143

Working top-down :cost estimating before -

development begins
P G Pugh, BSc, CEng, MRAeS
Centre for Defence Studies, King’s College, London

The present state of the art of cost estimating is reviewed with particular reference to its employment in connection with strategic
decisions such as whether to launch a major project or not and, hence, when information concerning the project is limited andfor
incomplete.
The processes of ‘top-down’cost estimating are described in sequence, starting with the gathering of data and its analysis followed by
the formulation of costing assumptions and the derivation of cost-estimating relationships and ending in the application of those to yield
cost estimates for the project in question. At each stage, the description is accompanied by practical advice and warnings of some
c o m n $t$aUs.

3 INTRODUCTION possibility of their work so far, however sketchy, being

High technology is not immune to economics and
accountancy: quite the reverse, since it spends-often in
profusion-scarce resources. Aerospace is an outstand-
ing exemplar of an industry in which innovation can
bring great rewards, but only after vast investments and
where worthwhile returns result from modest differences
between large costs and large receipts. Accurate cost
estimating is vital to the successful conduct of such
industries and, hence, to the exploitation of advances in
technology.
This paper reviews the state of the art of cost estimat-
ing as it now stands with particular reference to its
employment at the stage of strategic decisions such as
whether to launch a major project or not. Too often
regarded as an esoteric specialism, this is a topic that
deserves the attention of all engineers, not only because
of its utilitarian importance but also since it so well
exemplifies that special blend of scientific theory and
experienced judgement that constitutes the engineering
art.
2 ‘TOP-DOWN’ A N D ‘BOTTOM-UP’
The most important decision of any during the manage-
ment of a project is whether (or not) it should begin.
That must be taken in the absence of those design
details whose working out will become the immediate
focus of activity should the project proceed. Often, all
that is then available will be a set of requirements. At
best, the estimator may be given a general arrangement
drawing and have access to results of other preliminary
studies. Even they can be a poisoned chalice for the esti-
mator must then bear in mind the fact that these initial
schemes may not fulfil their purpose, that is when
finally built, tested and made to meet the requirement,
the aircraft or missile may differ significantly from the
specification that was costed. Notwithstanding that this
has been the case for every innovative project since the
dawn of time, the design team will heatedly deny the
The MS was receiwd on 10 January 1992 Md was accepted for publication on
18 August 1992.
Goo292 0954-4100/92 33.00
found wanting in any way. The engineering knowledge
and experience of the cost estimator is vital to main-
taining the necessary distinction between the eventual
cost of satisfying a requirement and of realizing a par-
ticular design whose ability to meet that requirement is,
as yet, unproven.
Likewise, the estimator will need to compile, for guid-
ance, a comprehensive assessment of the industrial,
financial and commercial conditions under which work
will be undertaken. The results of such an appraisal are
often known as ‘costing assumptions’, but that nomen-
clature ought never to be taken as implying that they
are arbitrary aspirations. If estimates of expenditure are
to be reliable they must be based on the most realistic
evaluation possible of all factors-economic as well as
technical.
The estimator must avoid becoming devoted to
detailed costing of those activities that can be agreed to
be necessary and, hence, can be defined in detail. Such
an approach, proceeding from detail to overall total, is
known as the ‘bottom-up’ method due to its working in
that direction through a hierarchical classification of
components, that is a ‘work breakdown structure’.
While useful later in a project, it invariably underesti-
mates total cost through the inadvertent omission of
some costs (commonly those of integration activities)
and the enforced neglect of whatever cannot be foreseen
in detail-which can amount to the greater part of the
development costs for an innovative project.
Instead, the cost estimator must survey the actual
total costs of past (completed) projects together with
technical characteristics that correspond to what is
known about the new project under review. Those costs
and characteristics must be related in some quantitative
way. Application of that relationship to the character-
istics of the new project then yields its likely total cost.
Figure 1 illustrates this process and indicates how,
should costs for individual systems be required, they are
then derived by apportioning the estimated total cost in
accordance with rules obtained from an analysis of past
projects. Because it proceeds from total to detail, this
approach is known as the ‘top-down’ method. It is an
+ .05 Proc Instn Mech Engrs Vol206

