10. Cost Estimating

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10.1 NOMENCLATURE

Block A structural interim product made from assem-blies, sub-assemblies and parts, which can be joined withother blocks to form a grand block or can be erected in-dividually.

CER A Cost Estimate Relationship is a formula relatingthe cost of an item to the item’s physical or functionalcharacteristics or relating the item’s cost to t \he cost of

another item or group of items. Examples:a. for steel block assembly, 25 man-hours/ton;b. for pipe material, $25/meter; andc. for shipyard support service, 10% production hours.

Cost Driver A controllable system design characteristicor manufacturing process that has a predominant effecton the system’s cost.

Cost Risk Cost Risk is the degree of cost uncertaintywithin an area of a project. It can be measured simplyby relating the cost estimate against potential minimumand maximum cost values or by probabilistic distribu-tions. Cost Risk can be impacted by schedule risk, tech-nical risk, performance risk and economic risk.

Direct Cost Any costs which are identified specificallywith a particular final cost objective. Direct costs are notlimited to items that are incorporated in an end product.For example, support services that can be specifically al-located toward a given project may be direct costs.

Estimate Cost figure developed to anticipate the cost forexecuting proposed work. The estimate normally be-comes the production budget less any management re-serves withheld from the estimate.

G&A General administrative costs that can be isolatedfrom general overhead. G&A (determined more typi-cally for government contracts) identifies administrativecosts supporting the given work facility, such as legaland accounting, cost of money, marketing, etc.

Interim Product A level of the product structure that is theoutput of a work stage and is complete in and of itself.

Indirect Cost Costs which are incurred for common or joint objectives and which are not readily subject to treat-

ment as direct costs. Indirect costs include overhead,G&A, and any material burden.

On-Unit Outfitting A method of installing outfit systemcomponents and equipment items into a “packaged ma-chinery unit” prior to its installation on-block or on-board.

On-Block Outfitting Installation of systems, fittings andequipment into structural blocks have been has been as-sembled. This work is often called pre-outfit . Pre-outfitoften is performed in two distinct phases: Pre-outfit hotrefers to work that must be performed on the unit beforethe unit can be painted (steel outfit items,seats, pipe, etc.);pre-outfit cold refers to work that can be performed afterthe structural unit has been painted (value fitting, HVAC,electrical cabling, equipment, etc.).

On-Board Outfitting Installation of systems,fittings andequipment after the hull structure has been erected. Thescheduling of on-board outfit activities normally shouldfollow a work plan organized for Zone Sequence Sched-uling.

Overhead An indirect cost that is normally related to di-rect labor costs. Overhead includes such general costs

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Chapter

10Cost Estimating

Laurent C. Deschamps and John Trumbule



as employee fringe benefits, plant maintenance and util-ities, rents and leases, equipment depreciation, etc.

PWBS Product-oriented Work Breakdown Structure: Acombination of a number of breakdown structures that

form a hierarchical representation of the products, stageand work type associated with the shipbuilding process.

Stage The division of the shipbuilding process by se-quence.

SWBS Ship Work Breakdown Structure. There are manyvarieties of SWBS, the U.S. Navy’s SWBS or more re-cently ESWBS (Extended Ship Work Breakdown Struc-ture) being the most familiar. This is a system-based WBS

Unit The placement of equipment and its related systemstogether on a common foundation (seat) such as a pack-aged machinery unit.

Work Center A company department or stage of con-

struction that is assigned specific responsibility and re-sources needed to perform work. Work centers may alsobe assigned to subcontractors.

Zone Physical areas of the ship: bow, stern, mid-body andsuperstructure. Zones can also identify structural blocksduring hull construction: Bow blocks, mid-body bottomblocks, mid-body deck blocks, etc.

10.2 INTRODUCTION

Shipyards, whether doing ship repair or new construction,typically have to deal with a highly variable product or serv-ice to perform. This high degree of variation means thatbidding on contracts can be extremely difficult, especiallyin a very competitive market. With minimal profit marginsand precious little time available to make bids, the pricingof new work can be hazardous unless there is a quick andaccurate means for developing reasonable and reliable costestimates.

10.2.1 Estimating Requirements Unique for Shipyards

The civil construction industry typically bids on work afterdesign has been completed and therefore can perform its es-timating on the basis of a bill of material takeoff from draw-ings. Shipyard work, on the other hand, is not nearly soformalized and detailed in terms of work specifications. Shiprepair contracts usually identify individual work items to beperformed, but rarely with well-developed drawings avail-able. Even new construction contracts begin without detailedproduction drawings. Such contracts usually include thework to develop such detailed technical information.

What usually allows a shipyard to develop rational costestimates is its ability to catalog historical costs by some con-

sistent work breakdown structure, or WBS. The WBS tradi-

tionally has been a list of common ship systems (hull struc-ture and outfit, equipment, piping, electrical, paint and fur-nishings), augmented by ancillary shipyard services neededto support production. A well-known WBS is the U.S. Navy’s

Ship Work Breakdown Structure, or SWBS. Another is theMaritime Administration’s Classification of Merchant Ship

Weights. Other WBS schemes have been developed over theyears by different shipyards some more detailed than othershave. Regardless of the specific WBS, each provides a for-mat by which a shipyard can collect and organize costs thatcan be used to estimate pricing for new work.

10.2.2 Traditional Bid Estimating

Bid estimates have usually evolved at three levels of detail.The highest level is to provide only a very rough-order-of-

magnitude (ROM) cost estimate before any details of the shipdesign and manufacturing processes are fully considered.Such high-level estimates have been made on the basis of shipweight, size and other general performance parameters.

The next level is when a Preliminary Design has beenprepared and system weights have been estimated, and oftenused to determine whether a project should be funded.

A more detailed estimate typically follows the comple-tion of the Contract Design with a pricing process that op-erates within the WBS format. Traditional bid estimatingusually involves several different approaches to develop thepricing information:

Hull structure is often priced on the basis of hull weightand type material (steel, aluminum, etc.). Some estimatingprocedures break down the hull structure into definableblocks or parts, such as double bottoms, decks, fore peak,aft section, etc. Each of these blocks has associated differ-ent degrees of production difficulty (for example, man-hoursper ton) to build and therefore, different associated costs toproduce. The more advanced estimating practices breakdown these basic hull block costs by stage of construction:preparation, fabrication, assembly and erection.

Major equipment items, such as propulsion diesel en-

gines, are usually priced by obtaining vendor quotations,then applying estimates for labor to install and test. Forlong-term contracts,price adjustments for inflation and othereconomic effects are added.

Other outfit systems are estimated either from detail ma-terial take-off, which are rarely available for new designs,or by estimating labor or material costs on an average costper parametric unit of issue basis. Historical costs collectedby WBS can be compiled with appropriate material size pa-rameters to provide such pricing factors if such historical datais readily available and compiled for use by the estimator.

Shipyard support services, including engineering, proj-

ect management and other production support efforts (ma-

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terial handling, temporary services, etc.), are usually esti-mated as percentages of overall production man-hour costs,taking into consideration the impact of the expected dura-tion of the contract, degree of technical difficulty, and other

factors that might influence the cost for these efforts.To complete the basis for a bid pricing proposal, over-

head is estimated based upon the shipyard’s production back log, which will dictate the distribution of indirect costs tothe new contract. Profit depends upon anticipated aggres-siveness of competing proposals for the contract and/or re-quirements of contract negotiations.

