DOE G 413.3-21, Cost Estimating Guide

AVAILABLE ONLINE AT: INITIATED BY: https://www.directives.doe.gov Office of Management DOE G 413.3-21 5-9-2011 Cost Estimating Guide [This Guide describes suggested non-mandatory approaches for meeting requirements. Guides are not requirements documents and are not to be construed as requirements in any audit or appraisal for compliance with the parent Policy, Order, Notice, or Manual.] U.S. Department of Energy Washington, D.C. 20585 NOT MEASUREMENT SENSITIVE DOE G 413.3-21 i (and ii) 5-9-2011 FOREWORD This Department of Energy (DOE) Guide may be used by all DOE elements. This Guide provides uniform guidance and best practices that describe the methods and procedures that could be used in all programs and projects at DOE for preparing cost estimates. This guidance applies to all phases of the Department’s acquisition of capital asset life-cycle management activities. Life-cycle costs (LCCs) are the sum total of the direct, indirect, recurring, nonrecurring, and other costs incurred or estimated to be incurred in the design, development, production, operation, maintenance, support, and final disposition of a system over its anticipated useful life span. This includes costs from pre-operations through operations to the end of the project/program life-cycle, or to the end of the alternative. DOE programs may use alternate methodologies or tailored approaches more suitable to their types of projects and technologies. DOE Guides are not requirement documents and should not be construed as requirements. Guides are part of the DOE Directives Program and provide suggested ways of implementing Orders, Manuals, and other regulatory documents. DOE G 413.3-21 iii 5-9-2011 TABLE OF CONTENTS 1.0  PURPOSE ........................................................................................................................................................... 1  2.0  GUIDANCE OVERVIEW ................................................................................................................................ 1  2.1  Purpose of the Cost Estimate ......................................................................................................................... 3  2.2  Overview of the Cost Estimating Process Model ............................................................................................ 4  3.0  COST ESTIMATING INPUTS ........................................................................................................................ 4  3.1  Project/Program Requirements ...................................................................................................................... 5  3.2  Documentation Requirements ........................................................................................................................ 7  4.0  COST ESTIMATING CHARACTERISTICS AND CLASSIFICATIONS ............................................... 12  4.1  Planning the Cost Estimates ........................................................................................................................ 12  4.2  Cost Estimate Classifications ........................................................................................................................ 13  4.3  Cost Estimate Ranges .................................................................................................................................... 17  5.0  COST ESTIMATING METHODS ................................................................................................................. 18

5.1  Detailed Estimating Method .......................................................................................................................... 18  5.2  Parametric Estimating Techniques ............................................................................................................... 19  5.3  Other Estimating Methods ........................................................................................................................... 21  5.4  Methods of Estimating Other Life-Cycle Costs ............................................................................................. 25  6.0  COST ESTIMATING DEVELOPMENT PROCESS .................................................................................. 26  6.1   Overview of the Cost Estimating Process ................................................................................................ 26  6.2   Estimate Planning ................................................................................................................................... 30  6.3   Cost Estimate Inputs ................................................................................................................................ 31  6.4  Cost Estimate Production .............................................................................................................................. 34  6.5   Cost Estimate Review ............................................................................................................................... 59  6.6  Estimate Reconciliation................................................................................................................................ 60  6.7  Cost Estimate Documentation ....................................................................................................................... 60  6.8  Estimate Maintenance ................................................................................................................................... 