Downloaded from pig.sagepub.com at Cranfield University on February 23, 2015

144 P G PUGH

I
Completed projects

t c
1 c
Economic Data
conditions collection

Analysis Cost-estimating Cost-apportionment

relationships

I I b

p-pqp-1
NewpTect
Estimated total cost
I:
I
characteristics facilities conditions
Expected costs of individual systems

Costing assumptions I
+
] I[
I
Implications for indt!stry and employment
I

I_-__
Feedback of exuerience
as new project proceeds * - -- - -
Fig. 1 Top-down cost estimating

extremely powerful approach whose results are based aggregated into total cost and also apportioned to finer
upon actual total costs in completing previous projects levels of subdivision within the work breakdown struc-
and, hence, allow for all the activities likely to be ture in what might be termed a ‘middle-outwards’
undertaken-ven those that cannot be planned in approach. Figure 2 suggests points of entry to a typical
detail at the time of making the estimate. hierarchy of costing elements according to the state
If the project goes ahead then more design and pro- reached by a project.
gramme details will become available and make it pos- However, the principles of ‘top-down’ estimating
sible to construct realistic estimates for individual remain valid for it is always best to confine estimating
systems directly rather than by apportionment of a to use of those characteristics that are known with rea-
grand total. In this way estimates can become more sonable certainty rather than merely conjectured. Also,
detailed and therefore pertinent to the choices and maintaining a pure top-down estimate for comparative
design refinements being undertaken. They can be both purposes is an excellent guard against inadvertent omis-

Li--’
Concept Aircraft

c3

+
Feasibility

7 9 Airframe Engine

I
Structure Systems Compressor Turbine Mission Vehicle

+
Start development

:
I ;
I
l I l I I :
I Combustor
and accessories

I
I
! !

