Friday, August 21, 2015

Steps for Preparing Good and Defensible Cost Estimates

The sufficiency of your cost estimating system can mean the difference between doom and success. Failure to understand solicitation requirements or failure to accurately estimate the costs necessary to address those requirements could very well result in a loss contract. In extreme cases, it could jeopardize the financial viability of a company.

No one should ever be put in the position of "throwing together an estimate". Cost estimating requires the application of skillful analysis and experienced judgment in projecting labor and material contract requirements. Timing constraints are a constant. A company might have as little as 30 days to respond to a Government solicitation. The availability of historical data will also have an impact on the estimating process.

When it comes to estimating techniques, one size does not fit all. Selections of appropriate estimating techniques require extensive analysis by contractors. Appropriateness of selected estimating techniques should be reviewed periodically. The same technique used when the program is at the engineering-concept stage, or when no bill of materials exists, is usually not appropriate for ongoing production. Because cost estimating integrates technical as well as financial information, the process requires input from many diverse organizational elements.

Although contractor estimating systems differ in approach and philosophy, their basic objectives are the same. Cost estimates are a series of informed projections and assumptions based on available information existing at the time of proposal preparation.

Cost estimating is comprised of logical steps. Typical steps in cost estimating might include:

  1. Ensuring that all relevant background documents such as historical costs, drawings, and specifications are available to assist in understanding job requirements. 
  2. Determining which estimating techniques will be used, the level of detail required, and the amount of time available to generate and document a completed estimate. 
  3. Determining if quotes and other information will be required from outside sources. 
  4. Deciding if any elements require further clarification, redesign, or have potential manufacturing difficulties. 
  5. Determining if the capability and capacity to manufacture required components exist in-house. 
  6. Determining if further information is required to develop and complete estimates. 
  7. Coordinating the activities of departments participating in the estimating exercise. 
  8. Obtaining quotes, history, and other bases for material and subcontract items. 
  9. Assembling direct costs by cost element, and computing indirect expenses using appropriate factors and rates. 
  10. Consolidating proposal elements and documenting preparation rationale. 
Failure to follow a systematic approach to estimating could also lead to allegations of defective pricing. For example, if relevant history is available and was not used and the reason for not using it was not documented, a Government auditor might contend that the contractor did not submit current, complete, and accurate cost or pricing data. It is just as important to document why certain cost or pricing data was not used as it is to justify why other data was used.

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