66  7.0  COST ESTIMATING OUTPUTS .................................................................................................................. 67  7.1  Cost Estimate Interfaces ................................................................................................................................ 67  7.2   Estimate Presentations to Management ................................................................................................... 68  7.3  Baselines and Change Control ...................................................................................................................... 68  7.4   Analysis .................................................................................................................................................... 69  8.0  COST ESTIMATING EXPECTATIONS...................................................................................................... 69  iv DOE G 413.3-12 5-9-2011 8.1  Summary of Expectations .............................................................................................................................. 69  8.2 Lessons Learned ............................................................................................................................................ 70  8.3 Independent Cost Reviews ............................................................................................................................. 70

8.4  Independent Government Cost Estimates ...................................................................................................... 73  9.0  APPENDICES .................................................................................................................................................. 74  Appendix A: Acronyms .......................................................................................................................................... A-1  Appendix B: Definitions .......................................................................................................................................... B-1  Appendix C: Summary of Federal Requirements ............................................................................................... C-1  Appendix D: Summary of DOE Requirements .................................................................................................... D-1  Appendix E: Generic Review Criteria ................................................................................................................... E-1  Appendix F: Example of the Calculation and Use of Economic Escalation ....................................................... F-1  Appendix G: Example of Life-Cycle Cost Analysis ............................................................................................. G-1  Appendix H: Cost Estimate Classifications (AACEI) ......................................................................................... H-1  Appendix I: Bibliography ........................................................................................................................................ I-1  Appendix J: Crosswalk to GAO-09-3SP ................................................................................................................ J-1  Appendix K: ICR and ICE Guidance .................................................................................................................. K-1  Appendix L: DOE Expectations for Quality Cost Estimates .............................................................................. L-1  DOE G 413.3-21 1 5-9-2011 1.0 PURPOSE The purpose of the DOE Cost Estimating Guide is to provide uniform guidance and best practices that describe the methods and procedures recommended for use at DOE in preparing cost estimates that is specific to all work including but not limited to construction projects and/or programs. This guidance is applicable to all phases of the Department’s acquisition of capital asset management activities. Practices relative to estimating life-cycle cost (LCC) are described. LCCs include all the anticipated costs associated with a project or program alternative throughout its life; i.e., from authorization through operations to the end of the facility/system life cycle (see Figure 3-3 in Section 3.2). This Guide does not impose new requirements or constitute DOE policy, nor is this Guide intended to instruct Federal employees in how to prepare cost estimates (see Appendix C, Summary of Federal Requirements, and Appendix D, Summary of DOE Requirements). Rather, it may be used to provide information based on accepted standard industry estimating best practices and processes—including practices promulgated by the GAO Cost Estimating and Assessment Guide (GAO-09-3SP)—to meet Federal and DOE requirements and facilitate the development of local or site-specific cost estimating requirements. The GAO has specifically recommended that DOE cost estimating guidance be provided following the GAO Twelve Steps of a High-Quality Cost Estimating Process to improve the quality of its cost estimates (see GAO- 10-199, Table 1, page 10).

