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Cost-Effective Space Programmes

David Greves & Herve Joumier What is Cost Engineering and Why is it Important?
Cost Analysis Division, ESA Directorate for
Industrial Matters and Technology Programmes, No one who has responsibility for managing major, complex, high-tech programmes with
ESTEC, Noordwijk, The Netherlands a high development content will dispute the importance of the cost and financial aspects
of the work, or the particular difficulty of assessing and controlling costs. Cost will be a
constant source of concern, but will be particularly to the fore when considering different
technical options, in conducting cost/technical trade-offs, in establishing budgets, in the
submission and evaluation of price proposals, in preparing for contract negotiations, and
in assessing the cost impact of introducing changes to existing designs. The question is
how to tackle these aspects to be best able to predict or assess cost, how to minimise the
The discipline of ‘cost engineering’ can be risk and impact of overspends against budgets, and how to ensure that there is an
considered to encompass a wide range of cost- appropriate balance between technical aspects and the related costs.
related aspects of engineering and programme With these goals in mind, cost engineering essentially attempts to capture practical
management, but in particular cost estimating, experience in a systematic way, to analyse that experience in order to develop tools and
cost analysis/cost assessment, design-to-cost, models which, together with expert judgement, can be applied under different
schedule analysis/planning and risk assessment. circumstances to make predictions of likely cost or assessments of whether a proposed
These are fundamental tasks which may be cost is reasonable. An assessment of the likely cost and risk is made taking account of
undertaken by different groups in different past experience with similar activities and the assessment of associated trends, and of any
organizations, but the term cost engineering changes in working practices and productivity gains.
implies that they are undertaken throughout But cost engineering extends beyond the estimation and assessment of cost, because
the project life-cycle by trained professionals these capabilities can also be applied to support the aim of achieving more cost-effective
utilising appropriate techniques, cost models, results. Awareness of the related cost is a key factor in the choice of approaches and
tools and databases in a rigorous way, and design solutions, but traditionally the roles of establishing design solutions and of
applying expert judgement with due regard to assessing the related costs have been separated both in time and responsibility. Typically,
the specific circumstances of the activity and the in the first instance the designer produces a design solution, which is then passed to other
information available. In most instances, the functions such as manufacturing and testing to add their inputs, and finally ends up with
output of a cost engineering exercise is not an the estimator to calculate the cost of implementing this solution. Unfortunately, this is
end in itself but rather an input to a decision likely to be too late, as these exercises are often subject to time pressures that do not allow
making process. for a solution that is too expensive to be changed in a controlled way, which would
normally require the design loop to be repeated.

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The alternative offered by cost Cost engineering therefore embraces responsibility for the schedule analysis/
engineering is to have cost information many facets of project management and control and risk-assessment elements
available when design choices are being engineering. The European Aerospace usually rests with the function within a
made, so that they will be made in the working group on Cost Engineering project management team known as
knowledge of approximately what the (EACE), in which ESA actively ‘Project Control’.
different potential solutions are likely to participates, has developed a Cost Cost engineering is a discipline with
cost. This awareness of the likely cost is Engineering Capability Improvement relatively few full-time practitioners, who
essential to be able to make effective cost/ Model (CECIM) in which 20 domains and are to be found mainly in larger organisations.
benefit trade-offs. In other circumstances more than 120 processes are identified Therefore, cost-engineering groups and
where cost is a critical factor, this awareness which can be said to fall within the broad professional bodies like EACE - originally
of costs can be applied in a design-to-cost scope of cost engineering. Responsibility known as the ESA/Eurospace Working
approach whereby the cost influence for these tasks varies from one Group on Cost Engineering - are very
directly drives the choice of solution. organisation to another; in ESA important in helping to maintain the level

Cost-Estimating Methods
There are many different approaches and methods for estimating or assessing costs, all of which have advantages and disadvantages under particular
circumstances. Factors determining the most appropriate method will include the nature of the activity to be costed or assessed, the degree of familiarity of
the organisation with the item or activity to be costed, and the extent to which reference can be made to previous exercises, the availability of reliable design
information and the time available to prepare the estimate. Other key aspects are the stage in the overall cycle at which the estimate is being made, the
specific customer requirements in terms of presentation of cost details, and the degree of accuracy required. Usually several methods will be applied as a
“sanity check” on means to verify that the results are valid. The most common approaches to estimating/cost assessment are:

- "Rule of thumb" approach

This approach is often used for the rough and rapid sizing of an activity in terms of cost. Its application is usually limited to very specific areas of activity
and it implies expert judgement and close familiarity with that field of activity. It is not very sophisticated, but the rapidly available cost approximation may
be sufficiently accurate in certain circumstances.

