Improving the Cost Estimating Capability at the Federal Aviation Administration (FAA)

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Improving the Cost Estimating Capability at the Federal Aviation Administration (FAA) Federal Aviation Administration Presented to: 2007 International Society of Parametric Analysts (ISPA) and Society of Cost Estimating & Analysis (SCEA) Joint Conference in New Orleans, LA By: Katrina Hall, FAA Air Traffic Organization, Finance Service Unit, Office of Investment Planning and Analysis Date: June 12-15, 2007

Agenda Background The Problem FAA Progress to Date Next Steps Q&A Federal Aviation 2 2 2

THE FAA DOT HISTORY: The Department of Transportation was established by an act of Congress on October 15, 1966, the Department s first official day of operation was April 1, 1967. The mission of the Department is to: DOT DOT Mission Serve the United States by ensuring a fast, safe, efficient, accessible and convenient transportation system that meets our vital national interests and enhances the quality of life of the American people, today and into the future. FAA MARAD FRA FRT NHTSA MANY OTHERS Federal Aviation 3 3 3

FAA Mission The FAA provides a safe, secure, and efficient global aerospace system that contributes to national security and the promotion of U.S. aerospace safety. As the leading authority in the international aerospace community, the FAA is responsive to the dynamic nature of customer needs, economic conditions, and environmental concerns. See also http://www.faa.gov/about/mission/ Federal Aviation 4 4 4

The FAA s Air Traffic Organization Foundation COO COO hired hired in in Aug. Aug. 2003 2003 Established Established in in Feb. Feb. 2004 2004 Performance-Based Organization Organization (PBO) (PBO) focused focused on on results results Revenue: Revenue: $9.1 $9.1 billion billion Employees: Employees: 36,336 36,336 National National Airspace Airspace System System operational operational facilities: facilities: 40,997 40,997 ATC ATC facilities: facilities: 649 649 OWNERS Focus CUSTOMERS U.S. Citizens* Traveling public* Taxpayers* *As represented by Congress Office of Management and Budget Secretary of Transportation Inspector General Commercial Aviation Airlines Cargo Business Aviation Private Aviation DHS (and other Government Agencies) Military (DOD)* *Partner with ATO EMPLOYEES ATO Individual Federal Employees Labor Unions Federal Aviation 5 5 5

Acquisition Management System - Policy AMS launched April 1996 Investment Analysis responsibility defined October 1996 Initial and Final Phases published in the FAA Acquisition System Toolset (FAST) March 2001 Mission Analysis change approved November 2004 Federal Aviation 6 6 6

Problem There needs to be greater standardization of cost estimating processes across the agency Underestimating has a financial implication in that the program would require allocated funds from other sources Overestimates lead to underutilized resources that could be used for other activities Engages scarce resources to rework cost estimates as they are presented for independent review Loss of credibility with legislative agencies such as OMB and Congress Federal Aviation 7 7 7

Other Drivers for Change Government Accounting Office (GAO) High Risk List FAA modernization program has been on the GAO high-risk list for twelve years 4 Focus Areas were developed in response to GAO recommendations Focus Area 1: Improve processes and capabilities for acquiring software intensive systems Focus Area 2: Implement and enforce a complete enterprise architecture. Focus Area 3: Improve cost estimating and cost accounting practices. Focus Area 4: Effective information technology investment processes. Findings from GAO Reports Federal Aviation 8 8 8

GAO Report Drove The Need for Cost Estimating Skills at FAA-ATO Cost growth and schedule delays of major acquisitions continue to stall NAS modernization efforts* FAA needs to develop a comprehensive strategy for modernizing the NAS to ensure major acquisition programs are delivered within cost, schedule, and performance milestones* * STATUS OF FAA S MAJOR ACQUISITIONS: COST GROWTH AND SCHEDULE DELAYS CONTINUE TO STALL AIR TRAFFIC MODERNIZATION Federal Aviation Administration Report Number: AV-2005-061 Date Issued: May 26, 2005 Federal Aviation 9 9 9

Other Drivers for Change cont. Office of Management and Budget (OMB) Major FAA Acquisitions are required to submit OMB Exhibit 300 Documents OMB Policy Letter 05-01: Developing & Managing the Acquisition Workforce Requires alignment of civilian and defense acquisition workforce requirements Sets Government-wide standards for education, training, and experience based on core competencies and common certification programs FAA has named cost estimators as an acquisition role and developed draft cost competencies Federal Aviation 10 10 10