10.3 TYPES OF COST ESTIMATES

Cost estimating occurs at various phases of ship design de-

velopment. The approach used to develop the cost estimatewill largely depend upon the level of detail available for thecost estimating process.

10.3.1 Concept Design (ship type oriented)

The cost estimating possible during concept design is at avery high level and makes rather broad assumptions aboutthe ship design, its general mission, and its physical and op-erational characteristics. Concept design may also makebroad assumptions about the general methods and organi-zation of the design,engineering and construction processes.This level is used to decide the economic feasibility of theproject.

10.3.2 Preliminary Design (ship systems oriented)

The cost estimating during preliminary design remains at arelatively high level, but there is more detail informationabout the ship design with regard to the hull structure, theequipment and outfit systems. During preliminary design,cost estimating can be successfully integrated with the de-sign-engineering process to produce high-level tradeoff stud-

ies useful for developing an appropriate direction for theship design. These studies set the basic design parametersfor meeting mission requirements within general cost andschedule constraints. Preliminary design cost estimating maybegin to reflect the effects of alternate build strategies. Thislevel is often used to evaluate and sanction projects.

10.3.3 Contract Design (interim product andmanufacturing process oriented)

Cost estimating at this phase of design describes costs onthe basis of production interim products (hull blocks, out-

fit modules, and ship zones) and manufacturing processes

(preparation, fabrication, assembly, installation, testing,etc.). Cost estimating can be integrated with detail engi-neering trade off studies, that include not only alternativesin design, but alternatives in production engineering and

manufacturing processes. The cost estimating at this stagecan be used as a successful strategy for managing the de-tail design process and will help ensure that the final designstays within prescribed cost objectives. The costing infor-mation provides the fundamental basis for the Contract Priceand for establishing production budgets. This level is usedby shipyards bidding on a design rather than for designtrade-off analysis.

10.4 DESIGN AND COSTING STRATEGIES

There is a number of different design and costing strategiesthat can impact a cost estimate.

10.4.1 Cost as an Independent Variable (CAIV)

CAIV is a Department of Defense developed strategy foracquiring and supporting defense systems that entails set-ting aggressive, realistic cost objectives (and thresholds)for both new acquisitions and fielded systems and manag-ing to those objectives. The costs objectives must balancemission needs with projected out year resources, taking intoaccount anticipated process improvements in both DoD anddefense industries. This concept means that once the sys-tem performance and objective are decided (on the basis ofcost-performance trade-offs), the acquisition process willmake cost more of a constraint, and less of a variable whileobtaining the needed military performance (1,2).

CAIV has brought attention to the government’s re-sponsibilities for setting and adjusting life cycle cost objectives and for evaluating requirements in terms of overallcost consequences. This is a shift from the traditional De-sign-to-Cost analytical approach.

CAIV and Design-to-Cost have the same ultimate goal

of a proper balance among RDT&E, production and oper-ating and support costs while meeting mission needs ac-cording to an established scheduled and within an affordablecost. However, CAIV approach has refocused Design-to-Cost to consider cost objectives for the total life cycle ofthe program and to view cost as an independent variable withan understanding it may be necessary to trade off perform-ance to stay within cost objectives and constraints.

10.4.2 Design-To-Cost

Design-To-Cost is a management concept wherein rigorous

cost objectives (ceilings) are established (3). The control of

Chapter 10: Cost Estimating 10-3



costs to meet these objectives is achieved by practical trade-offs involving mission capability, performance and other pro-gram objectives. Cost is the overriding criteria throughout thedesign development and production stages of the program.

When imposed on a program with a total cost constraint,a process of cost estimating is carried out throughout the de-tail design development. Cost, as a key design parameter, isaddressed on a continuing basis and is an inherent part of the design development. In the final analysis, each system,subsystem and component must be considered with respectto its cost and its effect on the cost of the program. Oftentimes, the principles of lean design are applied to these sys-tems and components as a means to reduce their cost byvirtue of simplifying the design, reducing the number of parts and making them easier and less expensive to build.

10.4.3 Negotiated Production Rates

Negotiated Production Rates is a development of time andmaterials type of contracting where the full scope of work is undefined. These contracts negotiate not only traditionallabor rates, but also the production rates applicable to thecontract being pursued. These production rates are baseddirectly upon the shipyard’s CERs measured to perform avariety of different work types and manufacturing processes.Such cost and pricing methods are used for establishingcost management of change orders and other work that can-not be identified in detail and where fixed price contractingmay carry too high a risk for either the shipyard or theshipowner, or both.

10.4.4 Life Cycle Costs

Life Cycle Costs (LCC) include design and acquisition (pro-duction) costs as well as operations and supports coststhroughout the life of the product. Life cycle costs haveoften been a major consideration for commercial shipown-ers who must look at the bottom line for profit and a returnon their investment. If the cost of design and construction,

including the cost of money, cannot be recouped within areasonable amount of time, the ship will not be built. If theoperating and maintenance costs (plus amortized construc-tion costs) exceed operating revenues, again the ship willnot be built.

When viewing the life cycle cost breakdown, only about25% of the costs may be directly related to acquisition (4).That means 75% of the total cost is operation and support andis made up of personnel, maintenance, and modernization.For naval ships, the largest of these (37%) is personnel cost,followed by maintenance (21%) and modernization (13%).

Therefore, in order to obtain a more complete picture of

the overall cost of a ship, its life cycle costs may need to beestimated and evaluated. The life cycle of a ship or a pieceof equipment is divided into essentially four stages:

Conception stage: All activities necessary to develop

and define a means for meeting a stated requirement. Forships and equipment, this normally includes research anddevelopment, design, contract specifications, identificationof all support necessary for introduction into service, andidentification of funding required and managerial structurefor the acquisition.

Acquisitions stage: All activities necessary to acquirethe ship and provide support for the ship and equipmentidentified in the conception stage.

In-Service stage:All activities necessary for operation,maintenance,support and modification of the ship or equip-ment throughout its operational life. The in-service stage is

normally the longest stage. Disposal stage:All activities necessary to remove the ship

or equipment and its supporting materials from service.In order to determine the overall life cycle cost for a

ship, costs must be estimated for each of the above stages.

10.4.5 Total Ownership Costs

An extension to LCC is the Navy’s Total Ownership Costs

(TOC). TOC covers the same cost elements of life cyclecosts, but also includes the added costs for the infrastruc-

tures required to support training facilities and other activ-ities normally treated as indirect costs to the ship and itsoperations.

10.4.6 Return on Investment (ROI)

ROI measures the estimated costs against estimated rev-enues. The balance or profit margin for the shipowner canmake or break a design proposal. It also can form the basisfor a design optimization strategy and tradeoff effort thatseeks to maximize the shipowner’s return on investment.

Another form of ROI measurement strategy is to deter-mine required freight rates (RFR) for the ship design pro-posed for service. Minimizing the RFR also can form thebasis for design optimization studies.

Naval ships do not have a bottom line commercial profitconsideration. These ships are put into service only to sat-isfy a national security commitment to its citizens. How-ever,as limited government funds address an ever-wideningarray of government responsibilities, naval ships designsnow must be developed with an increasing focus on getting

the biggest bang for the buck . Design and engineering trade-off studies can minimize costs without sacrificing mission




capabilities. The objective for these studies is an increasein mission capabilities without an increase in cost.

