A Digital Model for Cost Estimating

MacroWikinomics has spurred countless ideas on doing business in radically new approaches in the Digital Age.  In reading the book  for the second time (actually listening via my Kindle while driving), the section on digital crowds helping under-resourced regulators avert another financial crisis, I thought of related applications to Government Cost Estimating.


The digital crowd can also offer significant help to regulators who make rules and enforce them.  If the financial system becomes more transparent, this can turn into a powerful network that links the digital crowd, the regulators, and the enforces.  Through these digital networks, they can pool intelligence in the same way the law enforcement and national security services do.  The same digital networks [could] help decipher some of the most complex financial assets out there.

The Open Models Company (OMC) has a platform for open, collaborative, peer-reviewed valuation of financial products based on the many principles articulated in this book.  Call it the Linux of financial modeling.  OMC’s business model is designed to evaluate both existing assets, such as the problematic mortgage-backed securities, as well as new offerings brought to market by investment banks.  Open Models would then use an independent network of community modelers and experts who would come up with a value and more importantly comment on the underlying assumptions.  The whole process would be documented in a wiki-style format and open to the community.  External experts would be compensated according to their contributions.  The flexibility of the community approach will attract thousands of contributors ranging from those looking to break into the industry to seasoned veterans who are looking for a better work-life balance.

As the DoD (and agencies across the Federal Government) struggle to conduct robust, accurate, and timely cost estimates of acquisition programs, a digital, collaborative model may serve as a promising new approach.

Let’s first look at the challenges of cost estimating today:

  • Labor intensive effort to develop and populate a cost model
  • Following a program office developing a cost estimate two independent cost estimates (ICEs) are conducted at the Service and OSD level. These ICE provide additional expertise while minimizing any biases or manipulation of the figures.
  • Limited cost estimating staffs throughout the government
  • Regular debates on assumptions, calculations, and conclusions
  • Limited leveraging of related cost estimates to improve fidelity, time, and accuracy
  • Limited expertise in cost estimating new software development including SOA and Agile
  • Lengthy process to develop, coordinate, and approve a cost estimate prior to a program advancing to the next phase of the acquisition lifecycle.
  • Cost estimates may not be regularly updated to integrate the many changing factors influencing a program (budget changes, Senior Leadership direction, Congressional influence, requirements definition refinement, changes to other programs that impact this one, contractor performance, and countless other factors).
How could Cost Estimating adopt Digital principles?
  • Focus on open, collaborative, peer-review model
  • Develop digital platforms to share cost data (actuals and estimates), cost models, tools, resources, expertise, and more
  • Expand the Defense Cost and Resource Center (DCARC) data repositories and tools
  • Strengthen communities of practice online to increase collaboration across Services, Agencies, and OSD
  • Identify collaboration opportunities to work with defense and commercial industry on improving cost estimates
  • Develop platforms and processes where draft cost models could be shared with the community to allow contributions and refinement of assumptions, reference data, calculations, and final estimates and conclusions (open peer reviews)
  • Develop processes, policies, and ultimately culture that prioritizes collaboration and open models by streamlining approval processes.
  • Identify successful digital cost estimates, build upon early successes, and publicize best practices, lessons learned, and early adopters to the DOD cost community.

There are some areas of cost estimating (such as evaluating cost proposals in a source selection) that would not lend itself to an open, collaborative model due to proprietary data, but the lion share should lend itself to increased collaboration.  Some limitations may be required where the Government would tip its hand in negotiations or contractors abusing an inflated estimate, but opening up the model to the crowd would reduce the errors in the estimate and improve fidelity.

I’ll be the first to admit that I’m not a cost estimating professional, but rather a program manager by trade.  There may be tools and processes out there that I’m not aware of.  If all you cost estimators out there know of other challenges, opportunities, or additional ideas for an open, collaborative model, please provide your comments below.