+
Launch production Pneumatic

Hydraulic

Fie 2 Entrances to a cost hierarchv

Part G: Journal of Aerospace Engineering

Downloaded from pig.sagepub.com at Cranfield University on February 23, 2015

 WORKING TOP-DOWN: COST ESTIMATING BEFORE DEVELOPMENT BEGINS
sion of costs from more detailed ‘middle-out’ work-
such as may arise from a premature move to a greater
subdivision of the project.
Whether a pure ‘top-down’ or a hybrid ‘middle-out’
approach is employed, constructing a cost estimate will
involve the gathering of data, their analysis, the formu-
lation of costestimating relationships and the applica-
tion of those to the project under consideration. These
processes will now be described in sequence with hints
as to how they are best accomplished and warnings of
some pitfalls. These provide guidance for the practice of
top-down cost estimating. However, an estimator
should keep in mind that, as for many other engineering
activities, there can be no rigid step-by-step ‘cook book‘
approach. Each estimate will be unique to some extent
in order to make the best use of whatever information is
available at the time.
3 DATA COLLECTION
It takes only a little experience of cost estimating to feel
an affinity for the Ancient Mariner. There often seems
to be data, data everywhere but not a drop to use. Costs
are often quoted by those awarding or receiving con-
tracts and are much debated in connection with defence
and other budgets, thereby giving the estimator valu-
able data in addition to those available from the com-
mercial transactions of the organization for whom the
estimator works. Reference can be made to internal
records, trade journals and, for defence, to publications
of the (UK) Parliamentary Accounts Committee and
House of Commons Defence Committee and of the
(USA) Congress-the last being so extensive as to
support a minor industry devoted to abstracting cost
data. However, the cost estimator will be fortunate
indeed if any data pertinent to the concerns under con-
sideration are published at precisely the time and in
exactly the form that is needed.
Estimators must be prepared, therefore, for much of
their efforts to be given over to collecting data ahead of
need and for conducting analyses upon them that are
not for any specific purpose (other than to make sense
of it all and to ascertain which data are mutually consis-
tent and which are not). No great depth of analysis is
required at this stage but, as a minimum, records should
distinguish between acquisition and running costs and
between recurring and non-recurring costs, should
include dates of expenditures, should keep estimated,
contract and out-turn costs separate and, where pos-
sible, should note production quantities together with
observations on those industrial facilities and economic
conditions likely to have had material influences on
each cost. No single source will give all such informa-
tion for any product; however, over time, in the estima-
tor’s records there will accumulate a large stock of data
and a clear picture will emerge to the experienced ey,
especially to one familiar with the relevant engineering
background. It is to these records that the estimator will
turn when requiring particular data upon which to base
an estimate.
Very often the difference between a good and an
inadequate estimate derives not from the techniques
employed but from whether enough attention has been
given earlier to this accumulation of information as it
was published. Estimators must be allowed to make
Downloaded from pig.sagepub.com at Cranfield University on February 23, 2015
145
such investments of their time notwithstanding the ever-
present pressures of immediate business, such as esti-
mating costs of current projects.
4 ANALYSIS
Top-down estimating is not an arcane craft wrapped in
the mysteries of subtle statistical techniques. It is
common sense moulded by pertinent experience and
informed via the orderly collection of relevant data. Sta-
tistical methods have their place, but it is one of testing
and quantifying those relationships between cost and
characteristics of the product (or process) that prompts
the estimator to hypothesize. In assessing the results of
a statistical analysis, an estimator should beware of
over-reliance upon statistical significance tests. These
refer to the confidence with which two variables may be
said to be associated whereas the estimator is interested
in the accuracy with which one may be used to predict
the other. Essays into estimating costs of software have
used copious amounts of imprecise data and so
obtained regression equations that are ‘highly signifi-
cant’ yet useless by reason of a large standard error.
Commonsense visual inspection of a scatter diagram is
the surest guard against such mistakes. When two or
more explanatory variables are being used, scatter dia-
grams should be plotted for every combination of these
as well as between them and cost. This will detect any
strong correlation between explanatory variables-such
as those that inhibit statistical analysis from discerning
the true individual importance of each variable. Hence,
the estimator can avoid being deceived by a regression
equation whose utility is vulnerable to changes in tech-
nology or design aims.
No trustworthy cost-estimating relationship (CER)
can be devised except via the sequence of data collec-
tion, study, hypothesis and (only then) statistical
analysis. There are no short cuts, but if any step has to
be skimped for want of time and resources then it is the
last that should bear the brunt. The process of data col-
lection (and verification) itself may suggest CERs to the
cognescenti, but no amount of statistical analysis can
wring anything out of a non-existent or inadequate
database. If there are no data then there can (or should)
be no estimate, since unfounded estimates serve only to
mislead. In-service costs pose difficulties in this respect
for they are seldom known with anything like the same
precision as acquisition costs. Modern practice favours
basing decisions upon cost throughout the whole life
cycle of a project, but in many instances it is a moot
point whether choices are better for being founded on
unreliable estimates of the whole rather than accurate
forecasts of the part having the most immediate impact
on cash flows.
Sometimes assiduous data collection may yield exam-
ples so close to the project under review that statistical
analysis reduces to a simple check for consistency in the
ratio of cost to a measure of size. More usually, regres-
sion analysis is necessary to the testing of the estima-
tor’s hypotheses.
5 RULES OF THUMB
Thus many useful ‘rules of thumb’ have evolved-this
somewhat deprecatory nomenclature often disguises a
CER of great utility and accuracy. In them, cost is
Proc Instn Mech Engrs Vol 206
146 P G PUGH