2.0 GUIDANCE OVERVIEW High quality cost estimates provide an essential element for successful project and program management. The main objective of the Guide is to provide guidance that should improve the quality of cost estimates supporting execution of projects and programs. The cost estimating principles and processes provided herein may be used to meet or adhere to Federal and DOE requirements while utilizing industry standards and best practices. High-quality estimates should satisfy four characteristics as established by industry best practices—they should be credible, well-documented, accurate and comprehensive.1 An estimate should be  credible when the assumptions and estimates are realistic. It has been cross-checked and reconciled with independent cost estimates, the level of confidence associated with the point estimate has been identified,2 and a sensitivity analysis (i.e., an examination of the 1 GAO Cost Estimating and Assessment Guide, GAO-09-3SP (Washington, D.C., March 2009) 2 A point estimate is the best guess or most likely value for the cost estimate, given the underlying data. The level of confidence for the point estimate is the probability that the point estimate will actually be met. 2 DOE G 413.3-21 5-9-2011 effect of changing one variable relative to the cost estimate while all other variables are held constant in order to identify which variable most affects the cost estimate) has been conducted;  well-documented when supporting documentation includes a narrative explaining the process, sources, and methods used to create the estimate and identifies the underlying data and assumptions used to develop the estimate;  accurate when actual costs deviate little from the assessment of costs likely to be incurred; and  comprehensive when it accounts for all possible costs associated with a project, is structured in sufficient detail to insure that costs are neither omitted nor duplicated, and has been formulated by an estimating team with composition commensurate with the assignment. From the GAO Cost Estimating and Assessment Guide, there are 12 key steps that are essential to producing high quality cost estimates:3 1. Define the estimate’s purpose 2. Develop an estimating plan 3. Define the Project (or Program) characteristics 4. Determine the estimating structure [e.g., Work Breakdown Structure (WBS)] 5. Identify ground rules and assumptions 6. Obtain data 7. Develop a point estimate and compare to an independent cost estimate 8. Conduct sensitivity analysis 9. Conduct risk and uncertainty analysis 10. Document the estimate 11. Present the estimate for management approval 12. Update the estimate to reflect actual costs and changes This guide contains industry best practices for carrying out these steps. Appendix L comprises a suggested crosswalk of the 12 key GAO estimating steps and their implementing tasks to the sections of this Guide wherein guidance for accomplishing those steps within the DOE project environment is addressed and discussed. DOE O 413.3B, Program and Project Management for the Acquisition of Capital Assets, dated 11-29-10, promotes the development of a well-defined and managed project performance baseline (defined by scope, schedule, cost and key performance parameters). The guidance provided in this document highlights the importance of three closely interrelated processes to 3 GAO-09-3SP DOE G 413.3-21 3 5-9-2011

help define the project baseline: development of a Work Breakdown Structure (WBS) for scope definition, cost estimating, and schedule development.  The Work Breakdown Structure process provides: o A complete decomposition of the project into the discreet products and activities needed to accomplish the desired project scope (the WBS dictionary should contain in a narrative format what each activity includes); o Compatibility with how the work will be done and how costs and schedules will be managed; o The visibility to all important project elements, especially those areas of higher risk, or which warrant additional attention during execution; o The mapping of requirements, plans, testing, and deliverables; o A clear ownership by managers and task leaders; o Organization of data for performance measurement and historical databases; and o Information that is the basic building block for the planning of all authorized work.  The Cost Estimate process provides: o Documented assumptions and basis of estimate that provide further project definition; o The activity quantities that make up the scope of work; o The cost element data (labor and non-labor) needed to complete the products/deliverables; o The estimated resource hours and non-labor values that make up the work; o The component elements (labor, materials, equipment, etc.) required to complete activities and work packages; and o Additional WBS elements mined during the detailed take-off.  The Schedule process provides: o The activity durations based on the “crew” production rates per quantity and other work influences, i.e. hold points, space restrictions, cure time, etc.; o Logical relationships of all schedule activities; o Critical path that represents the longest duration for the project and the sequence of work with the least margin for deviation or flexibility; o The time phasing of activities that identify new activities or costs, i.e. winter work, escalation needs, etc.; and o The milestones and activity relationships that define possible impacts, i.e. overtime needed to complete activities. 2.1 Purpose of the Cost Estimate The purpose of a cost estimate is determined by its intended use (e.g., studies, budgeting, proposals, etc.), and its intended use determines its scope and detail. Cost estimates should have general purposes such as:  Help the DOE and its managers evaluate and select alternative solutions; 4 DOE G 413.3-21 5-9-2011  Support the budget process by providing estimates of the annual funding and phased budget requirements required to efficiently execute work for a project or program;  Establish cost and schedule ranges during the project development phases;  Establish a Project Performance Baseline to obtain Critical Decision-2 (CD-2) approval and to measure progress following the CD-2 approval (see Figures 3-1 and 3-2 for a pictorial description of the DOE Critical Decision Process);  Support Acquisition Executive approval for acquisition of supplies, services, and contracts; and  Provide data for value engineering studies, independent reviews, and baseline changes. 2.2 Overview of the Cost Estimating Process Model

