Cost Estimating Policy and Internal Control
Cost estimates are necessary to support decisions about funding one program over another, to develop annual budget requests, to evaluate resource requirements at key decision points, and to develop performance measurement baselines. A realistic estimate of projected costs makes for effective resource allocation and increases the probability of a program’s success. Thus, an entity’s cost estimating process is an internal control because it helps the entity run its operations efficiently and effectively, report reliable information about its operations, and comply with applicable laws and regulations. Case Study 29 gives an example of how a lack of cost estimating policy is related to a deficiency in internal controls.
Case Study 29: Cost Estimating Policy and Internal Controls, from 2020 Census, GAO-16-628
With a cost of about $13 billion, the 2010 Census was the most expensive population count in U.S. history, costing over 50 percent more than the $8.1 billion 2000 Census (in constant 2010 dollars). Some cost growth is to be expected because the population is growing and becoming more complex and difficult to count, which increases the workload of the Census Bureau (Bureau). However, the cost of counting each housing unit had escalated from $16 in 1970 to $94 in 2010 (in constant 2010 dollars).
For the 2020 Census, the Bureau intended to limit its per-household cost to not more than that of the 2010 Census, adjusted for inflation. To achieve this goal, the Bureau planned to significantly change how it conducts the census, in part by re-engineering key census-taking methods and infrastructure. In October 2015, the Bureau estimated that with its new approach it could conduct the 2020 Census for a life cycle cost of $12.5 billion in contrast to its estimate of $17.8 billion to repeat the design and methods of the 2010 Census (both in constant 2020 dollars).
GAO reviewed the extent to which the Bureau’s life cycle cost estimate of October 2015 met best practices for cost estimation. Among other issues, GAO found the Bureau had little planning information among its documents supporting its cost estimate. Early fundamental planning and guidance documents, such as general policies and procedures for cost estimation, can contribute to consistent control over the process used to develop a cost estimate and help ensure that desired standards and practices are implemented. Internal controls for the federal government state that management should design control activities to achieve objectives, such as the development of a reliable cost estimate. These internal controls could take many forms, such as an operational plan, guidance on specific steps, and job aids for staff involved in the process. Internal controls would help the Bureau ensure continuity of operations across turnover in staff during the decennial life cycle, ensure that its cost estimation process follows best practices, and help it meet its objective of a reliable cost estimate.
GAO recommended the Bureau take these steps to put guidance, policies, and procedures in place in GAO’s 2008 and 2012 reports on the Bureau’s cost estimation process. In response to GAO’s recommendation, in 2018 the Bureau established roles and responsibilities for oversight and approval of cost estimation processes, created a detailed description of the steps that should be taken to produce a high-quality cost estimate, and clarified the process for updating the cost estimate and associated documents over the life of a project. Such guidance should result in reliable cost estimates that management can use for making informed decisions.