Report
Impossible Certainty: Cost Risk Analysis for Air Force Systems
May 1, 2006
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Cost estimation is a process that attempts to forecast the future expenditures for some capital asset, hardware, service, or capability. Despite being a highly quantitative field, cost estimation and the values it predicts are uncertain. An estimate is a possible or likely outcome, but not necessarily the outcome that will actually transpire. This uncertainty arises because estimators do not have perfect information about future events and the validity of assumptions that underpin an estimate. Uncertainty may result from an absence of critical technical information, the presence of new technologies or approaches that do not have historical analogues for comparison, the evolution of requirements, or changes in economic conditions.
The Office of the Secretary of Defense and the military departments have historically underestimated and underfunded the cost of buying new weapon systems (e.g., by more than 40 percent at Milestone II). Much of this cost growth is thought to be the result of unforeseen (but knowable) circumstances when the estimate was developed. In the interest of generating more informative cost estimates, the Air Force Cost Analysis Agency and the Air Force cost analysis community want to formulate and implement a cost uncertainty analysis policy.
To help support this effort, RAND Project AIR FORCE (PAF) studied a variety of cost uncertainty assessment methodologies, examined how these methods and policies relate to a total portfolio of programs, and explored how risk information can be communicated to senior decisionmakers in a clear and understandable way. PAF recommends that any cost uncertainty analysis policy reflect the following:
Effective cost uncertainty analysis will help decisionmakers understand the nature of potential risk and funding exposure and will aid in the development of more realistic cost estimates by critically evaluating program assumptions and identifying technical issues.
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