regarded as the product of ‘size’ and ‘complexity’(that is
cost per unit size). The measure of size can be anything
that characterizes the extent of the task in question and,
hence, may be the weight of a component to be manu-
factured, the area to be machined, the number of lines
of computer code to be written or some function of
dimensions, weight, etc., that stand surrogate for a
physical size. If it is appropriately chosen then cost
should vary in approximate proportion to the size, thus
minimizing the need to allow for economies (or
diseconomies) of scale. Given the size thus measured for
the item (or activity) to be costed, its complexity is
judged by analogy and simple multiplication yields its
estimated cost. Cleverness lies not in the calculation
itself but in discerning an appropriate measure of size
and in judging analogies from which to obtain complex-
ity. An example of this approach is shown in Fig. 3. A
preliminary analysis of a somewhat eclectic data set
established that the unit production costs of a wide
range of ammunition varied in accordance with calibre
(used as surrogate for weight). Scatter about the trend
line-attributed to the diversity of data sources-
precluded direct use of the regression equation for cost
estimating. However, this statistical analysis did provide
a precise quantification of a measure of size. Thereby,
costs of new ammunition could be estimated by simple
scaling from an example of past costs selected for its
similarity to the new as regards manufacturing facilities
etc.
‘Rules of thumb’ may link one cost with another that
is more readily estimated. For example, as illustrated in
Fig. 4, there is often a consistent ratio between the unit
production cost of an item and the cost of its develop-
ment. The value of this ratio varies according to the
class of item being developed. It is least for those items
whose development can be most assisted by simulation,
test-rigs, etc., as exemplified by the use of wind tunnels,
strength and fatigue specimens in proving the design of
airframes. It is greatest for those whose development
requires many complete (or near complete) prototypes
-either because these are destroyed during testing (for
example weapons) or because many aspects have to be
explored concurrently owing to the potential for major
interactions between them (for example aero engines).
In proceeding thus the estimator is not ignoring the
manyfold technical subtleties considered and difficult
choices made during the evolution of a design, its devel-
opment and introduction to service. Rather, the estima-
tor is recognizing that during those subtle and complex
processes many interactions arise between the myriad of
variables involved. They become so interrelated and
correlated that a very few, if chosen with care, may
stand surrogate for all-provided those realizing the
project are allowed to work up their design in a rational
fashion. That weight (or any other pertinent measure of
size) correlates with cost does not evince some causal,
deterministic or inviolable relationship between the two.
It is merely a quantification of the way in which those
variables have been associated in the past and may be
expected, therefore, to continue to be associated in the
future.
Care is necessary in order not to abuse such CERs.
For example, during the preliminary phases of a project,
cost estimators may attempt to guide those drafting
requirements by stating that costs are likely to fall
within budget provided the aircraft’s empty weight does
not exceed a certain figure. They may intend thereby to
direct attention towards less ambitious choices of speed,
range, payload, etc. However, it is not unknown for
such guidance to prompt demands for the realization of
unchanged requirements within reduced weight limits
by using every trick of emerging technology however
exotic and therefore expensive.
The danger of uninformed use of a CER is evident
also in a misapprehension concerning life-cycle costs
that has a certain vogue at present. It is true that the
decision to proceed implies commitment to a large pro-
portion of the total whole life cost of an aircraft project.

Problem:
To estimate unit production cost (UPC) of a new 127 mm calibre ammunition.
Data:
105 mm calibre ammunition produced by same facility and in similar quantities has UPC = f 134.
Market intelligence gives eclectic database of costs, weights and calibres.
Hypotheses:
Weight is appropriate measure of size but, in default of this, calibre is a viable
surrogate when raised to a power (expected to be not far removed from cube).
Statistical test:
loo00 -Statistics:
Correlation coefficient = 0.960

Standard error of
estimate = +I01 to -50%
‘Oo0
- Regression coefficient
(multiplier of log calibre)
u Mean + I x SD = 2.47
o . 1 ~ 100 -Mean = 2.42
3
(via Fisher Z)
10 -
1 I
I LO
Calibre
mm
Fig. 3 Example of top-down estimating
Part G: Journal of Aerospace Engineering
./
Interpretation:
Correction of UPC with calibre validates
hypotheses. Standard error of estimate too large
to allow direct use of regression line for cost
estimating (large scatter attributed to variations of
production quantities and facilities), but range of
data and quality of correlation locates within
narrow limits the power to which calibre should
UPC = be raised in order to be a surrogate measure of
0.00149 X
/ size (and shows that to be near to the cube
as expected).
Solution:
Estimated UPC of new 127 mm ammunition =
f134 x (127/105)2.42 = f212. (Limitsof
1 2.32 and 2.47 for index give f208-f214.)
100 ‘Oo0 UPC new 127 mm ammunition = f212

Downloaded from pig.sagepub.com at Cranfield University on February 23, 2015

 WORKING TOP-DOWN: COST ESTIMATING BEFORE DEVELOPMENT BEGINS 147

USA and UK projects begun 1950-90.

Development costs of collaborative projects scaled to single nation
equivalents in proportion to square root of number of participating nations.
1OB