Other Drivers for Change cont. FAA Agency Goals Organizational Excellence Goal: to ensure success of the FAA s mission through stronger leadership, a better trained workforce, enhanced cost-control measures, and improved decision-making based on reliable data Eliminate the reasons FAA is on the Government Accountability Office s High Risk List for Air Traffic Control Modernization by FY 2008 Invest in prioritized solutions that provide positive return on time, on budget Develop strong business skills in the ATO Federal Aviation 11 11 11

FAA Progress to Date Defined Agency Cost Estimating Competencies Using SCEA Body of Knowledge as framework Defined Acquisition Workforce with Cost Estimating as a defined role Cost Estimating Included as Part of Investment Decision Processes Cost Estimates are developed within the Service Units and reviewed by Independent Evaluators Greater Emphasis on Business Case Development and Economic Analysis Metrics Increased level of scrutiny through decision process Federal Aviation 12 12 12

FAA Progress to Date Increased Adherence to Standards and Guidance Standard Work Breakdown Structure Basis of Estimate documentation standard Cost Estimate Legacy Definition Standard Cost Estimation Methodology Mandatory risk adjustment; Baseline at 80% confidence level Training Performed agency wide cost estimating skill set gap analysis Defined cost estimating competencies and training requirements Defined knowledge, skills, and abilities required for cost estimators Developed core training courses and plan for additional courses Federal Aviation 13 13 13

FOR EXAMPLE.. Federal Aviation 14 14 14

FAA Standard Cost Estimating Methodology 1.0 1.0 Understand Understand the the Proposed Proposed Program Program and and Existing Existing Estimates Estimates 3.0 Collect 2.0 Data for Cost Each Analysis WBS Element Planning 5.0 Time-Phase the the Life Life Cycle Costs in in Then-Year Dollars 7.0 7.0 Conduct Conduct External External Review Review and and Coordinate Coordinate 2.0 Cost 2.0 Cost Analysis Analysis Planning 4.0 Complete 2.0 Cost Cost Analysis Estimate Planning As As with any any scientific undertaking, there is is a repeatable process at at the the core 6.0 Conduct 2.0 Cost Internal Analysis Review Planning 8.0 Complete 2.0 Final Cost Reports Analysis and Documents Planning From: FAA Standard Cost Estimation Methodology, April 2003, v.1 Federal Aviation 15 15 15

FAA Standard WBS Structure FAA Standard Work Breakdown Structure The latest official version of the FAA Standard WBS can be found at http://fast.faa.gov Pre-Project Activities Project Specific Activities 1.0 1.0 Mission Mission Analysis Analysis 2.0 2.0 Investment Investment Analysis Analysis 3.0 3.0 Solution Solution Development Development 4.0 4.0 Implementation Implementation 5.0 5.0 In-Service In-Service Management Management 6.0 6.0 Disposition Disposition 1.1 Identify Projected Demand for Services 1.2 Identify Technological Opportunities 1.3 Identify Projected Supply of Services 1.4 Mission Needs Analysis and Assessment 1.5 Initial Requirements Definition Legend = Decomposes to lower level WBS elements 2.1 Initial Investment Decision 2.2 Final Investment Decision 2.3 Rebaselining Decision 3.1 Program Management 3.2 System Engineering 3.3 HW/SW Design, Development and Production 3.4 Physical and Airspace Infrastructure Design and Development 3.5 Test and Evaluation 3.6 Data and Documentation 3.7 Logistics Support 4.1 Program Management 4.2 Engineering 4.3 Environmental, Occupational Safety and Health Compliance 4.4 Site Selection and Acquisition 4.5 Construction 4.6 Site Preparation, Installation, Test and Checkout 4.7 JAI/Commissioning/ Closeout 4.8 Telecommunications 4.9 Implementation Training 5.1 Preventive Maintenance/ Certification 5.2 Corrective Maintenance 5.3 Modifications 5.4 Maintenance Control 5.5 Technical Teaming 5.6 Watch Standing Coverage 5.7 Program Support 5.8 Logistics 5.9 In-Service Training 5.10 Second Level Engineering 5.11 Infrastructure Support 5.12 Flight Inspections & SIAP Development 5.13 System Performance Assessment 5.14 System Operations 5.15 Travel To And From Sites 6.1 Program Management 6.2 Decommissioning 6.3 Engineering 6.4 Environmental Activities 6.5 Dismantle/Removal 6.6 Site Restoration Closeout Federal Aviation 16 16 16

