Cost Estimating Best Practices and the Estimating Process

The Cost Guide presents the best practices in the context of a 12-step cost estimating process. The cost estimating process provides the foundational guidance for initiating, researching, assessing, analyzing, and presenting a cost estimate. Each of the 12 steps is important for ensuring that cost estimates are developed and delivered in time to support important program decisions. The 12-step process represents a consistent methodology based on industry and government best practices that can be used across the federal government to develop, manage, and evaluate program cost estimates. By following a process of repeatable methods, agencies should be able to produce reliable estimates that can be clearly traced, replicated, and updated to better manage their programs and inform decision-makers of the risks involved.

Relying on a standard process that requires pinning down the technical scope of the work, communicating the basis on which the estimate is built, identifying the quality of the data, determining the level of risk, and thoroughly documenting the effort generally results in cost estimates that are defensible, consistent, and trustworthy. Furthermore, this process emphasizes the idea that a cost estimate should be a “living document,” meaning that it will be continually updated as actual costs begin to replace the original estimates. This step links cost estimating with actual results obtained from data that are collected by an EVM system. Examining the reasons for variances between the estimate and the final cost allows for lessons learned and an assessment of the effects of risk. It also provides valuable information for strengthening the credibility of future cost estimates by allowing for continuous process improvement. Figure 5 shows the cost estimating process and the related 12 cost estimating steps.

Figure 5: The Cost Estimating Process
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Briefly, the steps in the cost estimating process are:

  1. Define the estimate’s purpose: the purpose of the cost estimate is determined by its intended use.

  2. Develop the estimating plan: the estimating plan documents the members of the estimating team and the schedule for conducting the estimate.

  3. Define the program: a technical baseline description identifies adequate technical and programmatic information on which to base the estimate.

  4. Determine the estimating structure: a product-oriented work breakdown structure defines in detail the work necessary to meet program objectives.

  5. Identify ground rules and assumptions: establish the estimate’s boundaries using a common set of standards and judgments about past, present, or future conditions.

  6. Obtain the data: collect and adjust data from existing programs to estimate the cost of a new program.

  7. Develop the point estimate: develop the cost estimate for each element and compare the overall point estimate to an independent estimate.

  8. Conduct sensitivity testing: examine the effect of changing one assumption or cost driver at a time.

  9. Conduct a risk and uncertainty analysis: quantify risk and uncertainty to identify a level of confidence associated with the point estimate.

  10. Document the estimate: thoroughly document the estimate such that someone unfamiliar with the estimate can update or recreate it.

  11. Present the estimate to management for approval: present the estimate and its underlying methodologies so that management understands and is able to approve it.

  12. Update the estimate to reflect actual costs and changes: update the estimate to reflect changes in conditions and report progress in meeting cost goals.

Figure 5 presents the cost estimating process as a series of successive steps, but it is not necessary to follow the steps in order. For example, it is advisable that documentation chapter 13, step 10 occur throughout the estimating and updating process instead of a large documenting effort at the end. Sensitivity analysis chapter 11, step 8 and risk and uncertainty analysis chapter 12, step 9 are often conducted together or result from the same risk analysis output. The fluidity of the process steps is most evident in steps 3-7: defining the program, determining the estimating structure, identifying ground rules and assumptions, obtaining the data, and developing the point estimate. These steps are highlighted as a group in figure 5. They may be executed concurrently or cyclically depending on the phase of the program, the maturity of the cost estimate, the availability of data, and the realization of risks. Additionally, as the cost estimate is updated, the process may be revisited at any step. For example, once variances are examined and justified, analysts may need to reconsider assumptions or refine estimating methods.

As a process that helps agencies run their programs effectively, report reliable information, and comply with applicable laws and regulations, the 12-step cost estimating process also serves as an organizational internal control.10 This topic is discussed in greater detail in appendix XII.

The 12 steps and the related 18 best practices are presented in table 3.

Table 3: The Twelve Steps and their Best Practices
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Step a Best Practice b
  1. Define the estimate’s purpose
The cost estimate includes all life cycle costs.
  1. Develop the estimating plan
(See table note c)
  1. Define the program
The technical baseline description completely defines the program, reflects the current schedule, and is technically reasonable.
  1. Determine the estimating structure
The cost estimate WBS 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.
  1. Identify ground rules and assumptions
The estimate documents all cost-influencing ground rules and assumptions.
  1. Obtain the data
The estimate is based on a historical record of cost estimating and actual experiences from other comparable programs.

The estimate is adjusted properly for inflation.
  1. Develop the point estimate
The cost model is developed by estimating each WBS element using the best methodology from the data collected.

The estimate contains few, if any, minor mistakes.

Major cost elements are cross checked to see if results are similar.

An independent cost estimate is conducted by a group outside the acquiring organization to determine whether other estimating methods produce similar results.
  1. Conduct sensitivity analysis
The cost estimate includes a sensitivity analysis that identifies a range of possible costs based on varying major assumptions and parameters.
  1. Conduct risk and uncertainty analysis
A risk and uncertainty analysis is conducted that quantifies the imperfectly understood risks and identifies the effects of changing key cost driver assumptions and factors.
  1. Document the estimate
The documentation shows the source data used, the reliability of the data, and the estimating methodology used to derive each element’s cost.

The documentation describes how the estimate was developed so that a cost analyst unfamiliar with the program could understand what was done and replicate it.

The documentation discusses the technical baseline description and the data in the technical baseline are consistent with the cost estimate.
  1. Present the estimate to management for approval
The documentation provides evidence that the cost estimate is reviewed and accepted by management.
  1. Update the estimate to reflect actual costs and changes
The cost estimate is regularly updated to ensure it reflects program changes and actual costs.

Variances between planned and actual costs are documented, explained, and reviewed.
Source: GAO | GAO-20-195G

a Together the 12 steps represent a consistent methodology that can be used across the federal government to develop, manage, and evaluate program cost estimates. The steps are useful to auditors for determining the quality of an agency’s process, guidance, and regulations for creating and maintaining a high quality estimate.

b If implemented systematically, the best practices result in a cost estimate that is comprehensive, well documented, accurate, and credible. The best practices are useful to auditors for determining the reliability of a life cycle cost estimate.

c Step 2 does not have an associated best practice because it does not result in a definitive attribute of the cost estimate. Instead, failing to fully implement step 2 is a cause of why best practices may not have been fully met.

Chapter 16 describes how auditors can use the 12 steps and the 18 best practices as criteria. The best practices can be used to assess the reliability of a life cycle cost estimate and to determine the extent to which an estimate is comprehensive, well documented, accurate, and credible. The steps can be used to determine the quality of an agency’s process, guidance, and regulations for creating and maintaining an estimate. Accordingly, chapters in the Cost Guide that describe the steps present 1) a list of process tasks that supports the creation and evaluation of cost estimating guidance, policies, and directives, and 2) the associated best practices useful for evaluating the extent to which a cost estimate reflects the intent of the step, and thus is reflective of a reliable, high-quality estimate.

  1. Control activities are the policies, procedures, techniques, and mechanisms that enforce management’s directives to achieve the entity’s objectives and address related risks. See GAO, Standards for Internal Control in the Federal Government, GAO-14-704G (Washington, D.C.: Sept. 2014).↩︎