Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 62

Cost Estimating for Defense Contracting; Using the Internet; Appendix B Companies that do business with the U.S. Defense Department (e.g., The Boeing Company, Lockheed Martin Corporation, General Electric, Northrop Grumman, and General Dynamics) typically develop large multiyear proposals for large-scale defense-related projects. A key aspect of developing a successful proposal for the Department of Defense is to use proper cost estimation tools.

Required

1. Review the information at the site of the International Society of Parametric Analysis (ISPA), (www. ispa-cost.org/ISPA_PEH_4th_ed_Final.pdf), which sets out proper estimation methods for proposals to the Department of Defense. Look especially at Chapter 3 of the ISPA’s handbook. In 100 words or less describe the cost estimation methods suggested in this document for use in developing proposals for the Department of Defense. What are some example of how cost estimation is used by defense contractors such as The Boeing Company.

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2. Review Figure 3.6 in the handbook and compare it to Exhibit 8B.7 in this chapter.

Step 1 of 2

Cost Estimating for Defense Contracting; Using the Internet; Appendix B  (25 min)

1.

The cost estimation methods described in the document are called CERs (cost estimating relationships) which are defined as mathematical expressions relating the cost as the dependent variable to one or more independent variables. The CERs described in the document include simple and multiple linear regression and curvilinear regression. Cost estimating models such as regression could be used by Boeing to forecast the cost of construction of airframes, or in more detail, to modules for airframes. This information could then be  used in profit planning and in bidding on government contracts as well as contracts in the commercial aviation industry.