FAA Cost Baseline Management Approach 50% Confidence (Target) Breach Occurs Cost Probability Contingency Reserve 10% Overrun 50% Overrun Consider Shall Terminate Termination 80% Confidence (Cost Baseline) Acquisition Cost Capital Estimate $40 Million Capital Estimate $50 Million Contingency Reserve = S $(80% Confidence - 50% Confidence) Estimates $10M = $50M - 40M Example of how the cost baselining process will work for a hypothetical new program. The Service Unit must deliver the program for $50 million, but should be expected to deliver it at lower cost. Program will report spending of contingency reserve. Federal Aviation 17 17 17

FAA Investment Analysis Curriculum Practitioner Courses (no prerequisites) Benefits Estimating Workshop (1 day) Risk and Schedule Assessment (3 days) Introduction to Cost Estimating (2 days) Foundation/familiarization Course (no prerequisites) FAA Investment Analysis Process: Building the Business Case for Capital investment (2 days) Federal Aviation 18 18 18

Next Steps The Agency s Made Progress toward improving the Cost Estimating Capability at the FAA Conducted 6 course offerings of Introduction to Cost Estimating In FY2006 the agency met all of its cost performance target and remained within acceptable cost baseline limits Aligned agency goals to improving capability Defined plan and milestones for getting off the GAO High Risk List Continue work to build a quality Cost Estimating presence at FAA Define other Cost Estimating Standards and Guidance for agency wide use Establish in-house databases that collect cost data for tracking actuals to program estimates Offer comprehensive Cost Estimating Training Curriculum Partner with other established/benchmarked cost estimating communities Federal Aviation 19 19 19

BACKUP Federal Aviation 20 20 20

Air Traffic Organization We are organized around our customers service needs, with special focus on safety, service delivery, and financial management National leadership & policy Administrator & Deputy Administrator Agency Liaisons Joint Planning & Development Office (JPDO) DIRECTOR Chief Operating Officer (COO) Support Service Units Agency Liaisons Assistant Administrator for Financial Services/Chief Financial Officer Associate Administrator for Regulation & Certification Office of System Safety Safety VICE PRESIDENT Communications VICE PRESIDENT Operations Planning VICE PRESIDENT Finance SR. VICE PRESIDENT Acquisition & Business Services VICE PRESIDENT Federal Acquisition Exec. Assistant Administrator for Human Resource Management Office of the Chief Counsel Office of Government & Industry Affairs Operating Service Units Assistant Administrator for Civil Rights Office of Public Affairs Assistant Administrator for Region & Center Operations Associate Administrator for Commercial Space Transportation En Route & Oceanic VICE PRESIDENT Terminal VICE PRESIDENT System Operations VICE PRESIDENT Technical Operations VICE PRESIDENT Assistant Administrator for Information Services/ Chief Information Officer Assistant Administrator for Aviation Policy, Planning & Environment Assistant Administrator for International Aviation Assistant Administrator for Security & Hazardous Mtls. Associate Administrator for Airports Federal Aviation 21 21 21

The Context of Investment Analysis: Applicable Orders and Guidelines Government Best Practices Office of Management and Budget (OMB) A-94 Benefit-Cost and Cost-Effectiveness Analysis Alternatives Analysis Net Present Value (NPV) Discount Rates OMB A-11 (Exhibit A-300) New Budget Submittal Requirements (Capital Planning and Investment Control) - Business Case Focus - Return on Investment (ROI): NPV and Payback - Risk Analysis & Mitigation Plans DOT Policy Values - Fatalities - Injuries - Passenger Time FAA/APO Aviation Forecasts Economic Values - Aircraft Operating Costs - Aircraft Replacement Costs FAA/ATO F & P Probabilistic Analysis Work Breakdown Structure of Costs and Benefits Risk Analysis Legislation/Congress Clinger Cohen Act (IT investment management) Government Performance and Results Act (GPRA) Chief Financial Officer's (CFO) Act Federal Aviation 22 22 22

Building the Business Case 1 2 Technical/Operational Analysis Shortfall/Capability Analysis Concept of Operations Operational/System Rqmts. System Interdependency Alternatives Assessment Acquisition Strategy Transition Plan Support Concept Trade-offs What s the impact (metrics) of the shortfall on NAS services? What is the best mix of technologies & procedures to satisfy the requirements? Joint Resources Council What is the best value alternative to support the strategic goals? What values does this investment provide to FAA and users? Value Economic Analysis Cost-Benefit & Cost- Effectiveness Analysis: Assumptions Life Cycle Costs Monetary Benefits Return on Investment Non-Monetary Benefits 4 Affordability Analysis Risk Adjusted Baseline 1st Five Years Profile vs. CIP Congressional Oversight Impact on on F&E Budget Impact on on OPS Budget Trade-offs How affordable is the implementation? What is the impact on other programs? Risk What are the major risk drivers? How risky is the investment decision? Risk Analysis Risk Drivers Impact Assessments Probability Distributions Confidence Levels Risk Mitigation Strategies 3 Federal Aviation 23 23 23

