Techniques for Assessing Cost/Risk in Source Selections
Arguably the most important decision ever made in an acquisition weapon system program’s life cycle occurs prior to any contract award. That decision recognizes a potential contractor’s understanding of the cost, schedule, and technical risk inherent in his approach to satisfying government requirements as stated in a Request for Proposal (RFP). Although it cannot be validated, many acquisition professionals agree that the selection of the best contractor has a great deal to do with the success of a program –all the money in the world may not necessarily yield a successful program. And, while several contractors could probably satisfy program requirements eventually, the one who best recognizes inherent risks in his approach and prepares for those risks is the one DOD should be after.
Cost‐Price Risk is a major factor in the evaluation process. The Cost‐Price Risk evaluation team determines what the government feels is the eventual contract cost; if that cost varies from the offeror’s bid, then there is cost‐price risk in the approach. Depending on how large that gap is, the offeror’s approach could be evaluated as low, medium, or high risk. Both the government and the contractor should have an interest in driving the Cost‐Price Risk evaluation to “low risk”.
The process that the government uses to determine this risk‐adjusted, or “dollarized”, estimate is key to successful evaluation. This paper describes the challenges associated with preparing the government’s estimate of the offeror’s approach, based on several actual case studies in the past year. These challenges acknowledge legal constraints, visibility into contractor Bases of Estimates (BOEs), the treatment of total contract or program risk using uncertainty analysis, and other specific issues confronted in actual source selections. While this process continues to evolve at Eglin, the paper concludes with a discussion of “Cost‐Price Risk Best Practices”.
Col. Thomas R. Sanders is the senior reservist to the Comptroller, Air Armament Center, Air Force Material Command, at Eglin AFB, FL. In this position, he performs special projects for AAC/FM and AFMC as requested. Recent projects have included analysis of a proposal to consolidate Eglin’s 46th Test Wing and Edwards AFB’s 412th Test Wing; preparation of milestone documentation for a special access program at AAC; source selection lead for a major procurement for the test range at Eglin; initial feasibility analyses of major BRAC moves to Eglin resulting from the 2005 BRAC law; and acting director, AAC/FMC from 2001 to 2004. In his civilian capacity, Mr. Sanders is a senior economist with L-3 Communications’ Enterprise IT Solutions division in Niceville, FL. In this role, he has prepared economic analyses for international economic development projects in Yemen and Djibouti. He also prepares regional market studies for federal construction projects funded by the GSA, the VA, and the US Army Corps of Engineers. Col Sanders is a graduate of the first Masters program in cost analysis at AFIT offered in 1982.
Kenneth A. Kennedy is the Director of the Acquisition Cost Division, Air Armament Center, Eglin AFB, FL. He oversees a team of 22 cost analysts supporting cost estimating and earned value management of 17 ACAT I-III programs valued at $3Bil. annually. Prior to this assignment, Mr. Kennedy was the lead Cost and Earned Value Analyst for the Financial Management Directorate at Eglin AFB. IN that role, Mr. Kennedy was responsible for earned value management (EVM) implementation advice and analysis support across all program office units. He is a key member of the program sufficiency review team and is responsible for recommending earned value policy changes to HQ Air Force based on lessons learned. He is also responsible for teaching five Air Armament Academy classes. A native of Wichita, Kansas, Mr. Kennedy began his acquisition career with the Air Force as a Propulsion Project Manager upon graduation from Northern Michigan University in Marquette, Michigan. He has held progressively more responsible positions in the areas of project management, cost estimating, budget formulation, and earned value management. His experience spans several product centers and functional areas.
Kristina M. Golden is currently the Chief of the Air Force Cost Analysis Agency for the Eglin Operating Location, Eglin AFB, FL. Ms Golden began her career in 1989 as a cost analyst in the Cost Estimating and Analysis Directorate, Aeronautics System Command, Eglin AFB, FL. In 1992 she became the Lead Production Cost Analyst for the Air-to-Air Joint Systems Program Office, lead cost analyst for the Advanced Medium Range Air-to-Air Missile (AMRAAM) ACAT 1C program valued at $12.5B and a special assignment as Deputy Cost Team Chief and primary Air Force Cost Analyst to the Cost IPT for the $4.0B AIM-9X ACAT 1D program. In 1998, Ms. Golden was assigned to the Area Attack Systems Program Office as the Cost Estimating Team Chief, where she was the technical expert, advisor and senior consultant on cost estimates, cost effectiveness analyses, cost studies and performed financial management work involving preparation of detailed analysis of annual financial estimates and plans for four major area attack munitions programs valued in excess of $5B. Programs included Sensor Fuzed Weapon, Wind Corrected Munitions Dispenser, Joint Standoff Weapon and the BRU-57 Smart Rack. Ms Golden was then promoted in 2001 to Chief, Financial Management for Direct Attack Program Office as the chief financial advisor providing expert consultation and foundational advice to the System Program Director for the Small Diameter Bomb (SDB) ACAT 1D program valued at $3.7B. She was accountable for all financial management activities including budget formulation/preparation, cost estimating/analysis and funds execution.