The Four Characteristics of a Reliable Cost Estimate

GAO’s research has found that a reliable cost estimate is one that is comprehensive, well documented, accurate, and credible. Management minimizes the risk of cost overruns and unmet performance targets by ensuring cost estimates reflect these four characteristics.

• Comprehensive cost estimates completely define the program and reflect the current schedule and technical baseline. They are structured with sufficient detail to ensure that cost elements are neither omitted nor double-counted. Where information is limited and judgments must be made, assumptions and exclusions on which the estimate is based are reasonable, clearly identified, explained, and documented.

• Well-documented cost estimates can easily be repeated or updated and can be traced to original sources through auditing. Thorough documentation explicitly identifies the primary methods, calculations, results, rationales or assumptions, and sources of the data used to generate each cost element’s estimate.

• Accurate cost estimates are developed by estimating each cost element using the best methodology from the data collected. Accurate estimates are based on appropriate adjustments for inflation. Their underlying mathematical formulas, databases, and inputs are validated, and the resulting estimates contain few, if any, minor mathematical mistakes. Accurate estimates are based on a historical record of cost estimating and actual experiences from comparable programs. Finally, they are updated regularly to reflect significant changes in the program. Any variances between estimated and actual costs are documented, explained, and reviewed.

• Credible cost estimates discuss and document any limitations of the analysis, including uncertainty or bias surrounding source data and assumptions. The estimate’s major assumptions are varied to determine how sensitive it is to changes. Credible cost estimates include a risk and uncertainty analysis that determines the level of confidence associated with the estimate. In addition, high-value cost elements are cross-checked with alternative estimating methodologies to validate results. Finally, the estimate is compared with an independent cost estimate conducted by a group outside the acquiring organization.