10.5 ORGANIZING THE COST ESTIMATE

Normally, the bid estimate must be organized accordingto a Work Breakdown Structure (WBS) defined within therequest for proposal from the shipowner. For Navy bids,estimates typically must be provided according to theNavy’s Ship Work Breakdown Structure (SWBS), a break-down of work and material by ship system categories.Commercial shipowners provide more latitude, but usu-ally they too want to review the estimate to some practi-cal summary levels of detail that identifies the basic ship

components and systems, especially if there are variousdesign options to be considered.

But the estimate also needs to reflect the impact that theproposed shipyard’s build strategy has upon the pricing in-formation. The concept of modular construction points theway for a need for modular cost estimating. The Product-

oriented Work Breakdown Structure (PWBS) (5) is anotherview of the work by ship systems (SWBS), but it also al-lows costs to be packaged in terms of the modular con-struction environment. An estimating approach that isorganized around both a systems-based WBS and the mod-ular construction concept allows different build strategies

to be explored and the consequences these issues have uponthe bid proposal pricing.

10.5.1 Formats of Cost Estimate

The cost estimate must identify all direct costs (labor, ma-terial and subcontracted services) within the proposed scopeof work. Direct costs should include technical, productionand all supporting shipyard services that are not consideredindirect by the shipyard (supervision, temporary ship serv-ices, quality control, planning, project management, etc.).

Where applicable, miscellaneous expenses such as freightand transportation, insurance fees and taxes and duties at-tributable to direct costs also need to be considered. Sepa-rated from direct costs, indirect costs for overhead, materialmark-ups, and general administrative efforts are necessaryto complete the cost estimate.

The estimate needs to be developed within a framework that summarizes the costs within prescribed categories thatcan be monitored as the estimate evolves. The shipyard typ-ically has its own work breakdown structure that is the basisfor the company’s operating systems that collect and man-age return costs. These return costs provide the historical

basis for many of the cost estimating relationships (CERs)used by the cost estimator.

The WBS is a means for summarizing the scope of workand should provide the format for identifying and cataloging

the details of the cost estimate:

• manufacturing and assembly operations that can be eas-ily identified by task (discrete work production work or-ders),

• production support activities (level of effort work suchas shipyard services),

• technical services (design and engineering),• subcontracted services, and• material and equipment.

For new construction, the WBS defines the ship and itssystems as designed for the owner:

• hull structure,• propulsion plant,• major equipment items,• distributed Systems (Electrical, Piping, HVAC), and• cleaning and paint.

The additional efforts, including design and engineer-ing services and shipyard support efforts, must also be iden-tified and incorporated into the work breakdown structurefor the estimate:

• shipyard services, and• technical services.

It is also sometimes required, especially for govern-ment projects, that the cost estimate be provided to theprospective customer (the shipowner) according to a workbreakdown structure of the owner’s choice. Therefore, anestimating approach that supports multiple work breakdownstructures can save a lot of time from the estimator’s pointof view.

The following describe the more prevalent WBS con-figurations in use today:

10.5.2 Ship Work Breakdown Structure (SWBS)

The U.S. Navy’s SWBS is the most familiar of the systems-based work breakdown structures. However,when systems-based structures were the standard for managing shipconstruction, every shipyard devised their own variation tosuit their own needs and preferences. Today, ship designstill largely follows a SWBS format, particularly for weightcontrol and for systems design. The transition to productand process-based formats is not typically made until de-tail design is underway.




10.5.3 Product-oriented Work Breakdown Structure(PWBS)

Once any complex product such as a ship has been designed,planning and engineering efforts need to be applied toward

maximizing production efficiencies. This effort entails or-ganizing work and resources that promote productivity andminimize non-value added costs. The concept of group tech-nology, for example, supports this objective and enables en-gineered ship systems to be broken down into definableinterim products. These products can exploit significant costand schedule savings because they enable the work to beperformed under more convenient and more easily per-formed work conditions.

Figure 10.1 illustrates a PWBS that identifies the basicareas of the ship (zones) and a progression of structuralblocks assemblies, and outfit units that ultimately constitutethe total ship product. It also shows where the PWBS ele-ments change from a process focus to a product focus. TheU.S. Navy’s PODAC program has developed a genericPWBS, and a user-training program on its formulation isavailable over the Internet (6).

10.5.4 Shipyard Chart of Accounts (COA)

Each shipyard has its own internal work breakdown struc-ture used to plan and manage its costs. The COA tradition-ally had been systems-oriented, although every yard had its

own flavor and preference for identifying and categorizingship systems. Over the years, shipyards have been replac-ing their systems-based work breakdown structures withformats that are more product and process-oriented.

The importance of the COA to the cost engineer is thatthe COA is the basis with which the shipyard collects costsand with which the shipyard measures the cost perform-ance of its work.

10.6 COST ESTIMATING RELATIONSHIPS

Cost Estimating Relationships (CERs) provide the basicmeans for estimating costs. CERs come in many different

flavors and varieties. They allow cost estimates to be de-veloped for various material products, parts and compo-nents and labor processes including support services.

CERs come in many different levels of detail (Figure10.2). Costs can be estimated at very high levels during con-cept stages of design or they can be estimated at very lowlevels from detail bills of material. In between these levelsthere are CERs that provide perhaps more accuracy possi-ble from available design information but without the pre-cision of what might be obtained after detail design andengineering has been completed.

A Cost Estimate Relationship (CER) is a formula relat-

ing the cost of an item to the item’s physical or functionalcharacteristics or relating the item’s cost to the cost of an-other item or group of items. Examples:

• labor for steel block assembly at 25 man-hours/tonne,• material cost for pipe at $25/meter; and• labor for shipyard support service at 10% production

hours.

CERs are typically developed directly from a measure-ment of a single physical attribute (quantity and unit of measure) for a given shipbuilding activity, and the cost ofperforming the activity. If the shipyard uses the same at-

tribute for the same activities for each ship it builds, it cancompile a database of cost-per-unit of measure for each of


Figure 10.1 Product/Process Configuration & Cost Management Figure 10.2 Possible Levels of Cost estimating Relationships

Cargo Hold

Block Erection

Outfit Fittings

Outfit Pipe

Block Paint

Block Assembly

Steel Fab

Steel Prep

Mhrs/M3

Mhrs/Tonne

Mhrs/EA

Mhrs/LM

Mhrs/SQM

Mhrs/M Weld

Mhrs/Tonne

Mhrs/Tonne P r o d u c t s a n d P

r o c e s

s S e q u e n c e



its different activities. Some CERs may be developed for anumber of physical attributes. CERs may be developed todetermine a variety of costs and cost-related parameters,including labor hours, material costs, overhead, weight,

numbers of items, etc.While most CERs are simple linear relationships. For ex-

ample, 10 man-hours per pipe straight spool, others can bemore complex formulations. High-level CERs, for exam-ple, more often exhibit non-linear relationships to accom-modate the costs across a wide range of applications andvariety of detail requirements, for example, Steel Cost =0.00255∆0.99.

Generally, five types of CERs are used and are definedseparately, which will be described in the following sub-sections.

10.6.1 Manual CERS

Manual CERs are determined from external informationsuch as vendor or subcontractor quotations.

