Defence

Capability Development Group

The Price is Right

Getting Their Capabilities Right proclaims the poster for the Capability Development Group, formed in 2004 under Lieutenant General David Hurley. There are three parts to being right in this context: the right system for the job, at the right time, and at the right price.

PTE Fernihough of 5/7 RAR (Royal Australian Regiment) as part of the Al Muthanna Task Group dismounts the new Bushmaster to begin patrols in As Samawah, Iraq. The new Bushmasters are being progressively delivered into service. Photo by CPL Ruskin

By Damian Gilchrist

It is this last issue - the right price - that this article discusses. When we look ahead sometimes 10 years or more, the right price comes down to estimation, an educated guess. This is where Defence has been focussing attention, so that it can improve its ability to inform Government of what that right price could be. Comprehensive analysis of the up-front and whole-of-life costs of major capital equipment was one important recommendation of the Defence Procurement Review 2003 (the "Kinnaird Review").

To meet this challenge the Head of Capability Systems, Air Vice Marshal Kerry Clarke, has committed extra effort at the front end of the capability definition process. A new team of three cost estimators in Capability Systems (Damian Gilchrist, Peter Claughton and Tony Thackray) will now assist CDG major project staff in costing projects proposed for inclusion in the ten-year Defence Capability Plan (DCP). The DCP is a keystone document that provides clear, long-term goals for the development of the ADF based on judgments about the relative cost-effectiveness of different types of capability in achieving Australia's strategic objectives. On the basis of these judgments, the DCP forecasts capability development paths for each of the ADF's main areas of capability over the next 20 years, within which specific, costed development plans are provided for each major type of capability for the coming decade.

The Challenge

Developing such a long-range plan is a complex and involved task. Overestimating and providing too much money for one DCP project only takes money from other capabilities and other government priorities. However, underestimating may prevent the acquisition of a complete system, as the necessary funds will not have been programmed. In the early stages there is often significant uncertainty as to exactly what the new system will look like and how it will perform. This makes accurate cost estimation very difficult. Accordingly, the emphasis in cost estimation at this time is on understanding the quality of the cost estimate and the degree of uncertainty involved. Compiling the DCP, with confidence in the programming of funds over some decades, relies on a good knowledge of cost growth trends with defence equipment.

Importantly, individual projects still need to be considered and approved by government before proceeding; inclusion of a project in the DCP does not indicate approval for capital expenditure on the proposed capability. Instead the DCP guides the project definition work that Defence must undertake before seeking Government expenditure approval for a major capital equipment project.

The Methods

The initial baseline planning estimate developed for the DCP is further refined during the cost estimation team's involvement in the next stage of a project's life. This next stage is known as the First Pass (or initial business case) phase. In undertaking the task of estimating the costs of future defence equipment, usually of leading edge technology and often not yet built, two distinct methods are employed, and then combined, to gain the full picture.

Firstly, is cost estimation from the bottom-up. The new capability system is viewed as the sum of many smaller components, all of which are costed according to the best information available. The estimating process makes use of parametric methods, supported by a mix of simple and specialised software applications. The tools are useful, especially for taking account of price and exchange fluctuations, but are no substitute for a sound understanding of what the system is intended to achieve, as well as what is not covered by the scope of the project.

The RAAF's fleet of PC-9 training aircraft will be progressively replaced by the New Pilot Training System (NPTS) to be developed under Project AIR 5428. This is one of a range of projects recently analysed by the Cost Estimation team in Capability Systems Division. Photo by LAC Guy Young

Open dialogue between all the project team members and across the different parts of Defence remains vital. This cost estimation work also includes the identification of key cost drivers that affect both the acquisition and sustainment phases of the project's life cycle. Accordingly, staff from the Defence Materiel Organisation (DMO) need to be involved early in these early scoping stages, especially as past experience with similar equipment is an important ingredient of this bottom-up estimating process. In this work, DMO System Project Offices have a particularly important role to play in providing advice on the cost of operating the current equipment that the new project's acquisitions will replace.

Secondly is cost estimation from the top down. An external estimate is made based on the issues surrounding a project's impact on the wider Defence Capability Plan. Just as performance and design is sometimes uncertain in the early phases of a project, so too is the understanding of exactly when the capability will enter service. The Government's final decision on what to buy but also when to buy, along with anticipating the impact of bringing forward or delaying a project, are important components of balancing the budget. (Cold hard steel needs cold hard cash - credit cards not accepted!)

So two cost estimate views, one looking from the bottom up and one from the top down, are used to support the decision on what viable options should be put to government to meet an identified capability gap. This increased effort and attention is also providing the opportunity to standardise cost estimation methods across CDG, DMO and Industry. If cost estimates come through in a common language, having cost risks identified up front, then any re-work after Departmental scrutiny - internally by the Cost Analysis Branch of CDG and externally by Defence Capability Branch in the Department of Finance and Administration - should be minimised. Additionally, good initial estimates will assist with management right throughout the life of the equipment, including when the question of the next replacement system is raised.

CDG is committed to improving lifecycle costing from a project's inception. This will ensure the best cost estimates are presented to the senior leaders in the Department, Central Agencies and Cabinet. For the staff involved, the changes represent the start of an exciting time in implementing new approaches to major equipment project cost estimation.

Damian Gilchrist is Director Operations - Cost Estimation in Capability Systems Division.

[ top of page ]