442 Journal of the Spanish Institute for Strategic Studies N. 6 / 2015 Life cycle cost estimates for defence purchasing programmes are by their very nature, as we have already alluded, uncertain.21 Years of development and production of a system and decades of running costs and support need to be estimated on the basis of historical information that is scarce, disordered and stored in a motley assortment of systems that do not communicate with one another. Additionally, the information available for the system is often very limited such as the timetable, quantity of units to acquire, requirements, purchasing strategy, a rough design, etc. To complicate matters even further, the main characteristics of the system may change over the course of development and production such as variations to the weight of the system or its complexity etc. For all these reasons, a LCC estimate, when it just expresses a number, is merely an output or observation in a probabilistic cost distribution. The estimate is stochastic rather than deterministic. Cost estimation techniques Estimation techniques are used to break down a complex problem into a set of small problems that are easier to address. A combination of algorithms, judgement-based mathematical calculations and historical and current information deliver a cost estimate. Each technique offers advantages and disadvantages. Consequently, it does not seem advisable to use one method exclusively. We can order the estimation techniques according to their reliability: 22 1. Estimation using actual costs: This is used when we have developed a prototype. Its use is the most advisable and reliable since it permits us to extrapolate the cost according to the ongoing contract (prototype) in order to estimate the final cost of the system. 2. Estimation using engineering procedures (bottom-up): this considers price to be an output variable and cost calculations to be an input variable. This method identifies the cost components and these are valued and added together to obtain the direct cost. The indirect costs and the margin are then aggregated to obtain the sales price. This is the most detailed of all the techniques and the 21 A project in its initial phase, for example, may have a Rough Order of Magnitude Estimate (ROM) ranging from −25% to +75%. At a later project stage, as more information is gathered, the range of accuracy of estimates would fall to -5% to +10%. Source: Project Management Institute. A Guide to the Project Management Body of Knowledge (PMBOK® Guide). Fifth Edition. Pennsylvania. Project Management Institute Inc., ISBN978-1-62825-009-1, 2013, p. 200. 22 Source: Estimator’s experience. http://revista.ieee.es/index.php/ieee
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