A Simple, Universal Approach to Cost Risk Analysis: Integrating Simulations and Sensitivities
Within the last decade, probabilistic cost estimating techniques have increased in popularity as a quantitative method to bound the estimate and as a way to guard against optimism in the planning process. This paper begins with an objective look at the current techniques available to cost analysts. It then presents a new approach titled, Enhanced Sensitivity Analysis (ESA). ESA applies Response Surface Methodology concepts to the cost estimating environment. After walking through a case study using ESA, the paper then compares it with the input-based simulation approach. ESA’s main advantages are that it is less data intensive, is simpler to execute, is more repeatable, and provides traceability. However, not every situation lends itself to ESA, especially when there are many unknown parameters in the cost model. The paper concludes with a universal approach to performing cost risk analysis based on two criteria: number of parameters in the cost model and if the distributions of the parameters known. This general approach also shows that there are situations when probabilistic techniques can be integrated into sensitivity analysis to build a complete risk and uncertainty picture for the decision-maker.
Eric M. Hawkes CCE/A, CDFM graduated from the University of Kentucky in 2000 with a B.S in Mechanical Engineering and then joined the officer corps in the United States Air Force. Following an operational tour at Pope AFB, he was selected to attend the Air Force Institute of Technology and graduated with a M.S in Operation Research, specializing in Applied Statistics. Following graduation, he was selected to support the Air Force Cost Analysis Agency. There, he performed multiple Independent Cost Estimates and in 2007, he was presented with the Cost Analysis of the Year award – Military. He then joined Booz Allen Hamilton in Huntsville Alabama. Mr. Hawkes has presented multiple papers at both DoDCAS and SCEA and has been twice published in the Journal of Cost Analysis and Management.
Eric R. Druker CCE/A graduated from the College of William and Mary with a B.S. in Applied Mathematics in 2005 concentrating in both Operations Research and Probability & Statistics with a minor in Economics. He is employed by Booz Allen Hamilton as a Senior Consultant and currently serves on the St. Louis SCEA Chapter’s Board of Directors. Mr. Druker performs cost and risk analysis on several programs within the Intelligence and DoD communities and NASA. He was a recipient of the 2005 Northrop Grumman IT Sector’s President’s award and the 2008 TASC President’s award for his work on Independent Cost Evaluations (ICEs) during which he developed the risk process currently used by Northrop Grumman’s ICE teams. In addition to multiple SCEA conferences, Eric has also presented papers at the Naval Postgraduate School’s Acquisition Research Symposium, DoDCAS and the NASA PM Challenge. He has also performed decision tree analysis for Northrop Grumman Corporate law, built schedule and cost growth models for Hurricane Katrina Impact Studies and served as lead author of the Regression and Cost/Schedule Risk modules for the 2008 CostPROF update.