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Version 3.0 (Draft)Last Updated: 10 November 2011

Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more

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AMERICA’S ARMY: THE STRENGTH OF THE NATION

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

Step 2: Define CBA Boundaries and Parameters

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The Boundaries and Parameters of a CBA are the specifications that make an analysis feasible and practicable. They are expressed by Scope, Facts, and Assumptions.

• 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

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8. Report Results and Recommendations

7. Compare Alternatives

6. Define Alternative Selection Criteria

5. Identify Quantifiable and Non-Quantifiable Benefits

4. Develop Cost Estimate for each Alternative

3. Define Alternatives

2. Define Scope; Formulate Facts and Assumptions

1. Define Problem/Opportunity and Objective

The CBA should state the involved stakeholders, period of time that the analysis covers, and Stakeholders’ Needs not

addressed in the analysis.

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• Boundaries and parameters provide the limiting conditions that make a controlled analysis of alternatives possible. Consider:– Difficulty of analysis in an unbounded problem: how to achieve world

peace.– 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

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• In a CBA, the boundaries and parameters are expressed in the Scope, Facts, and Assumptions.

Boundaries and Parameters

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• “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

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• 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

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• 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

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• 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

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• 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.

Scope Exercise

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FY1 FY2 FY3 FY4 FY5 FY6

Sys 1 $3M $0.5M $0.5M $0.2M $0.4M $0.7M

Sys 2 $1M $1M $1M $0.8M --------- ---------

Note: Fictional

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• 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

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FY1 FY2 FY3 FY4 FY5 FY6

Sys 1 $3M $0.5M $0.5M $0.2M $0.4M $0.7M

Sys 2 $1M $1M $1M $0.8M --------- ---------

Note: Fictional

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• 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

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• 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.

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

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• An Army organization currently employs 1000 people, all DACs. This organization has prepared a CBA comparing the costs of 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

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• An Army organization currently employs 1000 people, all DACs. This organization has prepared a CBA comparing the costs of 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

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Definition: Facts

Facts:• 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)

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Assumptions:• 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

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• 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

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• “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

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• “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

19Note: Notional

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• You are preparing a Cost-Benefit Analysis to aid in the decision to sell or lease an older fleet of U.S. Army helicopters to the Iraqi Army. From the following facts listed, draw possible assumptions relevant to the analysis:– 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

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• Possible assumptions:– 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

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• 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

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• 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

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or “who, oh who should overtime bill?”

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• 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

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or “how much for one building?”

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• 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

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