10.6.2 Calculated CERS

Calculated CERs are determined from a single ship set of return cost data based on an actual cost expenditure and itsassociated measurable parameter, for example, labor hoursper square feet of painted area.

10.6.3 Predictive CERs

Predictive CERs are developed from return costs from mul-tiple ship sets or from costs collected from a given manu-facturing process where costs exhibit a pattern of changeover time. The predictive CER is the trend value of unit costexpected to apply for the given contract application.

10.6.4 Empirical CERs

Empirical CERs are developed by collecting a number of

physical attributes (parameters) for a shipbuilding activity,such as ship type and size, part weight, part area,part perime-ter, joint weld length, number of processes applied, num-ber of parts involved, etc., as well as the cost of performingthe activity. If this data is collected for a number of ships,in the same shipyard, a statistical analysis may determinethe statistical significance of the parameters and the equa-tions with coefficients and exponent values for the activityCER. The equation coefficients and exponent values areshipyard-dependent and will reflect its level of productiv-ity for the activity. If facility parameters are included, theimpact of facilities on productivity will also be evident.

10.6.5 Standard Interim Products CERs

An interim product is any output of a production work stagethat can be considered complete in and of iteself. It also canbe presented as an element within any level of a product

work breakdown structure (PWBS).As shipyards adopt standard interim products as the pri-

mary basis for building ships, the interim products them-selves can form the means for developing high-quality costestimates.

The interim product cost estimate package consists of aset of cost items and/or cost item CERs each describinglabor and/or material costs. The labor costs may be brokendown into the product’s sequence of manufacturing and as-sembly stages. They may also include indirect cost effortssuch as supervision and material handling,as well as relateddirect costs such as testing.

The interim products can be defined at any level of thePWBS. The higher the level, the more ship type-specific theyare likely to be. These interim products become, in effect,high level complex CERs because they may include anynumber of cost items and these cost items may be para-metric to any number of different defining characteristics.

The use of the standard interim product as a vehicle forcost estimating is sometimes referred to as a Re-use pack-age that can operate with a variety of applications. The im-portant aspect of the package used repeatedly as needed indeveloping a project cost estimate.

At issue for the estimator is what kind of CER is ap-propriate at any given stage of the design process. DetailCERs are of little value when few details are known. Sim-ilarly, high-level CERs are not acceptable when their as-sumptions no longer fit the problem at hand. Furthermore,the CER must identify the cost driver for the scope of workbeing estimated. The cost driver is a controllable ship de-sign characteristic or manufacturing process that has a pre-dominate effect on cost.

Finally, the real problem becomes this: where does oneobtain the data necessary to develop realistic and appropri-ate CERs that can be meaningfully applied at any given

time during the design evolution process?

10.7 USE OF HISTORICAL COSTS

A cost estimate is only as good as the information support-ing the estimate. For shipyards, historical cost information isinvaluable for developing cost estimates for new work. How-ever, historical information needs to be both accurate andcollected in ways meaningful to the estimating process. Forexample, if historical costs cannot be collected in ways thatidentify modular block costs, estimating by modular blocks




can be difficult and will probably have a relatively high de-gree of risk in the accuracy and validity of the estimate.

It is very important that the shipyard have in place a costplanning and data collection system that is capable of or-

ganizing costs in ways that can directly benefit the esti-mating process.

10.7.1 Cost Collection Methods

Shipyards collect costs in the following manner: labor costs(labor hours) are collected from time charges to productionwork orders. Material costs are collected from purchase or-ders and from stock transactions when applicable. Shipyardwork orders generally are organized around work type andstage of construction, while material often is cataloged (req-uisitioned) by ship system. The correlation of material to

work orders can be obtained from issues of material to work orders or the requisitioning of bills of material to the PWBS.

From a cost collection perspective needed for cost esti-mating, the work orders should identify scope or the phys-ical. That is, material throughput quantity for which thework is being done. For example, a work order may pre-scribe a budget of x-hours to assemble y material items,generally of size z.

The labor hours and material costs then can be summa-rized up through the PWBS. The units of measure at anygiven level of the PWBS will be the most meaningful unitof measure. That is, the cost driver for that level. For ex-ample, the unit of measure for steel fabrication might bebased upon the number of parts, while ultimately the unitof measure for block erection would be best described bya weight or joint weld length unit of measure.

Even though high-level CERs by ship systems are neededfor concept and preliminary design estimating, modern shipproduction methods no longer allow costs to be collecteddirectly by ship systems. The production management soft-ware systems implemented at many shipyards can developCERs only by measuring actual costs against known work order throughput parameters (meter of weld, square meter

of plate, number of pipe spools, etc.). Many of these ship-yard systems have little means to transform these product-and process-oriented CERs into the desired high level, shipsystems and mission oriented CERs.

10.7.2 Transforming PWBS Costs to SWBS Costs

Complex products, such as ships, are normally designedsystem by engineered system. However,manufacturing doesnot maximize its cost efficiency and schedule performanceif the work is planned and executed system by system.

Group technology and zone sequence scheduling are ex-

amples of executing work by interim product (units, blocksand modules) and by stage (fabrication, assembly and erec-tion). These examples of work objectives transform SWBSinto a parallel PWBS. This transformation occurs when the

systems-oriented ship design information is processed fornecessary work instructions by production engineering.

In order to provide production cost data that is SWBS-oriented, some reverse transformation is required. Some ship-yard production management systems have the capability totransform product- and process-oriented work orders so thatship systems costs can be collected. Methods have been de-vised for allocating or distributing costs that are effective, al-though somewhat approximate. One approach is to allocatecosts based upon a planned breakdown of budget by ship sys-tems involved in the work order. Then, when time chargesare entered, they are distributed automatically on a pro rated

budget basis back to the applicable ship systems. Typically,such work orders are restricted to a single type work process,such as fabricating pipe spools across ship systems. There-fore, the allocation can be a fair and reasonable representa-tion of the actual work performed on each system.

Another approach is for the estimator to analyze andcompile detailed production data and correlate these coststo some functional characteristic of the ship. For example,the electrical costs can be summarized and related to ship-wide electrical load, such as kW. Such a CER may be di-rectly useful for estimating at concept and preliminary stagesof design.

A third approach is to develop systems-based CERs fromshipyard work standards applied to the ship system’s bill ofmaterial.

10.8 IMPACT OF BUILD STRATEGY

Cost estimates should directly reflect the shipyard’s rela-tive level of productivity. The shipyard that desires to main-tain its competitive advantage by reducing costs and contractschedules must find areas where savings can be achieved.

Savings can be significant and can come from a variety ofsources.The methods used to organize and execute work within

the shipyard can affect work performance and this impactscosts to a very significant degree. One rule of thumb saysthat for every hour required to assemble material in the shop,it takes 3 hours to do it on-block and 5 hours to do it on-board. While this is an overly simplistic assessment, it doesindicate that there are more optimum times during con-struction when work can be undertaken more productively.Another impact is the use of alternative manufacturingprocesses, including the use of out-sourced services.