Running the FAA Like a Business ATO Finance Has Reviewed 81 Programs Over The Last 2 Years 67 Capital Programs 14 Operations Budget Programs 6 Programs Have Been Terminated or Restructured Quarterly Reviews to Assess Cost / Schedule Performance and Monitor Requirements Changes Link Investments to Strategy Objectives and Define Outcomes and Measures Investment Decisions are Data-Driven / Economically Driven Federal Aviation 24 24 24

The Flight Plan Sets Forth FAA s Overall Aims FAA Flight Plan Objectives Increased Safety S1. Reduce commercial airline fatal accident rate S2. Reduce number of fatal accidents in general aviation S3. Reduce the risk of runway incursions S4. Ensure the safety of commercial space launches S5. Enhance the safety of FAA s air traffic systems Greater Capacity C1. Increase capacity to meet projected demand and reduce congestion C2. Increase reliability and on-time performance of scheduled carriers C3. Address environmental issues associated with capacity enhancements Based on Flight Plan 2007-2011 International Leadership I1. Promote improved safety and regulatory oversight in cooperation with bilateral, regional, and multilateral aviation partners I2. Promote seamless operations around the globe in cooperation with bilateral, regional, and multilateral aviation partners Organizational Excellence E1. Make the organization more effective with stronger leadership, increased commitment of individual workers to fulfill organization-wide goals, and a better prepared, better trained, safer, diverse workforce E2. Improve financial management while delivering quality customer service E3. Make decisions based on reliable data to improve overall performance and customer satisfaction E4. Enhance our ability to rapidly and effectively respond to crises, including security related threats and natural disasters. Federal Aviation 25 25 25

How Decisions Are Made and Reviewed Emphasis is on Business Case Analysis, however other agency indicators are also reviewed Capital Investment Plan (CIP) Allocations Performance Gaps Alternative Analysis Agency Goals and Strategic Management Plan (SMP) Objectives Forward looking plans NextGen Alignment to NAS Architecture After a decision, there are processes in place to review status and progress Post Implementation Reviews Program Reviews Yearly Budget Documentation (RPDs, FY Budget Reviews, etc) Federal Aviation 26 26 26

Risk Tools Once the risks have been identified, a model can help quantify the risks. Quantifying risk means putting a value on risk. Sample listing of tools: Cost Tools Crystal Ball: Performs Monte Carlo simulations of Excel spreadsheets FARAD: FAA tool that distributes risk by WBS Cost & Schedule Tools @Risk: Microsoft Project or Excel spreadsheet embedded schedule risk analysis tool that runs Monte Carlo simulations around task durations SEER-SEM, COCOMO-II, COCOTS: Software development Schedule Tools Risk+: Microsoft Project embedded schedule risk analysis tool that runs Monte Carlo simulations around task durations Program Teams Risk Radar (FAA Tool): database software package that allows the program office to document over time how risk is changing and the steps that it has taken to reduce and manage risk Federal Aviation 27 27 27

GAO Focus Area 3: Milestones and Progress 4QFY07 - Publish life cycle cost model based on database of historical cost estimates. Progress: On Track for Completion. The cost model is being upgraded to receive Facilities & Equipment inputs. Current model only captures Operations and Maintenance cost estimates. 4QFY07 Implement quarterly reporting on the status of programs staying within annual cost targets at Flight Plan reviews. Progress: On Track for Completion. The December Flight Plan review will include the status of programs staying within cost targets. This will be reviewed monthly instead of quarterly for the year. Federal Aviation 28 28 28

GAO Focus Area 3: Other Activities Undertaken (ATO) Key components to improving cost estimating practices is providing targeted training and developing cost estimating guidelines and procedures. Since FAA High Risk Activities are underway, the following additional activities are included in support of Focus Area 3 completion: 4QFY07 Publish recommended course list for cost estimating based on cost estimating core competencies. Progress: On Track for Completion Benchmarking activities currently underway. Recommended courses will follow industry core competencies for cost estimating. 4QFY07 - Publish four cost estimating guidelines Progress: On Track for Completion Published Guidelines for Evaluating FAA Cost Estimates 1 st FY07. Other documents planned for one per quarter. 4QFY07 - Deliver at least four cost estimating training courses to headquarter and regional personnel Progress: On Track for Completion Completed delivery of one Introduction to Cost Estimating training course December 2006. Other courses planned for 2 nd and 4 th Quarter FY07. Federal Aviation 29 29 29