Bias in Initial Cost Estimates

How Low Estimates Can Increase the Cost of Acquiring Weapon Systems

by Joseph P. Large

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A survey of a small sample of defense contractors supports the hypothesis that low estimates, in themselves, create conditions that contribute to cost growth. While Armed Forces Procurement Regulations specifically prohibit the Department of Defense from awarding contracts for less than a fair and reasonable price, several factors contribute to their doing so: (1) difficulty in determining what is "fair and reasonable" for most advanced systems and (2) tendency for both parties to believe in low estimates for proposed systems they want procured. Until better estimating techniques are available, the buyer should explicitly recognize that early estimates are seldom meaningful and develop procurement procedures based on that premise.

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