Budgeting to the Mean
Decision makers (and policy) often require cost estimators and analysts to move to a higher percentage on the S-Curve to ensure enough budget is requested so that a program does not overrun its budget target. Although the request to budget at a higher confidence level is a pragmatic attempt to avoid overruns (under budgeting), there are other factors to consider besides simply “moving to the right” on an S-Curve; such as ensuring a cost estimate captures all relevant uncertainty and acknowledging acquisition changes that will impact a program after a budget has been set. With all of these forces to consider, the simply stated conclusion of this analysis is that the decision to pay for the project should be based on the risk adjusted expected value (mean) of a program. If an analyst believes in the completeness of their underlying cost model, it is rational to purchase the project for the risk adjusted expected value (mean) since the mean is the probability weighted, statistical norm or average. This analysis examines the rationale for advocating budgeting to the risk-adjusted mean, and compares this methodology and its results against budgeting above or below the expected value (mean). In addition, this discussion will also explore some of the misconceptions of confidence level terminology.
Rick Garcia has over 16 years of experience in aerospace and commercial financial analysis, including over 14 years of hands on and leadership experience as a program subject matter expert in cost analysis, cost estimating, and data normalization, providing systems acquisition management, acquisition planning, scheduling, budgets planning and earned value management analysis for various Air Force and OSD programs. In addition to providing direct support to every major Space and Missile Systems Center (SMC) acquisition program, Rick has recently focused his efforts on training and mentoring MCR Space Programs Division’s cost estimating and analysis personnel. His most recent assignments include support to the Air Force Cost Analysis Agency’s (AFCAA) SMC Operating Location and providing direct analysis support and cost analyst development for SMC/XR and the Operationally Responsive Space (ORS) Office at Kirtland AFB. Rick completed his undergraduate degree in Mathematics from the University of Pennsylvania and received his MBA, with a concentration in corporate finance, from the University of Southern California.
Casey Wallace has several years of experience in Space Acquisitions and Systems Engineering for various Air Force programs. Commissioned from the US Air Force Academy, he is a former Air Force Officer whose duties included working directly for the Military Satellite Communication (MILSATCOM) Chief Engineering Division interfacing daily with the Office of the Secretary of Defense (OSD) as well as being the Chief of Business Operations for the Command and Control Systems-Consolidated (CCS-C) ground system. Casey now works for MCR Space Programs Division, supporting SMC/FMC conducting earned value management and AFCAA providing financial analysis, cost research, and uncertainty analysis on a variety of SMC programs.