- Detailed "grass-root" or "bottom-up" approach

With this method, detailed estimates are made at relatively low levels in the work breakdown structure, typically at work-package or task level. This approach
is closely related to scheduling, planning and resource allocation and is both time-consuming and costly. It requires a good knowledge of the activity and
there also needs to be a reasonable level of definition for the exercise to be meaningful. Very often, and certainly in the case of ESA tender actions, such an
approach has to be followed by bidders in order to be able to present the detailed costing information that the Agency requires. One potential problem, apart
from the time and effort involved and the spurious accuracy implied by the process, is that the inclusion of contingencies for each element may well lead to
an excessive amount of aggregate contingency, resulting in an unrealistically high estimate.

- Analogy
This commonly applied method essentially relies on being able to ascertain the cost of previous activities or items and using that as a reference for predicting
the cost of a proposed new activity or item. It therefore depends on the accuracy of existing data, on being able to identify differences between the present
and past activity or item, but also on taking due account of any observed cost trends and any changes in circumstances that might have a bearing on costs.

- Competitive supplier proposals

Where it is intended to subcontract an activity, committing subcontractor proposals submitted on a competitive basis are likely to be the most reliable estimate
possible. However, customers should retain the ability to estimate and analyse the cost of work to be subcontracted, particularly when there is little or no
real competition, or where there is the likelihood of subsequent customer-generated changes.

- Parametric approach
Parametric estimating entails the analysis of cost, programmatic and technical data to identify cost drivers and develop cost models. The approach essentially
correlates cost and manpower information with parameters describing the item to be costed. This process results in sets of formulae known as "Cost-Estimation
Relationships" (CERS), which are applied to produce cost outputs for different elements of an estimate. Parametric models may be developed by any
organisation from analysis of its own data, but there are also external models available, some of which are marketed on a commercial basis. In the case of
commercially developed models, it is important that they are calibrated by reference to specific data from the user organisation. Whilst there may be
significant costs in developing such models or licensing commercial models, they have a number of advantages, particularly in that they allow estimates or
assessments to be made fairly rapidly and at little cost.

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of expertise and awareness of new tools and standard format. It also facilitates the fairest estimate possible based on the
techniques. The ESA Cost Engineering development and application of available information.
team also has frequent and close contacts methodologies and tools that would not be Over the last four years or so, the Cost
with NASA cost-engineering groups cost-effective for individual Directorates to Engineering Section has made significant
within the framework of an agreement on do because of the relative infrequency of changes in its working approach. One
cooperation in cost-engineering practices. major procurement actions in each problem was that whilst previously the
Directorate. Moreover, the fact of being Section was fully involved in assessing the
involved in the full range of ESA domains cost of proposals submitted by industry it
Cost Engineering in ESA permits a cross-fertilisation of experience. was not getting involved sufficiently early
A further feature is that the Cost in programme life-cycles and its tools and
In ESA there is a centralised Cost Engineering Section is neutral, being databases were not being fully exploited
Engineering Section within the Cost hierarchically independent of the customer and were not contributing optimally to the
Analysis Division, which forms part of the Directorates and therefore able to offer an effort of finding cost-effective solutions
Agency’s Directorate of Industrial Matters independent assessment that is unbiased for the Agency’s projects. A strategic
and Technology Programmes. This and objective, something which may not be decision was therefore taken to try to
centralisation ensures that there is possible for engineering/project staff become more involved in projects in their
systematic gathering of cost, technical, closely associated with the activity. In any formative stages. Fortuitously, this
programmatic and schedule information estimating or assessment exercise, the coincided with the setting of the
for all areas of activity according to a Section’s sole motivation is to produce the Concurrent Design Facility (CDF) at

What Cost Engineering now does for its Users

- Programme preparation
Programme Directorates often enlist the services of Cost Engineering when putting numbers together in order to present the financial elements of a
programme proposal to Programme Boards. This may involve coming forward with preliminary cost estimates when there may be few or no inputs from
industry yet available. An example would be the early consideration of candidate projects for future Science missions.

- ITT preparation
The costing requirements expressed in ESA Invitations to Tender (ITTs) for major projects are quite standard in terms of the need to complete the Price
Breakdown Forms (PSS-A forms) and to submit the financial proposal (ECOS files). There is also a standard format for expressing the costing requirements
in early phases with respect to the format and content of the cost estimates that the Contractor is to produce.