10.8.1 Modular Construction Methods

In the past, shipyards used to build ships ship system by shipsystem. The collecting of costs by ship system was a rela-tively straightforward procedure. However, better methods

for more productive organization of work have come intoplay. The packaging of work now focuses not on the spe-cific ship systems,but upon the nature of the work to be per-formed. The objective is to do the work when the workingconditions are most productive and to eliminate or minimizeany efforts that do not add value to the activity. This meansthat work done in shops are typically more productive thanif the work were scheduled for on board. To complementthis concept, modular construction techniques, includingon block construction (Figure 10.3) and advanced outfittinghave become the preferred methods for maximizing pro-duction efficiencies. These methods, however, do requiremore advanced product engineering in order to gain the fullpotential of efficiencies and cost savings. What was once aship systems-oriented way of organizing work and collect-ing costs has now given way to organizing work and col-lecting costs by interim products (sub-assemblies, assem-blies, hull blocks, ship zones) and manufacturing processes(cutting, welding, assembling,etc.). As described earlier, theinterim products can be standardized and identified withina PWBS.

10.8.2 Group Technology Manufacturing

Significant cost savings are possible with the application of group technology to product development and productionprocesses. Group Technology is a method for grouping likeor similar work together in order to gain the benefits pos-sible from batch manufacturing, including elimination of

multiple set-up process steps, etc. Group Technology canbe applied to many different kinds of work. The more clas-sical example is the fabrication of a large group of same-size pipe spools. However, the conceptevokes similar time

and cost savings with zone sequencing of trade work (sched-uling a given trade to work uninterrupted and unencum-bered in specified ship spaces or zones or on a specificstructural block’s advanced outfitting). Structural panelsand sub-assemblies also can be scheduled in ways to max-imize the productivity objectives of Group Technology.

However, from a material management logistical andhandling cost point of view, the group technology approachshould not be an absolute objective and not necessarily em-ployed across the entire ship’s structure in one single man-ufacturing run (assuming drawings and material are allavailable at this time). World-class shipyards often manu-

facture parts and sub-assemblies in separate batches corre-sponding generally to hull block requirements and theirproduction assembly schedules. This limited application ofgroup technology also can be seen with deliveries of out-sourced manufactured parts, since the shipyards require de-livery of these items in batches corresponding to theschedules of the hull block construction program.

10.8.3 Performance Measurement Systems

In order to identify what changes will provide the most sig-nificant levels of benefit, a shipyard must be able to evaluateits operations in quantitative terms. This means that the ship-yard must have implemented a reasonably accurate meansfor measuring cost and schedule performance at appropriatelevels of detail. Performance measurement systems shouldprovide the visibility of performance that will indicate whetheror not changes are warranted and ultimately if the changesare proving to be effective. Return cost information from suchsystems form the information needed to develop high qual-ity predictive CERs that reflect not only past cost perform-ance, but also anticipated performance on new work.

10.9 COST ADJUSTMENTS AND FORECASTS

CERs are based not only upon the type of material beingfabricated or assembled, but also upon a prescribed set ofshipyard performance characteristics. These characteristicsmay include the specific shipyard facilities, tools and equip-ment employed; the productivity and skill levels of the work-ers; the producibility of the design; the approach toorganizing the work,etc. These characteristics for each ship-yard will vary, and the expected costs to perform these ac-tivities will vary accordingly.


Figure 10.3 Advanced Outfitted hull Block Construction



The following sub-sections discusses various methodsby which the estimator can make adjustments to CERs inorder to refine a cost estimate with more accuracy to suitthe given estimating circumstances.

10.9.1 Major Types of Cost Adjustments

The estimator can obtain CERs from any number of differentsources, including CERs developed from actual shipyard re-turn costs as well as generic CERs that may be availableoutside the shipyard. The cataloged CERs immediatelyavailable to the estimator may not always accurately reflectthe expected costs for the application being estimated. There-fore, the estimator can either modify the cataloged CER ordefine with the existing CER an appropriate adjustment fac-tor to apply when computing costs. The latter approach may

be desirable if:

• The estimator wishes to preserve the original CER forcontrol purposes, and/or

• The estimator wishes to perform a trade-off study to testthe impact of a revised CER.

The following is an example of applying an adjustmentfactor to an existing cataloged CER:

CERadjusted = FWCadj × CERcatalog

where FCERadj is the shipyard’s CER adjustment factor andCER

catalog

is the existing cataloged CER.The estimator needs to take into consideration CERs for

the effects of the shipyard’s anticipated cost performancecharacteristics. These adjustments fall into the followingcategories:

• cataloged CER adjustments,• work center productivity adjustments,• stage of construction productivity adjustments,• PWBS complexity adjustments,• economic Escalation adjustments,• learning Experience adjustments,• high volume business material savings, and

• Material Waste adjustments.

Example: An industry generic CER might be 12 laborhours per tonne to assemble flat steel panel sections, such as,deck assemblies. This production rate is based upon a facil-ity using largely manual welding of stiffeners to the plate.The shipyard, however, might have an automated panel linewhere productivity is improved by a margin of 75%. There-fore, the CER adjustment factor for the shipyard would be0.25 (100%–75%). When the factor is applied, the adjustedCER for the shipyard computes to be 3.0 labor hours per ton.

How is the adjustment factor determined? Usually, the

estimator can make a comparison between the catalogedCER and comparable historical data from the shipyard orother sources known to be accurate. If there are catalogedCERs that are for similar work (for example, CERs for dif-

ferent size pipe) and they belong to a relatively consistentseries of cost data, oftentimes the same adjustment factorcan be used for all of them.

10.9.2 Work Center Productivity Factor

The estimator may wish to review the effects of changes inthe way the shipyard might want to execute the work. Thenthe estimator may use another adjustment factor that re-flects certain gains or losses in productivity within speci-fied shipyard work activities, such as, work centers, andevaluate the changes in the project’s total estimated costs.

Doing this through an estimating process can provide valu-able insight into a possible positive a return on investment.

Example: If the cataloged CER identifies 2 man-hoursper ton to paint a hull block, including extensive scaffold-ing costs, the shipyard that employs mobile lift wagons maybe able to reduce the cost by 50%. Therefore, a productiv-ity factor of 0.50 can be used to adjust the cataloged CER.

CERadjusted = FWCadj × CERcatalog

where FWCadj is the shipyard’s productivity factor for the paint-ing operation and CERcatalog is the existing cataloged CER.

It is important to note that when a specific shipyard’s per-formance factor has been defined for a specific work process,it should be applied to all cataloged CERs that are used todevelop cost item estimates for work in that center.

Additional information can be obtained on the relativeincreases in productivity that can be expected by imple-menting changes (modern process equipment) in the ship-yard facilities and operating practices.

10.9.3 Stage of Construction Productivity Factor

Generally speaking, the earlier stages of construction pro-

vide reduced cost opportunities to perform work, especiallyfor material installations.The best working environment exists usually within

workshops. Here, tools and equipment and other support fa-cilities are nearby, material is readily available withoutundue handling costs, and the working conditions are un-affected by weather and location.

In addition, work performed within workshops meansthat work is done only on relatively small components of the ship. Little effort is required to get access to these com-ponents and little time is lost moving men, equipment andmaterial to the work site.




On Board Work is the least productive working area.Here more time is required to access the work, to provideworkers, material, tools, and equipment and support serv-ices. Adverse climatic conditions also may have a negative

impact upon costs.On Block Work typically represents an opportunity to

perform work more conveniently and more productivelythan on board. The hull block is small relative to the entireship’s structure, so accessing it to install various outfit itemsis relatively easy (Figure 10.4). The work sites for outfit-ting hull blocks are usually nearby workshops. Hence, thecost to supply material, workers, tools and equipment ismuch lower than what is needed to support comparablework on board. If hull block construction can be done undercover, added costs from weather-related problems can beessentially eliminated.

