*George Mason
University*

*School of Information
Technology and Engineering*

*Department of Systems
Engineering and Operations Research *

** **

**OR 651 – Military Operations Research: Cost Analysis**

**Spring, 2001**

** **

**Abstract: **Cost Analysis is a sub-discipline of Operations
Research. While drawing on other disciplines (e.g., Managerial Accounting,
Econometrics, Systems Analysis, etc.), Cost Analysis uses the basic tools of
Operations Research to solve a specific class of public sector problems. Cost
Analysis is an inquiry to assist decision-makers in choosing preferred future
courses of action by evaluating selected alternatives on the basis of their
costs, benefits, and risks. Cost Analysis is distinctly different from Cost
Estimating in that projecting future courses of action usually requires
mathematical modeling, hence the link to Operations Research and Economic
Analysis. This course introduces the basic concepts of Cost Analysis.

This
class will follow a lecture format, but there will be a different lecturer each
week. An important topic in Cost
Analysis is scheduled for each lecture. We draw on the experiences of experts
from the Cost Analysis research and practitioner community; hence, this course
provides a unique introduction to the topic. This course is particularly useful
for students of Operations Research, Public Policy, Information and Software
Systems Engineering, and Systems Engineering.

**Course Coordinators: **Stephen J. Balut, Director

Cost
Analysis and Research Division

Institute
for Defense Analyses

1801
N. Beauregard Street

Alexandria,
VA 22311

Andrew
Loerch, Professor

George
Mason University

Fairfax,
VA 22030-4444

(703)
993-1657

**Time: **Thursday 16:15-18:55

**Location: **Institute for Defense Analyses

Alexandria,
VA

**Prerequisites: **STAT 654 (or equivalent) - Applied
Statistics

OR
540 (or equivalent) - Management Science

**Textbooks:**

** **

** **Quade, E.S., *Analysis for Public Decisions, *3rd Edition. Englewood Cliffs: Prentice-Hall, 1989.

Fisher, G.H., *Cost Considerations In Systems Analysis*. New York:
American Elsevier, 1971.

** **

** **

**Proposed Topical Outline
and Lecturers:**

** **

** **

January 18 **Cost Analysis Overview**

Building 2001 S. Balut, Institute for Defense Analyses, and

Room 118 T.
Gulledge, George Mason University

Presents a concise definition of cost
analysis, its history and evolution to the present time. Cost analysis is differentiated from related
disciplines, including operations research, systems analysis,
cost-effectiveness analysis, and policy analysis. Each ensuing lecture topic will be described along with the contribution
of the topic to cost analysis. Those
taking the course for graduate credit will be advised of testing, grading and
required class projects.

January 25 **Cost Effectiveness Analysis**

Building 2001 D. Levine, Institute for Defense Analyses

Room 118

First postulated by RAND Corporation
analysts in the 1950s, cost effectiveness analysis has been accepted as the
principle analytical methodology for making resource allocation decisions in
the government. In the Department of
Defense (DoD), it is applied to choices among weapons systems, support
concepts, training methods, and many other military outputs. This lecture will highlight the
methodology: a clear statement of the
objective(s), a broadly based search for alternatives for meeting the
objective, and the quantitative analysis of the costs and effectiveness of each
alternative. Preference is indicated
for the alternative with minimum cost for achieving a desired level of
effectiveness (or maximizing effectiveness among equal cost alternatives).

February 1 **Economics
in Cost Analysis**

Building 2001 M. Goldberg, Center for Naval Analyses

Room 118

Presents the economic underpinnings of
cost analysis. In particular, the cost
function will be derived from the underlying production function relating input
and output quantities. In addition, the
rationale for discounting future costs and benefits will be given. Finally, various criteria will be compared
for choosing among alternative investment projects: cost-benefit ratio, internal rate of return, and discounted
present value.

February 8 **Estimating
Relationships - I: Factors and Simple
Models**

Building 2001 P. Lurie, Institute for Defense Analyses

Room 118

Introduces simple factor models and
linear regression analysis as tools for establishing cost estimating
relationships (CERs). Topics to be
covered include measures of model fit, graphical goodness-of-fit diagnostics,
significant tests, confidence intervals, and cost prediction. The lecture will use a real-world example of
an aircraft airframe cost model to help illustrate the methodologies covered.