Traditionally, cost estimates are produced by gathering input, developing the cost estimate and its documentation, and generating necessary output. Figure 2-1 depicts the cost estimating process model, which should be similar for cost estimates at various points within the project life cycle. The scope of work, schedule, risk management plan, and peer review interact to influence the cost estimating process and techniques used to develop the output. These process interactions—inputs, processes (tools and techniques), and outputs—are used by the Project Management Institute and others to depict the transfer of information between steps in a knowledge area such as cost estimating. Figure 2–1. The Cost Estimating Process Model 3.0 COST ESTIMATING INPUTS Cost estimate development is initiated by inputs to the process. These inputs are process elements that can be either one-time or iterative in nature as illustrated in the above process model. One-time inputs may include project/program requirements, the mission need statement, Schedule Peer Reviews Input Output Risk Management Plan Scope Of Work Schedule Scope of Work Input Output Risk Management Plan Peer Reviews GAO 12 Key Steps DOE G 413.3-21 5 5-9-2011 and the acquisition strategy or acquisition plan. Iterative inputs may include the technical/scope development, the schedule development, and the risk management plan with associated risk identification and mitigation strategies. The peer review results in the process may also identify the need to revisit various process elements to improve the quality of the cost estimate. Cost estimates that are developed early in a project’s life may not be derived from detailed engineering designs and specifications (may not be a point estimate but a high/low range project estimate), but they should be sufficiently developed to support budget requests for the remainder of the project definition phase. Over the life of the project, cost estimates become increasingly more definitive, and reflect the scope and schedule of work packages and planning packages defined for the project. 3.1 Project/Program Requirements Appendixes C and D provide summaries of the Federal and DOE requirements for cost estimates, respectively. Each DOE program or project may have more specific, detailed requirements. Examples include the National Environmental Policy Act (NEPA); safety and health; site security requirement; and local requirements that may be specified in contracts, labor agreements, etc. Many of these requirements are implemented through the DOE annual budget formulation and execution process, and may add cost to projects. The primary requirement for developing cost estimates for capital asset projects is DOE O 413.3B, Program and Project Management for the Acquisition of Capital Assets, dated 11-29-10. During the life cycle of a project (see Figures 3-1 and 3-2), various cost estimates and related documents are required to support the Critical Decision process, the project reviews process, and the annual budget formulation and execution process. 6 DOE G 413.3-21 5-9-2011 Figure 3-1. Typical DOE Acquisition Management System for Line Item Capital Asset Projects4 CD = Critical Decision EIR = External Independent Review PARS = Project Assessment and Reporting System PB = Performance Baseline PED = Project Engineering and Design TPC = Total Project Cost 4 DOE O 413.3B DOE G 413.3-21 7 5-9-2011

Figure 3-2. Typical DOE Acquisition Management System for Other Capital Asset Projects (i.e., Major Items of Equipment and Operating Expense Projects)5 3.2 Documentation Requirements Common cost estimating outputs are shown in Figure 3-3. As this figure depicts, cost estimates must be developed, updated, and managed over the total life-cycle of any asset and are an important element for total life-cycle asset management within the DOE. Furthermore, project cost estimates are an integral element and key input into the management of programs over their life-cycle. Thus the concepts for cost estimate development described in this Guide should be applied to all instances when cost estimates are required to support both project and program management objectives. As described by the DOE O 413.3B and other DOE directives, cost estimates and LCC analyses may be produced for a variety of purposes. As discussed below, these may include:  The critical decision process within programs/projects (DOE O 430.1B Chg 1, Real Property Asset Management, and DOE O 413.3B). 5 DOE O 413.3B 8 DOE G 413.3-21 5-9-2011  The DOE annual budget guidance document.  Contract actions specifying requirements.  