On-Unit Work involves the assembly of outfit materialinto various forms of outfit units, pre-plumbed pumps andmachinery, equipment consoles, pipe racks, furniture mod-ules, etc. (Figure 10.5). Outfit units tend to be relativelysmall and can be done in workshops. Therefore, they canbe assembled under the most favorable and productive work-ing conditions. Since outfit units can be installed either onblock or on board, there are cost savings if installed onblock.

Work Orientation also affects costs, whether done onunit, on block or on board. Down-hand welding and as-sembly is much easier and far more productive than over-head work (Figure 10.6). If over-head work requires staging,costs for these operations can increase significantly.

Stage of construction productivity factors may be de-veloped using one of the stages of construction as the base-line for the costs. The stage of construction productivityfactors must be included in the work center productivityfactor described above. The cost differentials due to stageof construction become critically important as shipyards tryto implement changes in the way they do business and im-prove their competitive position in the market place. Thebuild strategy elected by the shipyard will determine how

much of the work can be done at the earlier, more produc-tive stages of construction.

10.9.4 Design Complexity/Density Factor

The stage of construction productivity factor helps deter-mine cost differentials for work done at different stages of the construction cycle (in shop versus on block versus onboard). However, an additional factor needs to be intro-duced for adjusting construction cost estimates for an in-crease or decrease in the relative complexities of the shipdesign or interim shipbuilding products. For example, on


Figure 10.4 On Block Outfit

Figure 10.6 Examples of More Productive Down Hand Work Orientation

Figure 10.5 On Unit Outfit

Over-Head Work

Down-Hand Work



board work may generally require five times more laborhours than equivalent work done in the shop. But, if theship zone is particularly crowded (denser), the work areamay be much more difficult to access. The costs therefore

may require even more labor hours to complete the work.Table 10.I, exhibits typical added cost margins used by

ship repair estimators to account for added difficulties forwhere the work is performed on board ship. Similar prob-lems exist in new construction where the working condi-tions vary from ship zone to ship zone, hull block by hullblock. The complexity factor should be sensitive to the levelof the PWBS hierarchy. For example, the manufacturing of parts for a particular ship zone may not be affected by thecomplexity of the zone, but the installation of those partsin the zone may be very much affected by the complexityor confinement of the space on board.

10.9.5 Economic Inflation Adjustment Factor

The estimator applies the complexity adjustments in thefollowing manner:

CERadjusted = FPWBSadj × CERcatalog

where FPWBSadj is the complexity factor and CERcatalog is theCER cataloged on the system database. Costs are influencednot only by various performance factors within the shipyard,but also by factors outside the shipyard. Costs can be influ-

enced by inflation/deflation and these effects change over time.Various economic forces in the marketplace create pres-

sures upon costs to either increase or decrease them overtime. In a free market economy, increased costs are causedby inflation and usually occur when demand outstrips sup-ply. Decreased costs are caused by the reverse, called de-

flation, and are caused by supply being greater than demand.Similar changes in costs can occur with changes in manu-facturing processes, engineering technologies, etc.

For cost estimating purposes, costs relevant during oneperiod of time can be used as costs relevant to another pe-riod in time. However, these costs need to be adjusted to re-

flect the economic conditions of that other period of time.This process of adjusting costs from one period to anotheris called cost escalating. Although the term escalating nor-mally infers an increasing of cost, a similar process of adjustments applies to costs that decrease over time.

To escalate costs, the following elements of informationare required:

• the original time and cost known to apply at that origi-nal time, and

• the anticipated time and change in cost from the origi-nal time to the anticipated time.

The increase or decrease change in cost is usually treatedas a general percentage. For example, if inflation has in-creased by 3.5%, then on average, goods and services haveincreased in cost by the same amount. Complete tables of thesechanges over a range of years are available from varioussources (for example, the Bureau of Labor Statistics and theNaval Center of Cost Analysis). The Consumers Price Index,published annually by the Government, compiles these per-centages into an index so that costs from one year to any otheryear in the table can be adjusted (that is, escalated). Theseindexes are produced on a monthly basis and are availableover the Internet. Table 10.II provides an example.

Most escalation indexes are provided as historically tracked.Index tables will vary from source to source depending uponwhat is the basis for its valuation and what is the base yearcosts being used to compare other year costs in the table. Inorder to perform cost escalations for years beyond availableindex tables, the estimator can extend these indexes with es-timates of what these indexes might be in the future.

These indexes allow any CERs to be adjusted for infla-tion/deflation. CERs from different periods of time can beindividually adjusted so that they all are applicable to thesame year, that is, base year, for which an estimate is beingdeveloped.

The estimator is cautioned against escalating costs morethan several years or across periods where costs changes aresignificant. The indexes are provided only on an averagingbasis and may not accurately reflect changes in costs for thespecific cost item at hand.

To use escalation index tables, the following definitionsare required:

• the known cost is called the cataloged cos.

• the time period of the known cost is called the cataloged

cost year . Typically, cost estimate data is comprised ofknown costs collected over a range of years. The esca-


TABLE 10.I Typical Added Complexity Of Ship Zone Work

Ship Zone Added Cost Factor

On Weather Deck 0%Oil Tanks 25%

Engine Room 50%

Superstructure 25%

Pump Room 50%

Holds 10%

Double bottom 25%



lation process must adjust these costs so that they all canapply to some common (baseline) period of time,

• the cost index recorded for the cataloged cost year is

called the cataloged cost year index,

• the time period whereby all costs are to be developed

for an estimate is called the base year for the estimate.

The base year typically is the current year. Costs cata-

loged at years earlier than the base year need to be up-

dated. One method for updating is to obtain new cost

information applicable to this base year. Another method

is to adjust earlier costs using escalation index tables so

that these costs apply to the base year ,

• the cost index recorded for the base year is called thebase year index. The process of escalating the cost from

its cataloged cost year to the base year is:

Base Year Cost = (base year index/cataloged cost year

index) × cataloged cost

• the time period projected in the future for the cost esti-

mate is called the projected cost year. Projected costs

are the base year costs advanced to some designated

year in the future. These costs normally are advanced

using the escalation tables, although some large equip-

ment cost items may have projected costs quoted and

guaranteed by vendors, and

• the cost index recorded for the projected cost year is called

the projected cost year index. The process of escalating

the cost from the base year to the projected year is:

Projected year cost = (projected year index/base year

index) × base year cost

Example: If the last price quotation for life saving de-

vices was in 1997, then the CER that defines that cost must

be cataloged with the year of 1997. The CER escalation ad-

justment factor can be computed in the following manner:

Fescalation = Indexbase year / Indexcost year

where Indexbase year is the escalation index for the year cor-responding to the year in which the project is planned to

expend the cost item; Indexcost year is the escalation indexcorresponding to the year in which the CER costs have beenrecorded on the database.

With this escalation factor, the cataloged CER can be es-calated for the base year:

CERadjusted = Finflation × CERcatalog,

For the life saving devices example, the 1997 costs can beescalated,using data presented in the above table to the year2000 as follows: Find the index values for the base year(1997), and for the projected year (2000).

