. Corporate.Income.Taxes.............................................42
3.2. Income.and.Cash.Flow.Statements..........................................43
3.3. Expected.Value.........................................................................43
3.4. Sensitivity.Analysis..................................................................47
3.5. Break-Even.Analysis................................................................50
3.6. Summary..................................................................................50
Questions.............................................................................................50
Problems..............................................................................................50
Reference.............................................................................................58
Bibliography........................................................................................58
Chapter 4 Life.Cycle.Framework.and.Techniques...............................................59
4.1. Introduction.to.Developing.Life.Cycle.Models........................59
4.2. Developing.LCC.Models..........................................................59
4.3. Life.Cycle.Cost.Categories.......................................................60
4.3.1. Industrial.Base.and.Supplier/Vendor.
Relationships...............................................................61
4.3.2. Research,.Development,.Testing,.and.Evaluation.......61
4.3.3. Acquisition..................................................................61
4.3.4. Operations.and.Support...............................................62
4.3.5. Disposal.or.Retirement................................................63
4.4. Estimating.LCC.throughout.the.Product.
Development Cycle...................................................................65
4.4.1. Analogy.......................................................................65
4.4.2. Parametric...................................................................65
4.4.3. Detailed.Engineering.Builds.......................................67
4.4.4. Cost.Accounting..........................................................67
4.5. Summary..................................................................................68
Questions.............................................................................................68
Problems..............................................................................................70
References...........................................................................................73
Bibliography........................................................................................74
Chapter 5 Simulation-Based.Costing...................................................................75
5.1. Introduction..............................................................................75
5.1.1. Ways.to.Study.a.System..............................................76
5.1.2. Advantages.and.Disadvantages.of.Simulations...........77
5.2. Review.of.Probability.and.Statistics.........................................78
5.2.1. Introduction.................................................................78
5.2.2. Random.Variables.......................................................78
Contents vii
5.2.3. Probability.Density.Functions.....................................80
5.2.4. Cumulative.Distribution.Functions.............................82
5.2.5. Special.Distributions...................................................85
5.2.5.1. Uniform.Distribution...................................85
5.2.5.2. Normal.Probability.Distribution..................85
5.2.5.3. Poisson.Distribution.....................................88
5.3. Discrete.Process.Generators.....................................................89
5.4. Continuous.Process.Generators................................................93
5.4.1. Inverse.Transform.Method..........................................93
5.4.2. Exponential.CPG.Derived...........................................95
5.5. Probability.and.Statistics.Summary.........................................97
5.6. Simulation.in.Practice..............................................................98
5.6.1. Introduction.................................................................98
5.6.2. Building.Complex.Simulations...................................98
5.7. Using.Readiness.Levels.for.Model.Input...............................101
5.8. Simulation.Using.Spreadsheets..............................................104
5.9. Building.Systems.Simulations................................................106
5.10. Summary................................................................................106
Questions...........................................................................................107
Problems............................................................................................109
Appendix.5A.....................................................................................131
References.........................................................................................133
Chapter 6 Costing.of.Complex.Systems............................................................135
6.1. Introduction............................................................................135
6.2. Issues.Surrounding.Complex.Systems...................................135
6.3. Systems.Engineering.and.Management.Costs.......................136
6.3.1. Hardware.Costs.........................................................136
6.3.2. Software.Costs..........................................................138
6.3.3. Interfaces.and.Integration.at.the.System.Level.........138
6.3.4. Systems.Engineering/Project.Management.Costs....138
6.4. From.Requirements.to.Architectures.....................................144
6.5. Summary................................................................................145
Questions...........................................................................................146
Problem.............................................................................................147
References.........................................................................................147
Bibliography......................................................................................148
Chapter 7 Software-Intensive.Systems..............................................................149
7.1. Introduction............................................................................149
7.2. Software.Estimating.Techniques............................................150
7.2.1. Overview...................................................................150
7.2.2. Expertise.Based.and.Hybrid......................................152
viii Contents
7.2.3. Algorithmic...............................................................152
7.2.3.1. Original.or.Basic.COCOMO.Model..........153
7.2.3.2. Intermediate.COCOMO............................159
7.2.3.3. Advanced.COCOMO.................................159
7.2.3.4. Function.Points..........................................160
7.2.4. Mathematical.and.Statistical.....................................163
7.3. Summary................................................................................165
Questions...........................................................................................165
Problems............................................................................................166
Appendix.7A.....................................................................................168
References.........................................................................................170
Bibliography......................................................................................171
Chapter 8 Parametric.Cost.Estimating..............................................................173
8.1. Introduction............................................................................173
8.2. Role.of.Statistics.....................................................................178
8.3. Some.CERs.of.Interest...........................................................179
8.3.1. Learning.Curves........................................................179
8.3.2. Wright’s.Method........................................................180
8.4. Summary.and.Conclusions.....................................................181
Questions...........................................................................................182
Problems............................................................................................182
References.........................................................................................184
Bibliography......................................................................................184
Chapter 9 Cost.as.an.Independent.Variable.......................................................185