1OM
Unit production cost (September 1980 prices)
Note: figure adjacent to each
line is ratio of development
to unit production costs.
Fig. 4 Development costs of defence systems
However, this is so because large elements of in-service
expenditure (on bases, aircrew, supply infrastructure,
command and control) are contingent upon having an
aircraft of any kind (as opposed to having none) and
have very little to do with its precise technical charac-
teristics. There is no justification of the current fashion
for logistic and other specialists within the military to
press for very early involvement in design and project
management. Rather, it argues for the reverse, that is for
a more critical examination of broad policy issues (such
as whether a particular need is best met by aircraft or
by guided weapons (GW) etc.) and avoidance of detailed
answers to special technical or logistic concerns lest
they pressure designers and planners into premature
decisions on matters of real consequence for cost.
6 CONTINUITY IN CHANGE
In debates at the commencement of a project, estima-
tors can find themselves to be nobody’s friend. Research
specialists wish to see their latest discoveries applied,
designers relish new challenges, while customers covet
the highest performance. Estimators often find them-
selves cast in the role of killjoy, insisting on realistic
costs and, hence, upon the unattainability of many aspi-
rations within available funding. Whether estimators
prevail or are persuaded or pressured into optimistic
underestimates can depend upon their personalities and
standing within the organization and, hence, upon the
organization’s willingness to foster people of the neces-
sary experience, independence of thought and robust-
ness of argument-despite them being thereby not
always the easiest of colleagues or subordinates.
3
f
Average over first
lo00 (weapons)
100 (aircraft)
5 (ships)
Among the arguments that an estimator may find
being deployed against estimates is one that reasons
that they reflect the past and not the future within
which benefits of current advances in technology and
management will be reaped. Such advances are invari-
ably overvalued. There is far greater continuity in
engineering and in costs than is suggested by the con-
tinual hype of every change. In particular, very few
extensions of knowledge open up any fresh field of tech-
nology. Most merely facilitate greater exploitation of
existing technologies and resources-such as when
more precise means of stress analysis allow more refined
structures or when better software tools allow the
writing of yet larger computer programs. Such advances
shift the economic limit at which a curve of cost against
performance turns sharply adverse. In so doing they
facilitate and validate extrapolation of the past rather
than the reverse.
Furthermore, where there are truly radical innova-
tions in technology they tend to be adopted ahead of
general need-being essayed first in those specialized
applications for which they are most obviously suitable
and only later extended to other uses as experience
makes them suitable for those also. Hence, change is
evolutionary within progressive organizations and when
aggregated across all activities comprising a major
project. Only if an organization has already fallen
behind the times for some while can a major step change
be made in its costs; even then, past costs-albeit those
of other enterprises-are both guide and spur to the
extent of change possible. Figure 5 gives an instance of
a major change in manufacturing technology which
Roc Instn Mech Engrs Vol 206

