What is Risk?
…Or more importantly, what is Uncertainty? Risk is defined as “the possibility of suffering harm or loss.” Uncertainty is generally defined as “being unsettled or in doubt” but has the more specific statistical definition of “the estimated amount or percentage by which an observed or calculated value may differ from the true value.” Cost estimators tend to use the words “risk” and “uncertainty” interchangeably, which causes confusion, especially when communicating with people outside the cost community. To avoid this confusion, it is the statistical definition of uncertainty that should be the cost estimator’s yardstick when we talk about risk or uncertainty. When we present an S-curve with probabilistic cost results, we are trying to quantify the amount by which a calculated cost value may differ from the true value. However, if we label our S-curve chart something like “Cost Risk Results” and show it to a program manager or engineer, they tend to focus on the impacts of technical and schedule risks on the cost estimate, which are only part of the overall cost uncertainty.
This paper focuses on explaining cost uncertainty S-curves to the management and technical communities. The elements of uncertainty that should be reflected in the S- curve are itemized and defined. Furthermore, typical ranges for the relative contribution of each uncertainty element are provided. These ranges are related to system type, life cycle phase, and cost estimating methodology. Not only does this paper provide a framework for communicating cost uncertainty to managers and engineers, it should also be helpful during the reconciliation process when comparing program office estimates to independent cost estimates.
Mr. Frederic has been with Tecolote Research since 1986. He is the Chief Scientist of Tecolote’s Santa Barbara Group, which includes offices in Santa Barbara, Ogden, Albuquerque, and Dayton. In his career at Tecolote, Mr. Frederic has logged a wide variety of experience including cost database software development, CER development, technical baseline development, schedule analysis, simulation software development, and cost estimating. His efforts have addressed many aerospace technologies including radars, missile systems, launch vehicles, launch facilities, space vehicles, and aircraft. In recent years, Mr. Frederic has performed cost risk assessments in conjunction with some of Tecolote’s most important estimating projects, including the Global Positioning System (GPS), the Airborne Laser (ABL), the International Space Station (ISS), and the Ares I launch vehicle.