Indexcost year = Index 1997= 1.1964

Indexbase year = Index 2000

= 1.3074

The escalation factor that adjusts the 1997 cost to the 2000cost is a simple ratio as follows:

Fescalation = Indexbase year / Indexcost year

= 1.3074 / 1.1964= 1.093

Escalation factors less than 1.0 indicate economic defla-tion. Factors greater than 1.0 indicate inflation. Therefore,in the year 2000, the life saving devices is estimated to cost1.093 times the cost in 1997.

If the projected project year is different than the currentcalendar year (base year), retrieve the cost items and re-place their Base Year with the projected project year. If aproject has costs cataloged for different projected years,this process will have to be done in yearly stages.

10.9.6 Composite Performance Factor

From the above discussions, the estimator may use a vari-

ety of cost adjusting factors. A composite adjustment fac-tor is simply a straight multiplication of individualadjustment factors:

CERadjusted = Finflation × FCERadj × FWCadj × FSOCadj

× FPWBSadj × CERcatalog

10.9.7 Learning Experience Adjustment Factor

The cataloged CERs usually establish costs under a certainprescribed set of production circumstances. Traditionally,the CER relates to costs for a prototype or the first of a se-


TABLE 10.II Sample Escalation Index Table

Year Index

1995 1.127101996 1.1616

1997 1.1964

1998 1.2323

1999 1.2693

2000 1.3074

2001 1.3466



ries construction program. It is often, but not universally ac-cepted that multiple products benefit from a learning curve

(7). That is, it is anticipated that for a series of ships eachship labor cost should decrease from continued improve-

ments introduced over time in the build strategy and man-ufacturing processes and refinements in productionengineering.

CERfollow ship = CERlead ship × Flearn

Therefore, when the estimator has developed the cost esti-mate for the lead ship of the series and copies this estimatefor each of the follow ships, the learning curve factors (Fig-ure 10.7) can be applied to each of the follow ship esti-mates. The theory behind learning curves is that thepercentage improvement is constant and occurs every timeproduct quantity is doubled. That is 2, 4, 8, 16 , etc. It has

been found to apply more to products that are produced inlarge quantities (100s) and in relatively short times (hours).

While production costs can decrease as from ship to ship,some shipyards often experience an increase in engineer-ing costs for the second ship. This is recognition that theprototype engineering was less successful and that a sec-ond-wind effort is needed to get the series program on a moreefficient footing.

While the above learning curves indicate a gradual costreduction per ship of the series, examining cost reductionsfor standard interim products and manufacturing processesacross all ship types can realize the same experience. Asshipyards introduce standard interim products as the primarymeans for designing and building ships, learning becomesa less important consideration. This is a good indication that

the cost reductions are gained not by an actual learning ex-perience, but more by a diminishing of expensive reworkthat should not have occurred in the first place.

10.9.10 Multi-Ship Material Cost Advantages

Besides the benefits of learning curve effects upon laborcosts, multiple ship contracts also can have a positive ef-fect upon material costs. It has been estimated that the prom-ise of a larger order backlog can elicit as much as a 15-20%cost reductions from vendors and suppliers. Busy shipyardsoften can gain lower material costs simply because theirsuppliers can rely upon these shipyards with long-term busi-ness opportunities.

10.9.9 Multi-ship Engineering and Planning AdvantagesObviously, for multi-ship contracts the engineering andplanning only need to be prepared once, and the cost (non-recurring) can be spread over each ship in the series. How-ever, there is still a relatively small engineering and planningcost (recurring) for each ship and it must be included forthe follow-on ships.

10.9.10 Material Waste Factor

What material is required from an engineering point of viewshould be reconsidered from a procurement point of view.Production often cannot consume 100% of the purchasedmaterial without some measure of waste. Therefore, the es-timator needs to account for waste in estimating the cost ofmaterial in the following manner:

Total Costmaterial = Quantity × (1.0 + Fwaste) × CERmaterial

where Fwaste is the estimated waste factor and CERmaterial isthe material cost CER.

10.10 COST RISK

When bidding on new contracts, shipyards look at pro-duction cost and schedule risk. To remain competitive, ship-yards develop strategies to minimize their exposure withoutlosing a good business opportunity. This means that the bidproblem needs to be examined and understood to the bestof one’s ability to do so. The bid process requires this ex-amination to focus not only on the shipyard’s own internalperformance abilities, but also that of the competition andthat of the shipowner’s ultimate objectives and funding re-sources.

Risk, or uncertainty, can be associated with any or all


Figure 10.7 Typical Learning Curve Factors



cost items included within a developing project cost esti-mate. The greater the cost risk, the less likely, or probably,that the cost estimate is realistic. The lower the risk, thegreater is the probability that the cost estimate is valid.

Uncertainty can be expressed, or represented, as a dis-tribution of cost estimates between certain values. Outsidethis range of expected values one would expect that othervalues would have very low probability (high risk). A num-ber of different cost probability models are possible.

Two popular types of risk analysis methods includeMonte Carlo Cost Risk and PERT (Project Evaluation Re-view Technique) Cost Risk. Both the methods summarizeexpected costs and levels of cost confidence at the projectlevel of the work breakdown structure with little additionalinformation required from the estimator.

The risk can be applied at different levels and thus dif-

ferent approaches. For example it can be applied to a com-pleted estimate. In this case the risk will either be based onhistorical performance of the shipyard against it’s estimatesand used to determine the bid price to give a confidencelevel of 100% that it would achieve its profit goal. It couldalso be based on a predicted distribution of competitors bidprices and then used to determine a bid price for the ship-yard that would give them say an 100% confidence level of winning the bid.

It also could be applied at each item level in the estimatewith actual equipment quotations allocated a probability of 1, whereas estimated quantities for both material and laborbeing assigned a probability distribution based on estima-tors confidence in the estimate. The completed estimatewould be a price distribution, from which the shipyard couldchoose the price it would bid.

Figure 10.8 illustrates a normal probability of cost dis-tribution. The particular characteristic of this type of distri-bution is that there is an average or mean cost value that hasthe greatest probability of occurrence. Above and below this

mean cost value, the cost probabilities become less and lessand the distribution of these probabilities is symmetricalabout the mean. This model has characteristics similar tothat of the triangular distribution model, but obviously re-

quires a good deal more information about the relationshipbetween probability of occurrence and actual cost values.

This is not typically possible or practical for the estima-tor to determine. However, most cost risk analyses use ap-proximate methods in order to provide a reasonable indicationof just how risky a particular cost estimate is likely to be.

In order to achieve maximum benefit, there needs to bea risk management strategy. It starts with collecting and an-alyzing known facts about the problem. This is called dis-

aggregating the risk. The process involves breaking downa large and unwieldy risk problem into smaller, more man-ageable pieces.

As the problem is broken down, the various elements ofthe problem can be risk-minimized by applying to themwhat is called familiarity advantages. This is the applica-tion of core competencies to better understand each pieceof the problem and minimize the risk of the unknown. Inother words, when you know what you are doing, you areless likely to make a mistake than when you are trying some-thing for the first time.