Downloaded from pig.sagepub.com at Cranfield University on February 23, 2015

 il
148
Trend until
h
-8
.
e
,/’
’ Actual
V upon robust scepticism allied to wide personal engineer-
’ ing experience, for it is here that the remarkable trans-
Potential for cost reduction
/ through NC machininghtegral
construction identified by
trials in late 1950s
I I I I I I I 1
I950 I960 1970 1980
Date (first delivery)
Fig. 5 Production costs of UK airframe designs
appears to have now realized the potential originally
envisaged but only after several decades have passed in
progressive improvement towards that end.
Continuity is further assured by cost being as much a
matter of the artificer as of the artefact. Just as the effi-
cient artificer adapts equipment and methods to the
work most often at hand so also the cost structure, cap-
italization and overheads of an efficient industry reflect
the work upon which it has been usually engaged. In
turn, that will strongly influence the costs of imme-
diately subsequent products-not always for the good.
An industry long accustomed to making always the
latest and best aircraft may successfully turn its hand to
aircraft of lesser performance, but it will be unable to
match the costs at which, in earlier times, it made types
of comparable performance when they were at the edge
of technical possibility. Costs will now be higher, bur-
dened as they are with the overheads of large invest-
ments now essential to the industry’s usual run of
business.
Even when, as with avionics, there is a persistently
high rate of technical advance, the impact on cost of
even the most revolutionary change is diluted by the
continuing need within a working system for other com-
ponents (for example racks, boxes, connectors, key-
boards, etc.) whose significance for costs is not
diminished by their being of long-established tech-
nology. Similarly, an estimator is not helpless in the face
of a rare instance of a truly novel project. Limited sub-
division into its elements will almost always suggest
analogous existing items-albeit in different applica-
tions-from whose costs that of the new project can be
synthesized. The special feature of such analyses must
be exhaustive cross-checking via similar syntheses of
known costs of existing projects chosen with a view to
elucidating integration costs, effects of different environ-
ments, etc., prone to be missed in an enforcedly early
descent into detail-which should, therefore, be
restricted to the unavoidable minimum.
7 RISK ALLOWANCES
In all, the accuracy of top-down cost estimating is less
likely to be disturbed by technical advances (since the
Part G : Journal of Aerospace Engineering
Downloaded from pig.sagepub.com at Cranfield University on February 23, 2015
P G PUGH
last project was completed) than by over-sanguine inter-
pretation of what those advances have made possible by
causing requirements to be set too close to the bounds
of economic possibility. The estimator has to judge
whether this is the case and, when appropriate, add
suitable contingencies to estimated costs. Such addi-
tions may be necessary to cover extra development
work and also to allow for additional production costs
due to items becoming more complex than at first envis-
aged. In so doing, the estimator will be heavily reliant
figuration of aerospace products will be encountered,
from being ‘at the cutting edge of high technology’ into
‘unambitious applications of long-established tech-
niques’ which is triggered by the mere mention of costs
and budgets.
In setting ‘risk allowances’ (that is contingencies) an
estimator again has the choice of proceeding in a ‘top-
down’ or in a ‘bottom-up’ manner. Numerous computer
aided bottom-up approaches are available. They are
superficially attractive on account of the detail and
specificity of the answers that they yield, but they are
prone to mislead via the omission of significant contri-
butions to total cost. The basic estimate will (or should)
comprise all expected costs, leaving only the unexpected
to be listed, costed and summated in a ‘bottom-up’
assessment of risk. Since only risks that can be envis-
aged (albeit not expected) can be listed, in the jargon of
the trade such methods can cope with ‘known
unknowns’ but ‘unknown unknowns’ lie outside their
scope.
Working ‘top-down’ involves a study of the extent to
which the (final) out-turn costs of previous projects
exceeded their (initial) basic estimates. Such over-runs
equal the ‘risk allowances’ that, had they been added to
the basic estimates, would have brought estimates and
out-turns into exact agreement (that is would have
allowed for both ‘known unknowns’ and ‘unknown
unknowns’). Judgement of suitable analogies can be
aided by statistical analyses to identify features of pro-
jects that make particular values (or ranges of values)
appropriate as risk allowances. An example is illus-
trated in Fig. 6. In it the risks of concurrent develop-
ment of a new airframe and a new engine are shown
to be manifest as additional costs of airframe
development-presumably because flight tests are then
prone to expensive delays for want of a fully mature
engine of the requisite performance.
The comprehensiveness of a ‘top-down’ risk allow-
ance can present difficulties in its use. It includes
‘unknown unknowns’ and, because of this, is incapable
of subdivision. Rather, it has to remain a large unitary
addition to the basic estimate which may often make
the difference between the total estimated costs falling
within or outside the budget allocated to the project.
The future of the project thereby comes to turn upon
engineeringjudgement of broad analogies with previous
projects-matters upon which there is unlikely to be
unanimity between the estimator and designers, project
management and others keen to have the project con-
tinue. Under such circumstances, higher management
have no valid options save to trust the estimator or to