9.1. Introduction............................................................................185
9.2. CAIV.Evolution.through.the.Life.Cycle.................................187
9.2.1. Conceptual.Exploration.............................................187
9.2.2. Component.Advanced.Development,.Systems.
Integration.Preliminary.Design................................188
9.2.3. Systems.Demonstration,.Test,.and.Evaluation..........189
9.2.4. Production.................................................................190
9.2.5. Operation,.Support,.and.Disposal.............................190
9.3. CAIV.Metrics.........................................................................190
9.4. Design.to.Cost.versus.CAIV..................................................190
9.4.1. Introduction...............................................................190
9.4.2. Overview.of.Design.to.Cost......................................192
9.4.2.1. DTC.Roles.and.Responsibilities................192
9.4.2.2. Impact.of.LCC.in.the.Program..................192
9.4.2.3. Elements.of.DTC.Program........................193
9.4.2.4. DTC.Plan...................................................193
9.4.2.5. Cost.Controls.(Goals).................................194
Contents ix
9.4.2.6. DTC.Trade.Space.Studies..........................194
9.4.2.7. Provide.Incentives.and.Awards.................194
9.4.2.8. Establish.Metrics.......................................195
9.4.2.9. Implementing.Risk.Management...............195
9.4.3. Role.of.CAIV.and.DTC.............................................196
9.4.3.1. CAIV.Plan.................................................196
9.4.3.2. Set.Cost.Goals...........................................196
9.4.3.3. Establish.Cost.Performance.Integrated.
Product.Team.............................................197
9.4.3.4. Perform.Tradeoff.Studies..........................197
9.4.3.5. Provide.Incentives......................................198
9.4.3.6. Establish.Metrics.......................................198
9.4.3.7. CAIV.Templates........................................199
9.4.3.8. Implementing.Risk.Management...............200
9.4.4. Differences.between.DTC.and.CAIV.......................200
9.4.4.1. Concept.Focus...........................................202
9.4.4.2. Costs.Tradeoffs..........................................202
9.4.4.3. Trading.Off.Performance.
Requirements.............................................202
9.4.4.4. Reducing.LCC...........................................203
9.4.4.5. Incentives...................................................203
9.4.5. Summary.of.DTC.as.Related.to.CAIV.....................203
9.5. Summary................................................................................204
Questions...........................................................................................204
References.........................................................................................205
Bibliography......................................................................................205
Chapter 10 Costing.and.Managing.Off-the-Shelf.Systems.................................207
10.1. Introduction............................................................................207
10.2. COTS......................................................................................211
10.2.1. Hardware-Centric.COTS..........................................214
10.2.2. Software-Centric.COTS............................................217
10.2.3. Integration.Costs.......................................................220
10.3. GOTS......................................................................................221
10.4. Software.Reuse.......................................................................221
10.4.1. LCC.Associated.with.Software.Reuse......................222
10.4.2. Cost.Reductions.Achieved.with.Software.Reuse......223
10.5. Open.Source...........................................................................223
10.6. Summary................................................................................225
Questions...........................................................................................227
Problems............................................................................................228
References.........................................................................................229
Bibliography......................................................................................230