February 15 **Cost
Data**

Building 2001 J. Cloos, Institute for Defense Analyses

Room 118

Emphasizes the requirement and importance
of accurate, consistent and relevant data for use in cost estimating and
analysis. The discussion will focus on
various dimensions of cost data and how such data should be presented for
analytical purposes. The overall cost
data process will be described, to include identifying data requirements,
assessing potential sources, and selecting methods for collecting and adjusting
data. Specific areas to be covered
include definitions of costs and cost structures (e.g., Work Breakdown
Structures), major sources of cost data, both contractor (e.g., Cost
Performance Reports) and government (e.g., Future Years Defense Program),
consistent measurement in dollar terms (e.g., normalization), and the
implications of time value of money on costs and investments (e.g., net present
value).

February 22 **Estimating
Relationships - II: Complex Models**

Building 2001 P. Lurie, Institute for Defense Analyses

Room 118

This lecture is a continuation of the
lecture on “Simple Models.” The lecture
will introduce more realistic non-linear models that are often used to model
cost relationships in practice. The same
aircraft airframe example used in the earlier lecture will be used again to
guide the students through model estimation, diagnostics, testing, and
prediction. Also to be covered are
methods of cost risk analysis, which allow the analyst to supplement point
estimates of cost with more informative distribution
on cost.

March 1 **Cost Progress Curves**

Building 1801 T. Gulledge, George Mason University

Room 120S

The public generally understands the
notion of the learning curve. This
lecture presents the theory and history of the development of the related cost
progress curve in common use by cost analysts.
The fitting of curve parameters is illustrated using empirical
data. Application of the curve is
illustrated using an example.
Extensions of the cost progress curve are described.

March 8 **Spring Break**

March 15 **Midterm Examination**

Building 2001

Room 118

March 22 **Software Costing**

Building 2001 T. Frazier, Institute for Defense Analyses

Room 119

Describes the background and history of software
cost estimating. The discussion will
focus on software metrics used today; software cost estimation methods;
software cost models; and the predictive accuracy of current models. Finally, the lecture will deal with the
impact of new software engineering practices and tools on software cost
estimating.

March 29 **Production Rate Effects**

Building 2001 S. Balut, Institute for Defense Analyses

Room 118

The relationships between direct and
indirect costs, and fixed and variable costs will be discussed, along with
related implications for possible error in forecasts of the costs in future
periods. A method for separating fixed
and variable costs will be presented.
Two methods for forecasting future costs will be described, both of
which take into account the component of cost that is fixed, thereby avoiding
this source of error in estimates.

April 5 **Schedule Estimating**

Building 2001 B. Harmon, Institute for Defense Analyses

Room 118

As proposed defense system acquisition programs
approach major decision points, the reasonableness of planned acquisition
schedules must be assessed by DoD representatives. Research into this problem had included the development of
databases and methods of assessing the reasonableness of proposed acquisition
schedules for tactical aircraft, tactical missiles, and unmanned space
systems. The cornerstone of the methods
consists of time estimating relationships (TER’s). TER’s are analogous to CER’s, where the dependent variable is a
time interval instead of cost. This
lecture will focus on both the development of the methods and their
application, illustrated using examples.

April 12 **Life-Cycle Costing**

Building 2001 J.R. Nelson, Institute for Defense Analyses

Room 118

Life-cycle cost estimating relationships
and procedures will be presented in the context of the DoD acquisition
process. A hypothetical fighter
aircraft will be used to illustrate the methodology. The phases of the life-cycle (development, production, operating
and support) will be described, and the components of costs for each element of
the fighter aircraft (airframe, engine, and avionics) will be addressed for
these phases. Constant, then-year and
discounted life-cycle cost funding streams will be discussed.

April 19 **Force Costing**

Building 2001 J. Wilson, Institute for Defense Analyses

Room 119

Introduces the concepts of force and
infrastructure costing. An example will
be used to demonstrate how the tools and techniques taught in earlier sessions
can be used to create a cost estimate for a change in force structure of a
defined force. Infrastructure
categories will be defined and their relationship to forces will be
discussed. Important questions the
analysts must consider will be identified along with possible approaches to
overcome inherent shortcomings of available analytical tools and methods. A brief history of force costing and trends
for the future will be presented.

April 26 **Project Reviews**

Building 2001

Room 118

**Final
Examination Thursday, May 3,
16:15-18:55 **

Building 2001

Room 118

**Performance
Evaluation:**

** **

Midterm Examination 30%

Final Examination 30%

Project in Cost Analysis 40%