Cost beniefit analysis training for decision makers and manager step2

• “The scope of the analysis defines the range of coverage encompassed by the project along specific dimensions such as time, location, organization, technology or function.. “Normaliza

Last Updated: 10 November 2011

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AMERICA’S ARMY: THE STRENGTH OF THE NATION

Cost-Benefit Analysis (CBA) Four-Day Training Briefing

Step 2: Define CBA Boundaries

and Parameters

• Scope: Defines the range of coverage encompassed

by an initiative or proposal along specific dimensions like time, location, and organization.

• Fact: A verifiable statement that is real and something

that has happened or is happening.

• Assumption: A conclusion drawn from facts and

observations describing a status or condition that is not certain to exist.

Defining CBA Boundaries and Parameters

7 Compare Alternatives

6 Define Alternative Selection Criteria

6 Define Alternative Selection Criteria

5 Identify Quantifiable and Non-Quantifiable

– Possibility of analysis in a bounded problem: how best to neutralize the

threat of potential Iranian nuclear capability by the strategic deployment

of a new missile defense system, given an annual budget allocation of

$1.5B, and given that several potential deployment sites exist in Eastern Europe and the Middle East

Boundaries and Parameters

• In a CBA, the boundaries and parameters are

expressed in the Scope, Facts, and Assumptions.

Boundaries and Parameters

• “The scope of the analysis defines the range of coverage

encompassed by the project along specific dimensions such as

time, location, organization, technology or function The CBA

should state the involved stakeholders, period of time that the

analysis covers, as well as organizations or requirements not

covered or addressed in the analysis.” (CBA Guide, “Step 2”,

https://cpp.army.mil )

Definition: Scope

• The choice of scope is very significant, and can distort the analysis in favor

of one or more COAs Consider:

– The cost of buying versus leasing a car

• over a period of one year

• over a period of fifteen years

– O&M costs of Pentagon office space from the perspective of:

• Individual DoD employee

• Department of the Army

• Department of Defense

• Taxpayer

– Impact of 2008 Lehman Brothers bankruptcy on:

• Lehman Brothers 2008 summer intern

• Lehman clients

• Barclays

• U.S and international financial markets

• 2011 Occupy Wall Street protesters

Scope

• Different scopes entail different cost estimates: For example, Flyaway, Weapon

System, Procurement, Program Acquisition, and Life Cycle Costs all encompass different types of costs.

Scope

• The scope chosen for the CBA

– Must be the same across all COAs.

– Must allow for a fair comparison

between the costs and benefits of all alternatives “Normalization.”

• For instance, if the cost of COA1 starts off very high in the first year but drops off sharply in later years, and the cost of COA2 starts off low but rises sharply in later years, the time scope chosen should be

sufficiently large to accurately capture the effects of both trends.

Scope

• Properly scope the following CBA:

– A comparison of two new weapons systems, Sys 1 and Sys 2, to be

procured by all FORSCOM units Sys 1 has a lifecycle of 6 years, Sys 2 has a lifecycle of 4 years O&S costs are shown in the table below Give the

appropriate length of analysis for this CBA

• Properly scope the following CBA:

– A comparison of two new weapons systems, Sys 1 and Sys 2, to be

procured by all FORSCOM units Sys 1 has a lifecycle of 6 years, Sys 2 has a lifecycle of 4 years O&S costs are shown in the table below Give the

appropriate length of analysis for this CBA

Solution: The appropriate time span is 12 years … the lowest common

multiple of the four- and six-year lifecycles for the two systems

Scope Exercise

• An office within HQDA is expanding by 10 people and requires

additional desk space within the Pentagon Since the office space

is provided to the Army by DOD without charge, one analyst has suggested that all COAs within the Pentagon are cost-free, and

therefore only benefits need to be considered Determine if this reasoning is correct, and determine the appropriate scope for the analysis.

