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Operating and Support (O&S) Cost Estimating for the Product Support Manager (PSM)

DAU GLOSSARY DEFINITION

Alternate Definition

The PSM has a key role in conducting an O&S cost estimate, along with representatives from program management, requirements, programming, financial management, engineering, contracts and cost estimating. This team works together to estimate the life cycle sustainment costs to be incurred from the initial system deployment through the end of system operations. This includes all costs of operating, maintaining, and supporting a fielded system. Specifically, this consists of the costs (organic (government civilian and military) and contractor) of personnel, equipment, supplies, software, and services associated with operating, modifying, maintaining, supplying, and otherwise supporting a system in the DoD inventory. These costs include those associated with the system-specific training of personnel necessary to support the system.

 

General Information

Background

In 2009 the US Congress passed the Weapon System Acquisition Reform Act (WSARA) that resulted in the DoD conducting the WSARA Product Support Assessment (WSAR-PSA). The assessment:

  • Formally documented the challenges facing major weapons systems product support;
  • Identified and recommended opportunities for business process improvements;
  • Provided an operational strategy that aligned and synchronized the operational, acquisition, and sustainment communities to deliver required and affordable Warfighter outcomes.

A key recommendation of the 2009 WSAR-PSA report was to address O&S costs. Specifically, the report stated that the “lack of an affordability requirement and adequate visibility of operating and support costs has been a long-standing barrier to effectively assessing, managing, and validating the benefits or shortcomings of product support strategies.” As a result, there were three specific actions related to O&S cost management:

  • Establish an O&S affordability requirement that links O&S budgets to readiness.
  • Develop and implement processes and procedures across the operational, acquisition, and sustainment communities, engaging them in the affordability process.
  • Increase visibility of O&S costs and their drivers across the life cycle of acquisition programs.

O&S Cost Estimating Participants

The PSM serves as the product support representative to the Program Manager’s (PM) Integrated Product Team (IPT) for the conduct of trade studies that reduce O&S costs and the product support planning process, which includes planning and management of O&S cost. The PSM also leads the development and implementation of the Product Support Strategy (PSS) to ensure achievement of desired product support outcomes during sustainment. 

In addition to the PSM, other key IPT participants in O&S cost estimating include:

Key stakeholders in O&S cost estimating include:

Will Cost and Should Cost

Per the O&S Cost Management Guidebook, a Will Cost estimate is a historically informed Independent Cost Estimate (ICE) used to baseline program budgets, whereas a Should Cost estimate is derived through continuous analysis of cost drivers and initiatives to reduce the impact of those cost drivers without degrading effectiveness or suitability.

A Will Cost estimate must include all costs necessary to sufficiently resource and execute the program under normal conditions, assuming average levels of technical, schedule, and programmatic risk. The Will Cost estimate supports the budget build process with sufficient detail to provide confidence that the program can be completed without the need for significant budget adjustment and that the program will avoid Nunn-McCurdy (Nunn-McCurdy Act, Title 10 USC 2433) or critical breaches. Will Cost estimates should reflect the program Life Cycle Cost Estimate (LCCE) and are developed by the responsible Cost Agency for that organization and reconciled with ICE performed by the Component Cost Agency (CCA) or the CAPE office following standard cost estimating methodologies.

Will Cost estimates for O&S may utilize any of the established cost estimating methodologies described in the CAPE O&S Cost Estimating Guide – parametric, analogy, engineering estimate, actual costs, and cost factors. Most O&S estimates base their estimating starting point on an analogy to an existing or historical system. Accordingly, the DoD Components use the Visibility and Management of Operating and Support Costs (VAMOSC) program to collect historical data for O&S costs. The VAMOSC databases include the Army's Operating and Support Management Information System (OSMIS),the Department of the Navy's VAMOSC, and the Air Force Total Ownership Cost (AFTOC). Each VAMOSC system has its own anomalies and deficiencies. Analysts using the databases should become familiar with the data limitations in order to interpret trends or results of data analysis correctly.