Other project/program management purposes (various Federal regulations, DOE Orders, and industry practices). Figure 3-3. Facility/System Estimate Outputs as Compared to Life-Cycle Major Milestones 3.2.1 DOE Critical Decisions for Project Management and the Supporting Cost Estimates  Critical Decision (CD)-0, Approve Mission Need — Generally, a cost estimate range is prepared to support CD-0. Assumptions developed by the project team generally will drive the project scope and bound both the project scope and costs. There will likely be very little detail to support these cost estimates, so it is important that scope assumptions be well- documented. A project cost magnitude range should be established based on potential project alternatives and major areas of risk, with appropriate consideration of the accuracy range of any supporting estimates or analyses. The proposed range should be sufficiently broad such that it fully bounds all possible project cost outcomes, understanding the very limited design basis that exists at the time and the more imprecise methodologies used at this stage of the project. This estimate assists in establishing the Acquisition Authority Level for CD-0. In addition, an estimate of the costs to be incurred prior to CD-1 which is for developing the Conceptual Design for the project, could also be required to support resource Program / Project Life-Cycle Approve Mission Need / CD-0 Facility Operations, Maintenance, & Upgrades Approve Alt. Selection & Cost Range / CD-1 Facility Deactivation, Decommissioning, & Demolition Approve Start of Operations CD-4Approve Start of Construction CD-3 Approve Performance. Baseline / CD-2 Typical Estimate Outputs Program Office: Pre- Initiation Phase Program Office: Long - Term S&M or transfer to Legacy Mgt. • TPC Range • LCC Alternative Analyses • Key Milestones • TPC Range for Selected Alternative • LCC Alternative Analyses • Annual Funding Profiles • Key Milestones • TPC (TEC+OPC) • Establish Performance Baseline • Resource Loaded Schedules • TPC (TEC&OPC) • Resource Loaded Schedules • Government Estimates • Bid Evaluation Estimates • Construction Modification or Change Estimates • OPC Estimates • Start-up and Testing Cost Estimates

• O&M Cost Estimates • Process Modification or Change Estimates • Resource Loaded Schedules • Annual Operating Plans (AOP) • System Modification and Optimization Analyses • Maintenance and Facility Recapitalization Estimates • Resource Loaded Schedules • Detailed Work Planning Estimates • Planning Estimates • Preliminary Estimates • LCC Analysis Estimates • TPC (TEC+OPC) • Performance Baselines • Resource Loaded Schedules Program / Project Life-Cycle Approve Mission Need / CD-0 Facility Operations, Maintenance, & Upgrades Approve Alt. Selection & Cost Range / CD-1 Facility Deactivation, Decommissioning, & Demolition Approve Start of Operations CD-4Approve Start of Construction CD-3 Approve Performance. Baseline / CD-2 Typical Estimate Outputs Program Office: Pre- Initiation Phase Program Office: Long - Term S&M or transfer to Legacy Mgt. • TPC Range • LCC Alternative Analyses • Key Milestones • TPC Range for Selected Alternative • LCC Alternative Analyses • Annual Funding Profiles • Key Milestones • TPC (TEC+OPC) • Establish Performance Baseline • Resource Loaded Schedules • TPC (TEC&OPC) • Resource Loaded Schedules • Government Estimates • Bid Evaluation Estimates • Construction Modification or Change Estimates • OPC Estimates • Start-up and Testing Cost Estimates • O&M Cost Estimates • Process Modification or Change Estimates • Resource Loaded Schedules • Annual Operating Plans (AOP) • System Modification and Optimization Analyses • Maintenance and Facility Recapitalization Estimates • Resource Loaded Schedules • Detailed Work Planning Estimates • Planning Estimates • Preliminary Estimates • LCC Analysis Estimates • TPC (TEC+OPC) • Performance Baselines • Resource Loaded Schedules Facility/System Life Cycle DOE G 413.3-21 9 5-9-2011 planning and near-term schedules.  CD-1, Approve Alternative Selection and Cost Range—There are three cost estimates needed for CD-1. 1. Prior to the approval of CD-1, the project team should develop a definitive estimate of the near term preliminary design cost, which is needed for the project engineering and design (PED) funding request (if needed for project execution). An estimate may also be used to support PED funding for use in preliminary design, final design and baseline development. 2. As part of the CD-1 requirement, the project team should perform analyses of the most likely project alternatives. Thus, the second cost estimate needed at CD-1 is the LCC of the likely alternatives that are being considered. A risk adjusted LCC estimate should be prepared for each alternative under consideration to ensure the alternative with the best cost/benefit ratio (and generally the lowest life-cycle cost) to the government is considered. Full LCCs, including all direct and indirect costs for planning, procurement, operations and maintenance (operational analysis should be used to evaluate condition and any negative trends on cost projections for assets in use), and disposal costs must be considered for each alternative being evaluated (OMB A-11). 3. After selecting the alternative that best meets the mission, the project team develops the third estimate, the total project cost (TPC) range, a schedule range with key milestones and events, and annual funding profiles. The TPC range should consider identified project risks and estimate uncertainty and encompass the full range of potentially required resources necessary to successfully execute the planned work associated with the preferred/recommended alternative. The TPC range also assists in establishing the Critical Decision Authority Thresholds.

