Methods and Models for Life Cycle Costing

The results of life cycle costing must, whatever the phase of the programme, contribute to the process by which managers can make the best decisions on options presented to them. These options can include evaluation of future expenditure, comparison between alternative solutions, management of existing budgets, options for procurement and evaluation of cost reduction opportunities. Life cycle costing is also used for affordability assessment and determining the cost drivers associated with the Key Performance Indicators or Key User Requirements. There are many methods and models available to conduct life cycle cost estimates. It is important to understand the applicability and boundaries of each method and model in order to use them appropriately. The core objectives of the SAS-054 Task Group were to understand NATO and PfP Nations’ methods and models and to promulgate best practice within the NATO Phased Armaments Programming System (PAPS) phases. In order to meet this aspiration the following objectives were defined in the Task Group terms of reference.

O.1 REVIEW OF COST FORECASTING METHODS
The report has captured all the key estimating methods and provided examples to demonstrate their applicability. For consistency, both the methods and models have been categorised as Optimisation, Simulation, Estimation and Decision Support. The findings confirmed that almost all nations used a similar process to develop life cycle cost estimates; that the quality of the available data nearly always determined the method to be employed; and, in addition, that the type of study also influenced the process and the selection of the appropriate method.

O.2 REVIEW OF COST FORECASTING MODELS
In developing life cycle cost estimates all the nations have in-house developed models that are based on a defined Cost Breakdown Structure. Data for these models is estimated either by empiric methods or parametric formulae (for completeness, sometimes both techniques are employed). The findings confirmed that there were many life cycle cost models in use and these are identified within the report. Generally speaking, the use of more than one model to produce a life cycle cost estimate is considered good practice. This would provide verification of the life cycle cost estimate. However, the use of multiple methods and models should always be balanced with the knowledge and understanding of how the estimate will be used. It is important to ensure that the life cycle costing activities are conducted in a cost-effective manner and balanced with what is realistically achievable at a specific stage in the programme. It is also important to ensure that every model used for acquisition and life cycle costing is subject to calibration, verification and validation. This will build confidence that the cost model is fit for purpose.