10.11 COST ESTIMATING SYSTEMS

There is a number of cost estimating systems available onthe market. In addition to the ubiquitous spreadsheets, thesystems prevalent in use for cost estimating Navy ships arethe following:

Advanced Surface Ship Evaluation Tool (ASSET) ad-dresses all engineering disciplines required for total shipdesign. It is used for new ship design and conversion stud-ies and produces Rough Order of Magnitude (ROM) de-sign information for concept design and feasibility studies.ASSET has direct program links to the ACEIT cost esti-mating system.

Automated Cost Estimating Integrated Tools (ACEIT) isa joint Army/Air Force program support by the Navy. Pri-marily SWBS-based, it accommodates indirect costs, es-calation adjustments and learning curves. The systemproduces time-phased life cycle costs

Unit Price Analysis (UPA) estimates time-phased non-recurring and recurring costs, indirect, and cost of money.The system offers factors to adjust the SWBS-based CERsfor specific design characteristics and producibility.

PRICE Systems offer a parametric approach to estimatingcosts. A variety of adjustment (calibration) factors and em-pirical productivity values may be applied to standard CERs.


Figure 10.8 Normal Probability of Cost Distribution



The PRICE systems are primarily SWBS-based and includefunctions for estimating life cycle, post-construction costs.

Product-oriented Design and Construction (PODAC)

Cost Model is a relational database application that has li-

braries of CERs and expanded cost item packages that canbe quickly applied to a cost estimate. The system allowscosts to be generated by various work breakdown structuresincluding ship systems SWBS, by product and manufac-turing process (PWBS) and by the shipyard’s own internalchart of accounts (COA) as well as by contract line items(CLINs) and repair item or specification paragraph. Thesystem uses escalation tables, learning curves, and a vari-ety of cost adjustment factors to accommodate differencesin process efficiency, design producibility, etc. The systemprovides a cost risk analysis. Shipyard return costs can belinked directly into the database. A statistical analysis ca-

pability enables the estimator to analyze a wide cross-sec-tion of labor and material cost data and develop new CERsat various levels of detail.

There also are ship design systems that have cost esti-mating capabilities. Design synthesis tools employ designand cost estimating algorithms for specific ship types. Thesesystems are useful for developing concept-level ship designcharacteristics and measuring the impact on cost from tradeoff studies. Examples of synthesis tools include the PODACsystem empirical cost models, the USCG buoy tender, off-shore cutter and patrol boat models. Synthesis models alsoare available from the University of New Orleans for con-tainer ships and tankers.

While synthesis tools employ high-level, generalizeddesign and costing algorithms, there are other ship designtools with cost estimating capabilities that operate at moredetailed levels of analysis:

• Parametric Flagship, a system developed under aMaritech ASE project, links various ship design andnaval architecture analysis systems directly with thePODAC cost model (8),

• Intergraph’s multiple discipline GSCAD system alsolinked with the PODAC cost model, and

• as of the time of this writing (2001), the Navy’s ASSETdesign tool is being linked to the PODAC Cost Model.

Work also has been done developing systems for simu-lation-based acquisition (SBA). These systems dynamicallylink applications of design, analysis and evaluation soft-ware and enable the designer to optimize a given product’sperformance, cost and deployment schedule. The goal forthese systems is not only to provide quantitative design,cost and schedule responses to a range of design and con-struction alternatives, but probabilistic responses of the in-herent risk.

10.12 REFERENCES

1. Bosworth & Hough, “Improvements In Ship Affordability,”

SNAME Transactions, 1993

2. U.S. Department of Defense, “ Mandatory Procedures for

Major Defense Acquisition Programs and Major Automated

Information Systems Acquisition Programs,”DoD Instruction

5000.2-R, 1996.

3. Leopold, Jons and Drewry, “Design To Cost Of Naval Ships,”

SNAME Transactions, 1974

4. Duren, B.G. and Pollard, J.R., “Building Ship as a System: An

Approach to Total Ship Integration,” ASNE Journal, Septem-

ber 1997

5. Chirillo, L. D. & Okayama, Y., “Product Work Breakdown

Structure,” National Shipbuilding Research Program, Revised

1992

6. PODAC IPT & Lamb, T., “Generic Product-Oriented Work

Breakdown Structure (GPWBS), A Programmed LearningCourse,” U.S. Department of the Navy, Carderock Division,

Naval Surface Warfare Center , 1996

7. Spicknall, M. H., “Past and Present Concepts of Learning: Im-

plications for U.S. Shipbuilders,” Ship Production Sympo-

sium, 1995

8. Trumbule, J. C. & PODAC IPT, “Product Oriented Design and

Construction (PODAC) Cost Model—An Update,” Ship Pro-

duction Symposium, 1999

10.13 SUGGESTED READING

Boyington, J. A., “The Estimating And Administration Of Com-

mercial Shipbuilding Contracts,” Marine Technology, July

1985

Boylston, J., “Toward Responsible Shipbuilding,” SNAMETrans-

actions, 1975

Carreyette, J., “Preliminary Ship Cost Estimation,” RINA Trans-

actions, 1977–78

Chirillo, L. D. & Johnson,C. S., “Outfit Planning,” National Ship-

building Research Program, 1979

Chirillo, L. D., “Product Oriented Material Management,” Na-

tional Shipbuilding Research Program, 1985

Department of Defense, “Parametric Cost Estimating Handbook,”

Joint Government/Industry Initiative, Fall 1995Fetchko, J. A., “Methods Of Estimating Investment Cost Of Ships,”

University of Michigan, June 1968

Harrington, R. A., “Economic Considerations In Shipboard De-

sign Trade-Off Studies,” Marine Technology, April 1969

Hutchinson, B., “Application Of Probabilistic Methods To Engi-

neering Estimates Of Speed, Power, Weight And Cost,” Ma-

rine Technology, October 1985

Lamb, T. and A&P Appledore International Ltd, “Build Strategy

Development,” National Shipbuilding Research Program,

NSRP 0406, 1994.

Landsburg,A. C., “Interactive Shipbuilding Cost Estimating And

Other Cost Analysis Computer Applications,” ICCASS, 1982




Mack-Florist,D. M. &. Goldbach, R., “A Bid Preparation In Ship-

building,” SNAME Transactions, Vol. 104, 1976

Mansion, J. H., “A Manual on Planning and Production Control

for Shipyard Use,” National Shipbuilding Research Program,

1978Maritime Administration , “A Study Of Shipbuilding Cost Esti-

mating Methodology,” MarAd Report , 1969

McNeal, “A Method For Comparing Cost Of Ships Due To Al-

ternative Delivery Intervals And Multiple Quantities,” SNAME

Transactions, 1969

PODAC IPT and SPAR Associates, Inc., “Risk Analysis In the

PODAC Cost Mode,” U.S. Department of the Navy, Carde-

rock Division, Naval Surface Warfare Center , 1999

Ramsden, “Estimating For A Changing Technology,” Marine

Technology, January 1990

SPAR Associates, Inc.,

“Cost Savings Using Modular Construction Methods & Other

Common Sense,”1998“Guide for Estimating New Ship Construction,” 1998

“Guide for Identifying CERs,” 1998

“Guide For Life Cycle Cost Estimating,” 1999

“Planning New Construction & Major Ship Conversions,” 1999

Summers, “The Prediction Of Shipyard Costs,” Marine Technol-

ogy, January 1973

Telfer, Alan J., Zone Outfitting in a Canadian Great Lakes Ship-

yard , Collingswood Shipyards, 1995


Documents

10. Cost Estimating