Scope Exercise

Pentagon are cost-free, and therefore only benefits need to be considered

Determine if this reasoning is correct, and determine the appropriate scope for the analysis

Solution: Scoping the cost to the Army, the cost of office space is not captured.

The appropriate scope which captures the full cost is from the perspective of DOD Note: These answers assume that the additional staff must be in the Pentagon If putting the 10 people in another building is a viable alternative, then the

solution shown here would probably change.

Scope Exercise

converting 5 of the current DACs to 5 contractors (working the

same number of hours) The annual cost to employ each DAC is

$100K, and due to training expenses, the cost to employ each

contractor is $110K In the CBA, the cost of COA1 (all DACs) is

listed as $100M, and the cost of COA2 (995 DACs, 5 Contractors)

is listed as $100.05M What is wrong with the scope of this CBA?

Scope Exercise

converting 5 of the current DACs to 5 contractors (working the

same number of hours) The annual cost to employ each DAC is

$100K, and due to training expenses, the cost to employ each

contractor is $110K In the CBA, the cost of COA1 (all DACs) is

listed as $100M, and the cost of COA2 (995 DACs, 5 Contractors)

is listed as $100.05M What is wrong with the scope of this CBA?

Solution: The scope should be confined to the five positions that are being considered for conversion The comparison should be

between five DACs and five Contractors.

Scope Exercise

• A verifiable statement that describes an objective

condition or event, something that has happened

or is happening The most relevant facts are those

that constrain the CBA

• Constraints are the “limits placed on resources to

be devoted to the project All managers are faced

with certain constraints within which they

operate Constraining organizational policies or

procedures, funding considerations, physical

limitations, and time-related considerations need

to be addressed in the CBA These

policies/considerations could stem from technical,

environmental, ethical, or political constraints.”

(CBA guide, “Step 2”, https://cpp.army.mil)

• A condition or situation over which we have no control but is essential to

the success of our proposed solution

• Assumptions impose risk on the solution The risks and risk mitigation

measures must be specified in the CBA

• Sensitivity analyses are performed by purposefully strengthening or

weakening individual assumptions, and noting the effect on the COA

recommended The best COAs are those that remain the optimal course of

action over a wide range of assumptions

Definition: Assumptions

• Assumptions made for one COA should be made to the same

degree in all other COAs as relevant For instance:

– It is not reasonable to assume in one COA that 20 people will required to perform a task if in another COA it is assumed that only 15 people are required to perform the same task

– It is not reasonable to assume in one COA that a particular resource will

be available in 10 years, if in another COA it is assumed that it will be available only for the next year

Assumptions

• “Army War College S&P Department Expansion CBA”

– Fact: Course demands through the Strategy and Policy Department at the War College have increased by 65% over the past three years

– Fact: 60% of the S&P Department faculty will be 70 or older in the next

five years

– Assumption: Workload for department faculty will increase

– Assumption: More than one third of the S&P faculty will retire within the next five years

– Assumption: After an initial training period, each new hire will be able to perform as much work as the recently retired faculty member

– Fact/Constraint: the War College Dean has allocated no more than

$1.2M/year to pay the salaries of new faculty members

Facts and Assumptions Examples

• “U.S Army Central Command Afghanistan Police Force Training”

– Fact: President Obama has announced that all U.S troops will withdraw from Afghanistan by the end of 2014

– Assumption: Troop withdrawal will proceed as scheduled

– Fact: American troops provide for 80% of current domestic

counterterrorism force training in Afghanistan

– Assumption: demand for counterterrorism training will not decrease after U.S withdrawal

– Assumption: without coordinated assistance, security training resources will be understaffed after U.S withdrawal

Facts and Assumptions Examples

Note: Notional

– Fact: under the current agreement, a lease may be extended or concluded

at the end of every two years, at the discretion of the Iraqi Army At the conclusion of the lease, the helicopters will be returned to the U.S Army The RAF will be accountable for any damages beyond normal wear

