Original Date: 05/01/2000
Revision Date: 01/18/2007
Best Practice : Proposal Cost Estimating Relationships
Prior to 1992, Northrop Grumman Defensive Systems Division (DSD) utilized bottoms-up discrete estimates for proposal cost estimating. This practice employed multiple estimators for related but dissimilar tasks, as well as different data sources without explanation. The submitted proposals were inconsistent, voluminous, and difficult to understand. As a result, customers questioned the cost estimates generated in this manner which significantly reduced Northrop Grumman DSD’s position in pricing negotiations. To establish a more consistent pricing methodology, the company developed Proposal Cost Estimating Relationships (CERS) which generate reliable estimates in a timely manner with nearly zero loss in negotiation.
CERs significantly reduce routine proposal preparation costs normally involved in the costing/pricing process. This practice utilizes one or more independent variables (e.g., production assembly/test hours, production material cost) to estimate the dependent variable in a proposal effort. A CER is established through a statistical analysis of historical data. Once established, the independent variable is estimated and inserted into the CER equation. A dependent variable, such as hours or another direct cost element, is then automatically generated. The process effectively creates a template for cost estimating, which enables Northrop Grumman DSD to apply it to many individual contract actions. The result is a shortened negotiation process; more consistent and easily analyzed data; and a customer who is satisfied with the process and estimates.
Various statistical methods can be used such as simple or rolling averages, single variable linear regressions, and multiple variant/non-linear equations. Critical data should include: Multiple data points to generate accurate analysis. A larger collection of cost data usually produces more accurate results.
Stability in the product, processes, and environment. Over time, changes in these areas may yield inconclusive analysis and/or unpredictable results.
Logical relationships between the dependent and independent variables to avoid statistical anomalies.
Northrop Grumman DSD’s Proposal CERs use a well-defined process to generate consistent pricing in proposal negotiations. This process also enables the company to lower negotiation losses to nearly zero, save a significant amount in bid and proposal labor, achieve a 98% on-time proposal rate, and foster a goodwill relationship with its customers. Because CERs are generated with Defense Contractor Audit Agency software, the data is easily transmitted and understood by all involved. The Proposal CERs foster a better sharing of cost estimating data as well as enlighten customers on new tools and techniques.
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