Best Practices Related to Developing and Maintaining a Reliable Cost Estimate

A number of best practices form the basis of effective program cost estimating. Our research shows that comprehensive, well-documented, accurate, and credible cost estimates are developed by industry and government organizations that systematically implement these best practices. The following list describes the best practices that, if implemented, result in a cost estimate that exhibits the four characteristics.

A comprehensive cost estimate

• includes all life cycle costs;
• is based on a technical baseline description that completely defines the program, reflects the current schedule, and is technically reasonable;
• is based on a WBS that is product-oriented, traceable to the statement of work, and at an appropriate level of detail to ensure that cost elements are neither omitted nor double-counted; and
• documents all cost-influencing ground rules and assumptions.

A well-documented cost estimate

• shows the source data used, the reliability of the data, and the estimating methodology used to derive each element’s cost;
• describes how the estimate was developed so that a cost analyst unfamiliar with the program could understand what was done and replicate it;
• discusses the technical baseline description and the data in the technical baseline are consistent with the cost estimate; and
• provides evidence that the cost estimate was reviewed and accepted by management.

An accurate cost estimate

• is based on a model developed by estimating each WBS element using the best methodology from the data collected;
• is adjusted properly for inflation;
• contains few, if any, minor mistakes;
• is regularly updated to ensure it reflects program changes and actual costs;
• documents, explains, and reviews variances between planned and actual costs; and
• is based on a historical record of cost estimating and actual experiences from other comparable programs.

A credible cost estimate

• includes a sensitivity analysis that identifies a range of possible costs based on varying major assumptions, parameters, and data inputs;
• includes a risk and uncertainty analysis that quantifies the imperfectly understood risks and identifies the effects of changing key cost driver assumptions and factors;
• employs cross-checks—or alternate methodologies—on major cost elements to validate results; and
• is compared to an independent cost estimate that is conducted by a group outside the acquiring organization to determine whether other estimating methods produce similar results.