- Participation in TEBs
Cost Engineering is systematically involved in the main procurement actions as Tender Evaluation Board (TEB) or Cost Panel members. The first responsibility
when industrial financial proposals are received is to interpret them (using the ECOS files) in order to give Panel/TEB members the best possible
understanding of the price as proposed by the bidder. In addition, a "should cost" analysis is usually prepared to support the assessment of the cost which
has been proposed and to subsequently allow the ESA negotiation team to orientate its discussions with the selected or short-listed bidders. The Cost
Engineering Section also works closely with the Industrial Cost Auditing Section with respect to determining the acceptability of the rates and overheads, profit
rates and price-revision formulae proposed by tenderers.

- General support to Projects

For the early phases of major projects, Cost Engineering has the capability to define and animate Design-to-Cost exercises in cooperation with the Contractor
and the ESA Project Team. There is also the possibility to carry out an internal independent cost-estimating exercise involving the Project Team members,
thus combining the benefits of cost-engineering tools and experience and the specific knowledge of those closest to the work. This may be then be used in
support of decisions concerning the project, or to provide inputs in order to reinforce the Agency’s negotiating position.

- Participation in Reviews
Cost Engineering is sometimes invited to participate in design reviews, especially when there are some deliverables related to cost estimates or where there
are cost implications with solutions adopted. This usually involves providing independent assessment and analysis of the concepts proposed by the Contractor.

- Participation in CDF activities

Cost Engineering participates in CDF activities as a member of the core team. In some ways this is the most fulfilling role as it is very much proactive,
permitting the cost engineer to make a real contribution to finding cost-effective design solutions.

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ESTEC on a trial basis at the end of 1998,

when Cost Engineering Section was
invited to participate as part of the core
team. This was a real step forward because,
by being involved from the outset in each
study, it became possible to participate in a
pro-active manner, making timely
cost/benefit analyses allowing the early
identification and discarding of
unaffordable solutions.
There are instances where the Section
is requested to prepare completely
independent cost estimates as an input to
the Project team. However, in the same
way as its involvement in the CDF, the
Section has also been able to become more project’s constituent systems, subsystems definition, very rapidly, with a level of
proactive in other programmes where it has and equipment. A major advantage of accuracy commensurate with the decision-
worked together with project teams and this is that it ensures a degree of making needs.
their technical support, co-ordinating the standardisation so that there is a consistent A lot of focus is placed on determining
preparation of an in-house estimate approach to cost/work breakdown not only the value for money of proposed design
benefiting from the input of all available through the contractual hierarchy on a concepts. There is therefore currently a
experience. particular project, but also between projects. broad action within ESA aiming at
Several other space organizations, developing design-to-cost oriented
Tools of the Trade including the Italian Space Agency, also models, with Cost Engineering working
regularly use ECOS for their own together with staff of the Directorate of
The Cost Analysis Division is the purposes. One of the strong features of Technical and Operational Support and
custodian of the ESA PSS-A series of ECOS is the ability to compare normalised other ESA Directorates. The Cost
price-breakdown forms required in the work-breakdown structures. For both ESA Engineering Section’s participation in the
submission to the Agency of all price and Industry, it guarantees the ability to CDF studies is also a major help in making
proposals. The use of these forms ensures identify each activity properly through a progress in this area.
the breakdown of cost so as to give checklist system, and it also provides the The cost-engineering tools used are not
adequate visibility, but also a standard possibility to compare similar activities limited to internally developed cost
breakdown and presentation as regards the from one project to another. models. The Section also makes extensive
different categories and elements of cost. To be effective and bring the right level use of commercially available parametric
The Division has had developed software of expertise to all of its activities, the Cost packages such as PRICE, which includes a
called ECOS (ESA Costing Software) that Engineering Section is constantly series of specialised cost models for
allows bidders to prepare and present their developing or acquiring the most extensive hardware and software. These commercial
financial proposals in an efficient and and pertinent set of cost models possible. parametric tools are sometimes very
rigorous manner. Both Industry and the The first step is to properly organise the convenient for filling-in gaps in the more
Agency have a strong interest in using accumulation of reference data, and this is specialised set of internally developed
ECOS, because the complexity of the done mainly using a cost/technical/ models. Also, a number of models for
Industrial teams for major space programmatic database called CEDRE specific activities and systems have been
programmes makes the calculation and (Cost Engineering Data Repository for obtained free-of-charge as a result of ESA’s
aggregation of the financial contributions Estimates). This database has some cooperation in the development of those
a difficult exercise. An important feature normalisation features that allow the data models.
of ECOS is the computerised integration to be pre-processed, before being exploited The maintenance of a permanent state-
of data at successive levels of the in the development of cost models for the of-the-art cost-engineering infrastructure
contractual hierarchy, thereby avoiding the different applications. These cost models also leads to the use of some integrated
onerous task of manual integration of data are then integrated into a cost-estimating solutions, such as the Ace-It product. This
from several sources, a task that is both software system such as RACE (Rapid tool, acquired under license, permits a
time-consuming and error-prone. Advanced Cost Estimate). This develop- number of different cost models to be
ECOS also imposes a product-tree ment allows the Section to produce cost managed in an integrated manner and also
approach to the work breakdown, so that estimates for a complete spacecraft, based addresses the documentation and reporting
there is a uniform definition of the on the mission requirements and payload needs.