back their own judgement. They must resist the temp-
tation of repeatedly calling for yet more and yet finer
 WORKING TOP-DOWN: COST ESTIMATING BEFORE DEVELOPMENT BEGINS
I All projects
0 +2oo%
Cost over-run
Fig. 6 Top-down analysis of risk
analysis until a consensus emerges, The more detailed
the analysis the more it presumes (albeit implicitly) par-
ticular outcomes. Detail is possible only for those out-
comes that can be foreseen in detail and, hence, are
anticipated. ‘Unknown unknowns’ are excluded imme-
diately. With enough persistence, risk can be analysed
away entirely, every matter outside the anticipated pro-
gramme having had to be set aside for want of the exact
and certain knowledge necessary for the level of detail
and rigour in justification eventually demanded.
Complex risk analysis is inclined to sophistication in
the true (original) sense of that much abused word. Any
comfort derived from enforced convergence upon a
reduced risk allowance will soon be dispersed as true
risks manifest themselves in delays and cost over-runs.
It is sometimes supposed that customers can rid
themselves of concern for risk by transferring it to their
suppliers via taut fixed-price contracts. Laying aside the
question of whether such contracts can ever have their
intended force-evidence of which is ambiguous at
best-they do not obviate all effects of risk upon the
customer. They merely change its character. Should the
contractor’s price not take account of possible cost
over-runs then the customer faces the risk of the con-
tractor’s bankruptcy and, thence, of being left unsup-
plied. If the contractor guards against such risk by an
appropriate increase in price then the customer gains
certainty in price at the expense of paying a premium.
The more innovative and the larger the project (in rela-
tion to the contractor’s resources) the more regard the
prudent contractor must have for even remote contin-
gencies and, hence, the larger the premium paid by the
customer. At what point, if ever, it is better for the cus-
tomer to assume the risk is a matter for debate, but
such decisions need to be guided by the customer’s
independent estimates of cost and risk.
8 SOFTWARE
A new and major source of risk in many high-
technology projects is the present inability to estimate
the costs of software with either accuracy or precision.
Downloaded from pig.sagepub.com at Cranfield University on February 23, 2015
149
I With new
engine
Airframe
development
+200%
Mean = +SO%
0 +Zoo% With existing
Cost over-run I engine
+200%
Intrinsic accuracy /1\ Cost over-nm
of methods-;
I
1
’\
I
1
0
‘\ I I
+2oo%
Cost over-run
As Fig. 7 demonstrates, estimates of productivity [that
is the number of source lines of code (SLOC) written
per worker-month] are highly imprecise, in addition to
which the sizes of programs commonly turn out to be 3
or 5 times as great as was envisaged when work began.
Until recently, most estimates of software cost relied
upon proprietary models. These did not assist the esti-
mator in evaluating program size while their predictions
of productivity were based upon uncritical acceptance
of inadequate regression equations. In addition, estima-
tors have been overinfluenced by optimistic claims for
the ease with which previously unessayed applications
would yield to novel computational procedures or of
the efficacy of new languages and methods in clarifying
and specifying requirements. This has resulted in a
bitter harvest of massive cost over-runs, cancellations
and financial difficulties for the industry.
At the least, massive contingencies must become a
feature of cost estimates for software-intensive projects
until far better understanding and control of such activ-
ities is not just claimed but is demonstrated repeatedly.
Not that there is anything especially intractable about
software cost estimating. On the contrary, top-down
cost estimating shows great promise-given the sine qua
non of an adequate database allied to unprejudiced
analysis. For example, a recent study (by Dr Vijayaku-
mar, Mr Harland and the author) assembled data on
over 200 software projects and was able to suggest
interdependencies of size, language and productivity
that appear to have been important contributors to the
failure of current estimating methods.
9 INFLATION AND RELATED MA”ERS
Space precludes an extensive discussion of many other
matters of interest to the cost estimator such as how
allowances may be made for inflation when collating
the databases upon which the work depends. All that
need be said here is to remark that in such matters
engineering knowledge and experience plus common
sense are of the essence. Often inflation between two
dates is allowed for by factoring costs in proportion to
Proc Instn Mech Engrs Vol 206
150
50
40
30
20
10
0
xo. 1
Out-turdestimate
I Log,o(out-turn/estimate)
Fig. 7 The state of the cost-estimating art
indices that reflect movements in the prices of a basket
of goods and services. Choice must be exercised as to
which of the many published indices is appropriate to
the task in hand. Thus, economists may write reams on
why indices of input costs (wages, materials, etc.) per-
sistently rise faster than, say, retail prices, but a pro-
duction engineer will recognize at once the constant
struggle to get more value in output out of less (or less
costly) inputs. To the engineer, such divergence is not a
puzzle but a vindication of the effort expended. Thus, it
is clear that if the object is to discover what something
would have cost at a different time but made in an
unchanged manner then the appropriate index is one
based on a representative sample of input costs. On the
other hand, if it is supposed, say, that production
methods would also have changed (to contemporary
standards) then an index of output prices will have to be
used instead-or a separate correction made. Likewise,
if the data available permit such distinctions, different
indices may be used to adjust costs of items manufac-
