Monday, August 22, 2016

Parametric Cost Estimating Techniques

There are many ways to estimate costs. The most common method is the discrete estimate method where, for example, a bill of material is created and vendor quotations are obtained to determine costs. Another method used - especially by large firms with ample historical data and a significant volume of proposals - is "parametrics".

"Parametric cost estimating" (or, parametrics), are techniques employing one or more cost estimating relationships (CERs) to estimate costs associated with the development, manufacture, or modification of an end item. You have no doubt seen or heard the national average cost for new housing construction expressed as an amount per square foot, e.g. $125 per square foot. That is an example of parametric cost estimating - it factors in labor and materials, plumbing, electrical, etc into a single rate.

A CER expresses a quantifiable correlation between certain system costs and other system variables either of a cost or technical nature. CERs represent the use of one or more independent variable to predict or estimate a dependent variable (e.g. a cost).

Parametrics can be simple or complex. For example, a simple arithmetic relationship using historical data to estimate scrap costs is a parametric cost estimating technique. Simple ratios are easy to compute and explain to the Government's satisfaction. However, the use of parametrics are often based on more advanced or complex applications.

Advanced applications included cost-to-noncost CERs, multiple independent variables related to a single cost effect or independent variables defined in terms of weapon system performance or design characteristics.

Parametric estimating techniques may be used in conjunction with any of the following estimating methods:

  • Detailed --- also known as the bottom-up approach. This method divides proposals into their smallest component tasks and are normally supported by detailed bills of material. 
  • Comparative --- develops proposed costs using like items produced in the past as a baseline. Allowances are made for product dissimilarities and changes in such things as complexity, scale, design, and materials. 
  • Judgmental --- subjective method of estimating costs using estimates of prior experience, judgment, memory, informal notes, and other data. It is typically used during the research and development phase when drawings have not yet been developed. 
Judicious use of parametric estimating can save a lot of time and effort over traditional methods. Just remember though that CERs invite a higher level of Government scrutiny as they become more complex.

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