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Conclusion
The Accuracy of Cost Estimates and Cost Assessments
Cost Engineering in ESA is established on
“It is the mark of an instructed mind to rest satisfied with the degree of precision which
a sound footing and is extending the scope
the nature of the subject admits and not to seek exactness when only an approximation of
the truth is possible.” and level of its activities with a rapidly
Aristotle increasing internal customer base. Whilst
cost estimating and cost assessment
For any cost-estimating or cost-assessment exercise the achievable level of accuracy will be dependent on remain fundamentally important activities,
the level of understanding of the problem, the completeness and the correctness of the information relating there is also a new focus on the added-
to the cost-driving parameters, and the quality of the cost model itself. value coming about as a consequence of
earlier cost-engineering involvement in
The desirable level of accuracy is that which is sufficient to allow a correct decision-making process. programme life-cycles. Its operations
within the context of the CDF are a good
In many situations it will be sensible to give a range of projected costs from a “lowest” cost, to a “most
model to illustrate its value and potential in
likely” cost and a “highest” cost. This is known as a three-point estimate-with the width of the range or
this respect, namely working in a proactive
spread being indicative of the perceived degree of uncertainty as determined by a risk-assessment
exercise. way and making a major contribution to
identifying affordable solutions to achieve
programme objectives.
However, there are many other situations
regularly encountered in the Agency’s
Estimating the cost of project software is The industrial companies participating in programmes where cost engineering is
a great challenge. The difficulty in the space programme also need to be able increasingly demonstrating its added
accurately predicting the size of software, to properly assess costs and to achieve value. It can be expected that in the future,
the rapid evolution in languages and cost-effective solutions for their own with restricted budgets, with a changing
programming tools, the reuse of existing financial health. If they fail to do so, they industrial environment in which effective
software modules and the inclusion of risk becoming uncompetitive in both competition may not always be possible,
COTS (commercial off-the-shelf) products institutional and commercial markets and and with an increasing momentum of tech-
makes estimating software development unprofitable, either because they feel nological development and programme
costs really problematic. The Agency has obliged to accept work on the basis of complexity, the need for and benefits of
therefore been striving for some years, uneconomic prices in order to secure effective cost-engineering services will
with the help of the INSEAD business orders or because they have unwittingly become even more evident.
school, to establish reliable software underestimated the costs. Having established a sound basis in
development metrics for cost estimating Therefore, in addition to endeavouring organisational terms, with the changes in
and assessment purposes. INSEAD to consolidate and improve its own cost- its working practices that have taken place
routinely gathers data on software engineering capabilities for its own over the last four years, the cost-
projects not only in the space domain but purposes, ESA is also actively encouraging engineering service is now in a good
also in other hi-tech sectors, and the development of the cost-engineering position to move forward, taking advantage
analyses it in order to produce predictive capabilities of its contractors. Apart from of the rapidly developing software tools
models. identifying cost-engineering principles and and consolidating its own experience in
practices in its own Project Management order to meet the challenges and
Manual, in its support of the ECSS opportunities that lie ahead. s
Benefits of Cost Engineering for ESA and Management Standards, ESA’s General
Industry Conditions of Tender for major projects
will in future require not only the
ESA and its industrial contractors have a presentation of cost and pricing
mutual interest in practising and information in a certain format, but
promoting cost-engineering in support of also the identification of the cost-
the goal of achieving cost-effective estimating methods and tools applied
performance. Space projects tend to be by the contractor for the different
inherently complex and costly, and so elements. This should give both the
being able to control costs and to achieve contractor and ESA greater confidence in
cost-effective missions is extremely the costing details and make it easier for
important for the Agency and its Member both parties to agree fair and reasonable
States who ultimately provide the funding. prices.

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