Other program-specific documents used to develop the Will Cost estimate may include (but are not limited to) the Cost Analysis Requirements Description (CARD), manpower estimates, the Maintenance Plan, and the Life Cycle Sustainment Plan (LCSP). Using valid and appropriate historical data and program specific inputs is fundamental to the development of a valid Will Cost estimate. The Milestone Decision Authority (MDA) records the approved Will Cost estimate in the program’s Acquisition Program Baseline (APB), and this estimate becomes the basis for budgeting. A valid Will Cost estimate is crucial to O&S Cost management since the program office will use it not only for budgeting but also as the basis for Should Cost initiatives. Familiarity with the CAPE O&S recommended cost element structure and the O&S phase appropriations is fundamental to understanding the Will Cost estimate (and ultimately the Should Cost estimate).

Should Cost is a tool, to manage costs across all phases of the life cycle that focuses on controlling the cost of the actual work being performed or expected to be done. Should Cost management requires the PM to incorporate the efficiencies, lessons learned, and best practices of current and historical programs to aggressively drive down costs in execution and of future years.

Should Cost is a target -- often a stretch goal -- that PMs must work toward in order to improve the overall affordability of the weapon system. Should Cost is not a way to refine current cost estimates, but rather “to examine a program’s technical and programmatic assumptions and make deliberate changes to reduce costs.” Should Cost Management is to be applied throughout the life cycle, with particular emphasis on up-front planning and engineering trades. The PM needs to scrutinize every element of cost under his/her control and assess how to reduce the dollar value without an unacceptable reduction in the value received.

O&S Cost Management - General Information

O&S Costs are funded primarily with the Operations and Maintenance (O&M) and Military Personnel appropriations. However, Research Development Test and Evaluation (RDT&E), Procurement, or Military Construction (MILCON) appropriations may also be used, as appropriate, based on the nature of the effort, after the weapon system has been deployed. 

 Types of O&S costs include:

  • Fixed and Variable - 
    • A Fixed Cost is a cost that remain constant, regardless of any change in an organization’s activity or costs that do not vary with the volume of business, such property taxes, insurance, depreciation, security, and minimum water and utility fees.
    • A Variable Cost is a cost that changes with the production quantity or the performance of services. This contrasts with fixed costs that do not change with production quantity or services performed.
  • Direct and Indirect 
    • A Direct Cost is an expense that can be traced directly to, or identified with a specific cost center or cost object such as a department, process, or product. Examples of direct costs include, but are not limited to fuel, spare parts, dedicated maintenance personnel, operators, etc.
    •  An Indirect Cost is any cost or expense that cannot be economically or directly traced back to a cost object. Cost objectives can be such things as an aircraft, a tank, a department, a function or program or a contract. Examples of indirect costs include, but are not limited to, advertising, computing, maintenance, security, supervision, utilities, and daily used supplies.
  • Labor and Non-Labor 
    • Labor costs consist of:
      • Costs that are Variable in the Short Run
        • Basic Pay, Allowances, Health Care Benefits
      • Costs that are Fixed in the Short Run
        • Appropriated funds for commissaries, day care
      • Pay-as-you-go Costs that are Deferred
        • Fully Funded [i.e., Retirement Pay (payments are made into an accrual fund)]
        • Not Fully Funded [i.e., Non-Medicare-eligible retiree health benefits (DoD incurs a liability in the future.)]  Direct non-labor costs are the costs of goods (e.g., materials, supplies, equipment, facilities, and other items), services, and benefits that are used exclusively by an organization.

Cost Element Structure (CES)

The CAPE O&S Cost Estimating Guide spells-out the work breakdown structure for O&S costs.These costs are defined as the CESs and described in detail and broken into further sub-element categories. The six major O&S CES categories are:  

1. Unit-Level Manpower

2. Unit Operations

3. Maintenance

4. Sustaining Support

5. Continuing System Improvements

6. Indirect Support

Knowing your system will give you insight into the kinds of direct impacts to O&S shown below:

  • Personnel Costs
    • Crew ratios
    • Maintenance workload (System Reliability and Maintainability)
    • Organization support functions (Security, Mission Planning, command and control)
  • Operating Costs
    • Inventory
    • Operating Tempo (OPTEMPO)
    • Mission Profiles
    • System Weight Growth (Fuel Costs)
  • Maintenance Costs
    • System Reliability and Maintainability
    • Support Concept (Level of Repair)
    • Overhaul/Inspection Standards
  • Sustaining Support
    • Amount of Support Equipment
    • Skill Levels (Operators and Maintainers)
  • Continuing Support
    • Size of Software Suite and Growth Over Time