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Activity title

Cost Analysis of Contractor's Price for Defense Research and Development Projects

Activity Reference

SAS-ET-DW

Panel

System Analysis and Studies

Security Classification

PUBLIC RELEASE

Status

Active

Activity type

ET

Start date

2018

End date

2019

Keywords

cost breakdowns, military contracting, Military procurement

Background

Estimates of the cost to develop and produce weapon systems are frequently understated. As a result, it is possible to come up with cost increases from early development estimates. Procurement agencies need to provide detailed information and cost breakdown structure to the contractors as a result of their requirements analysis in the acquisition process of a specific system. Readily retrievable cost data that could serve in computing cost estimates for new weapon systems are generally lacking. The contractors estimate each cost item in the cost breakdown structure of a project and then prepare their price proposal for the required system. It is not an easy procedure, especially for research and development projects. There are a lot of uncertainties and risks from the conceptual design phase to the detailed design phase. In order to be on safe side, contractors increase their cost estimation by some percentage. This has a direct negative effect (increase) on price proposals. Organized and systematic efforts are not made to gather actual cost information to achieve comparability between data collected on various weapon systems or to see whether the cost data report by contractors is accurate and consistent. The procurement agencies analyze the contractors’ price proposals in order to not pay more than their true value. The limited numbers of defence companies make this problem difficult for all but a number of larger nations.

Objectives

In this study, the aim is to find out processes, methodologies, models and tools to analyze price proposals of contractors in different types of defence procurement projects including quick procurements. The procurement process consists of sub-processes such as needs analysis, requirements analysis, development of the procurement project, requesting information about project from contractors, requesting price proposals from contractors, selection of contractors, conceptual design, detailed design, procurement, verification, validation and testing, and acceptance to the inventory. This process may extend to four or five years or more in some system development projects. Analyses of price proposals of contractors are always very important issues for procurement agencies. When these agencies receive requirements for system development projects, they have to estimate roughly how much they spend because of budgetary issues with a limited amount of information. If they have a large enough budget, then they start to get more information by requests for information. They then collect price proposals from contractors to benchmark. There is a need for methodologies of benchmarking of contractors’ price proposals. Of course, the price is not only one criterion for contractor selection, but it is one of the dominant factors in determination of contractors. The factors other than cost will also be included in the contractor selection process. It is also important to monitor and evaluate the costing issues in a selected contractor for project development. Cost estimation, analyses of price proposals of contractors, contractor selection processes and methods for monitoring/evaluation of selected contractors will be discussed in this study.

Topics

• Data analysis and forecasting methodologies such as regression analysis will be used. • Data mining and big data, artificial intelligence techniques will be utilized. • Cost analysis techniques will be identified and learning curves affects will be discussed. • Development of a cost analysis methodology and processes for contractors’ prices will also be included in this research.

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