Cost Risk as a Discriminator in Trade Studies
Prior to formal program initiation, analysts typically undertake trade studies to investigate which of several candidate architectures or designs can best provide a desired capability at minimum cost. However, the various candidates typically differ significantly in risk as well as in cost, but members of the Government or industry trade- study team do not have the time, and the candidate solutions usually aren’t sufficiently detailed at this stage, to conduct a thorough risk analyses. Yet, those differences in risk, as well as in cost, should be taken into account to the extent possible during the trade- study decision process. Because timeliness and simplicity are key requirements of analyses undertaken in support of trade studies, what usually happens is that a “point” cost estimate, or perhaps a 50%-confidence estimate, is established for each candidate, and the go-ahead decision is made on the basis of that estimate. But a nagging question remains: “What if Candidate A, the lower-cost option based on those estimates, faces risk issues that make its 70th-percentile cost higher than that of Candidate B?” In other words, Candidate B would be the lower-cost option if the cost comparison were made at the 70% confidence level. This is the classic situation in which the decision maker must choose between a low-cost, high-risk option and a high-cost, low-risk option. This report describes a methodology that allows the program manager take account of all risk scenarios by making use of all cost percentiles simultaneously, namely the entire cost probability distribution of each candidate, not simply the point estimate or the 70% confidence cost. As it turns out, the expression of system cost in terms of a probability distribution makes it possible to estimate the probability that Candidate A will turn out to be less costly than Candidate B, and probabilities of that kind are the basis on which an informed decision can be made.
Dr. Stephen A. Book is Chief Technical Officer of MCR, LLC. In that capacity, he is responsible for ensuring technical excellence of MCR products, services, and processes by encouraging process improvement, maintaining quality control, and training employees and customers in cost and schedule analysis and associated program-control disciplines. He was a principal contributor to several Air Force cost studies of national significance, including the DSP/FEWS/BSTS/AWS/Brilliant Eyes Sensor Integration Study (1992) and the ALS/Spacelifter/EELV Launch Options Study (1993). He has served on national panels as an independent reviewer of NASA programs, for example the 2005 Senior External Review Team on cost-estimating methods for the Exploration Systems Mission Directorate, the 1997-98 Cost Assessment and Validation Task Force on the International Space Station (“Chabrow Committee”), and the 1998-99 National Research Council Committee on Space Shuttle Upgrades. Dr. Book joined MCR in January 2001 after 21 years with The Aerospace Corporation, where he held the title “Distinguished Engineer” during 1996-2000 and served as Director, Resource and Requirements Analysis Department, during 1989-1995. Dr Book is the current editor of ISPA’s Journal of Parametrics, and the 2005 recipient of ISPA’s Freiman Award for Lifetime Achievement. He earned his Ph.D. in mathematics, with concentration in probability and statistics, at the University of Oregon.