tured in-house or bought in or to allow for changes in
relative costs of labour and of raw materials, etc. Each
case is best taken on its merits, bearing in mind that
there is no uniquely correct method of allowing for
inflation and, hence, the means chosen must reflect the
use to which inflation-corrected costs are to be put.
In the author’s experience all such matters soon
capitulate when assailed from the points of view of the
workshop floor and the High Street. If they do not, they
are devoid of practical significance--an ever-present
possibility with arcane topics in economic theory.
10 PROPRIETORY METHODS
Nor is it necessary to dwell long upon the claims of
numerous proprietary computer-based cost-estimating
methods for which very wide applicability is often
claimed. Even their most ardent proponents concede
Part G : Journal of Aerospace Engineering
Downloaded from pig.sagepub.com at Cranfield University on February 23, 2015
P G PUGH
Estimates made at start of development
,
indicates mean of distribution
The ghost of troubles
Hardware
that their successful use depends upon the user accumu-
lating an extensive database of costs and technical char-
acteristics of past projects. Having done so, one may as
well proceed directly to the analysis of these. Rather
than force the results of analysis into a prescribed and
possibly inappropriate format or use a CER of
(supposedly) general applicability, it is better to develop
ones specially devised to make maximum use of what is
known and avoid presuming outcomes of decisions or
trials yet to be made. This is not to criticize authors of
proprietory methods, only to observe that no one can
avoid the dilemma posed by the price of generality
being paid in loss of relevance to particular individual
circumstances. Moreover, any prudent decision maker
will wish to put trust in reasoning that can be fully
explained rather than repose faith in any ‘black-box’
opaque to inspection. The whole worth of any cost esti-
mate derives from being able to use it to guide decisions
affecting the future course of a project. Hence, cost esti-
mates are almost without value unless there is a clear
‘audit trail’ from known data through analysis to the
estimate itself.
11 CONCLUSIONS
In summary, this paper draws attention to the power
the light of the costs of past projects conducted by an
experienced engineer and supported by statistical
analysis where appropriate. To recapitulate, this
approach, summarized in Fig. 1, comprises four stages:
1. The collection for completed projects of data con-
cerning their costs and technical characteristics
together with the industrial facilities employed by
them and the economic conditions under which they
were undertaken. Much of this activity is best per-
 WORKING TOP-DOWN: COST ESTIMATING BEFORE DEVELOPMENT BEGINS
formed ahead of need as an investment essential to
maintaining a capability for cost estimating.
2. Analysis of pertinent data to form cost-estimating
relationships and apportionment rules. These may be
simple or complex and may be derived via statistical
analysis or from observation of proportionalities
between cost and a measure of size. However, all
should originate as hypotheses framed on the basis of
engineering knowledge, then be tested against all
available data.
3. Compilation of costing assumptions giving the best
(that is most realistic) description of the new project
under consideration. These should be as com-
prehensive and as detailed as possible consistent with
their being limited to those matters that are known
with reasonable certainty as opposed to being hoped
for or conjectured.
4. Application of the cost-estimating relationships (and
apportionment rules) to the costing assumptions so
as to yield estimated costs for the new project. This
stage should include an appraisal of technical and
other risks and the addition of risk allowances evalu-
ated on a similar ‘top-down’ basis of comparing esti-
mated and out-turn costs for analogous past
projects.
Such an approach to cost estimating merits particular
attention from higher management since it offers the
only means of their obtaining reliable cost estimates
upon which to base crucial ‘go-no go’ decisions at the
start of major projects. However, it is not just a matter
of them commanding its use and awaiting the benefits.
For their part, they need to consider how staff are to be
Downloaded from pig.sagepub.com at Cranfield University on February 23, 2015
151
encouraged to gain the requisite breadth of experience
in an age when greater specialization and automation
increasingly obscures the fact that the most important
computer available to any enterprise remains the
incomparable one sited between the ears of an experi-
enced engineer. They further need to ensure that estima-
tors are allowed (and rewarded for) independence of
judgement even when, as it must, that leads them often
to unpalatable conclusions. Such issues are difficult, but
their successful resolution is vital since upon good cost
estimating rests the soundness of decision making. With
that goes the long-term future of industry and, hence,
the worth of all technologies, however esoteric, high-
tech or specialized.
ACKNOWLEDGEMENTS
A paper that endeavours to summarize a decade of
experience must be heavily indebted to the many
persons with whom the author has worked over so long
a period. Even were it possible to bring to mind each
and all then space would preclude so extensive a list.
The author can only hope that others, for whose
various assistances he remains grateful, will forgive him
singling out for particular mention Messrs A. Acorn, A.
Deller, J. Harland, M. Spatcher and M. Thatcher,
together with the late Mr F. Knott. As section heads in
the department that the author was privileged to lead,
their sharing of the heat and burden of many a day has
contributed greatly to such merit as this paper may
claim.
0Crown copyright 1992
Proc Instn Mech Engrs Vol 206