Chapter 2: Cost Analysis and Cost Estimates

The systematic and rigorous application of cost analysis methods provides critical support to program managers and decision authorities. These methods can improve the allocation of resources and handling of program risks. Although the terms cost estimating and cost analysis may be used interchangeably, cost estimating is generally understood to be a subset of activities within the broader scope of cost analysis.

Cost analysis is a discipline used to gain knowledge about costs and is used to develop cost estimates. Cost analysis also can be used to evaluate trade-offs, analyze alternative products or services, or to assess an existing cost estimate. Additionally, cost analysis may focus on understanding past efforts and the influence of various parameters. In contrast, cost estimating is typically used to predict a specific program’s cost. Using methods of cost analysis, cost estimating relies on historical data that are adjusted to reflect information about new materials, technology, software, and development teams for the program of interest.

Successful cost analysts typically combine concepts from such varied fields as accounting, budgeting, computer science, economics, engineering, mathematics, operations research, and statistics. Because cost analysis and estimating synthesize expertise from a wide range of disciplines, it is important that the cost analyst either develop broad knowledge of these disciplines or have ready access to experts.