– Fact: The fleet has been used extensively in Operation Desert Storm (Iraq, 1991) They will also be used by the Iraqi Army in a similar climate

– Fact: Recent sales of used helicopters have been at “as-is” condition

Facts and Assumptions Exercise

– Under a lease, the Iraqi Army will have less of an incentive to properly

maintain the fleet against “normal wear,” and the actual life cycle of the fleet may be reduced as a result

– Since conditions of use are similar, future wear can be approximated by

historical wear

– By selling the fleet, the U.S Army will not be responsible for further costs

of maintaining the fleet (i.e the buyer assumes the risk)

• Other facts to be determined that would aid the analysis:

– Estimate of remaining lifetime of the fleet

– “Lease” and “Buy” prices at which Iraqi Army is willing to settle

– Remaining utility of fleet to U.S Army

Facts and Assumptions Exercise

• In a rented garage at 58 Bagley Street in Detroit, Henry Ford

completed his first gas-powered car on the morning of June 4,

1896 He had spent $250 FY1896 dollars on equipment to build the car, and $100 on labor The garage cost $15 per month to

rent After the car was assembled, it was clear that it would not

be able to fit through the door of the rented garage The car was

to be used as a model for the two-year long test-driving phase of his R&D process, with the final goal of arriving at a model for

mass production and sale Define the scope and identify facts

and assumptions.

Review Exercise: Henry Ford

• Following the President’s announcement of the scheduled deployment of

three BCTs to Australia, it has been determined that a secure communications link must be established between the White House, Pentagon, State

Department, and the new Australian base SECDEF and CJCS have tasked Army WEBCOM with the extra responsibility of managing the new communications link Currently, 35 Army civilian GS-11 employees in WEBCOM are assigned to U.S Army Pacific It is anticipated that 42,800 total work hours per year will be required to maintain the new communications link Each of the 35 Army

civilians currently works full time For Army civilians, if less than 200 hours of overtime is worked per year, the pay rate for overtime is $60 per hour If

between 200 and 400 hours of overtime is worked per year, the pay rate is

$80 per hour of overtime If more than 400 hours of overtime is worked in

one year, the pay rate is $120 per hour of overtime Contractors may be hired

No vendor quotes are currently available, but from the GSA catalog it has

been determined that hourly rates can be estimated to be $88/hr for this

type of contractor labor Currently, WEBCOM has been placed under a hiring freeze for Army civilians only Perform all 8 CBA steps to support a decision

Mini-case Exercise #1

or “who, oh who should overtime bill?”

• In preparation for BRAC, the Army plans to build 20 office

buildings (20 acres per office building) for use at Fort Beatrix

Army planners have identified 400 acres of uneven land near Fort Beatrix that it owns, and it has been valued at $45K per acre The cost to the army of constructing the first building is $2.25M, and the cost of constructing each additional building increases by

$.25M for each building built due to increasing marginal cost of developing the uneven land (i.e., the second costs $2.5M, the

third costs $2.75M, and so on) Alternatively, a contracting

company is willing to construct any number of office buildings at

a flat rate of $3M each Perform all 8 CBA steps to support a

decision.

Mini-case Exercise #2

or “how much for one building?”

• Due to the impending drawdown and changing mission

requirements, the General Officer overseeing three forward

operating bases in Iraq—FOB Ironman, FOB Danger, and FOB

Python—has been tasked to come up with 200 soldiers as

transportation and logistics specialists within the next six

months However, the GO has been given no new growth

mandates The 200 must be relocated to Baghdad, which is a

distance of 100 mi., 200 mi., and 150 mi from Ironman, Danger, and Python, respectively Each FOB has provided a list of

nonessential personnel available for transfer to Baghdad, along with salary data Perform all 8 CBA steps to support a decision.

Mini-case Exercise #3

or “what’s the cheapest route to Baghdad?”