Assumptions

Assumptions represent a set of judgments about past, present, or future conditions postulated as true in the absence of positive proof. Without firm ground rules, the analyst is responsible for making assumptions that allow the estimate to proceed. In other words, assumptions are required only when no ground rules have been provided. The analyst must ensure that assumptions are based on expert judgments rendered by experienced program and technical personnel. Many assumptions profoundly influence cost; the subsequent rejection of even a single assumption by management could affect many aspects of the estimate. Therefore, it is imperative that cost estimators brief management and document all assumptions well so that management fully understands the conditions on which the estimate was structured. Failing to do so can lead to overly optimistic assumptions that influence the cost estimate, to cost overruns, and to inaccurate estimates and budgets. (See case study 10.)

Case Study 10: The Importance of Assumptions, from Columbia Class Submarine, GAO-19-497

The Navy plans to invest approximately $128 billion to research, develop, and purchase the replacement for 14 Ohio class nuclear-powered ballistic missile submarines—the current sea-based leg of the nation’s strategic nuclear deterrent. According to the Navy, the lead Columbia class submarine will need to make its first patrol in fiscal year 2031 in order to avoid a deterrence gap; the Ohio class submarines begin to retire in 2027. The Navy has identified the 12-submarine Columbia class program as its top acquisition priority and has set an aggressive schedule to deliver the lead submarine in fiscal year 2027, followed by a period of testing before the first patrol occurs.

The Navy’s procurement cost estimate of $115 billion to construct Columbia class submarines was not reliable because it did not reflect likely program costs and risks. GAO found that the cost estimate substantially met the criteria for the comprehensive characteristic of a reliable cost estimate, and partially met the criteria for the remaining three characteristics.

In particular, GAO found that the cost estimate did not accurately reflect program costs because it was based on overly optimistic labor hour assumptions. The Navy estimated that it would need $115 billion to design and construct 12 submarines and Navy cost estimators identified labor costs as a primary source of cost risk. The Navy anticipated that it would need 12 million labor hours to directly construct the lead submarine. This represented 17 percent fewer labor hours than what was needed for the lead Virginia class submarine, when adjusted for weight differences. To develop this estimate, Navy estimators relied heavily on historical labor hour data from the construction of the lead Virginia class submarine and cost data from the Ohio class submarine program for unique ballistic submarine components, such as missiles. However, the labor hour estimate was overly optimistic—with assumptions on construction efficiencies that were either unsubstantiated or unprecedented compared to Virginia class and other shipbuilding historical data.

Compared to the Navy’s estimate, Columbia’s estimated touch labor hours, as calculated by other organizations, were more conservative. For example, the Congressional Budget Office questioned the Navy’s assumption that ballistic submarines are less expensive to build than attack submarines, after accounting for weight differences. They estimated that for the overall class, including the lead and follow-on submarines, the Navy would more likely realize an 8 percent reduction rather than the 19 percent reduction estimated by the Navy. If the program’s optimistic assumptions were not realized, the program may have required more funding than originally planned to construct the Columbia class