 CD-2, Approve Performance Baseline—Cost estimates supporting CD-2 should utilize more definitive cost estimating techniques (see Section 5.0). For CD-2, since available information will be more developed, the range should be collapsed to a point estimate. A single cost estimate will represent the entire project, utilizing the current scope and associated design parameters. The estimate will include appropriate allowances for risk and estimate uncertainty, i.e., Management Reserve and Contingency (see Section 6.4.5). This estimate is the basis for the cost estimate of the project’s Performance Baseline and the Performance Measurement Baseline used for earned value reporting as required for projects with a TPC greater than $20 million.6  CD-3, Approve Start of Construction—Cost estimates based on the Final Design may incorporate some actual bids received from contractors used to establish the project’s requirements for construction or execution. Cost estimates for Other Project Costs and Operational phases of the asset being acquired are finalized. These updated estimates 6 DOE O 413.3B 10 DOE G 413.3-21 5-9-2011 support authorization to commit resources necessary, within funds provided, to execute the project.  CD-4, Approve Start of Operations or Project Completion—Establishes when the project is ready for turnover or transition to operations, if applicable. Determines the final Estimate at Completion (EAC) and provides final project cost and performance reports developed in accordance with the project’s approved WBS. Cost and performance reports are necessary to document the TPC for the asset acquired, as well as assisting in the capture of historical cost information. 3.2.2 Annual Budget Process Project or program budgets are sometimes adjusted to accommodate appropriations and allocations that are more or less than expected. Some situations may require development of alternative budget scenarios that can mitigate the risk of project funding uncertainty. When actual funding differs from planned budgets, baselines and estimates for current-period work (work packages) should be adjusted accordingly. Timing changes of actual funding versus planned budgets may not change the technical scope for which an estimate has been developed. However, those timing changes (extending work into the future from planned schedules) can cause changes to programmatic scope, project duration, and efficiencies, which affect overall project costs (such changes are subject to change control – scope, schedule and cost). 3.2.3 Contract Actions During the normal course of project execution, contract actions occur. These commonly entail developing a government cost estimate, a proposed estimate, and a final estimate. Depending on contract types and other factors, varying levels of information will be available to facilitate the cost estimating process. Before determining the content of an estimate, it is relevant to understand the contract types that will be used to execute the work. Types of contracts include firm-fixed price, fixed-price incentive, and cost reimbursable with a variety of fee structures, including fixed fee, award fee, and performance-incentive fee. Understanding the contract that will be used can influence the assumed government risks, contractor risks, productivity, and overhead and profit rates used in the estimate. The contract type should be defined in the Acquisition Strategy/Plan.

Independent Government Cost Estimates (IGCEs) are required before most acquisitions and may become either the basis for contract negotiations or settling claims. The purpose of the IGCE is to establish a basis for reserving funds for a contract during acquisition planning, comparing costs or prices subject proposed by offerors, and providing an objective basis for assisting in determining price reasonableness, and to assist in establishing the Government’s negotiation position and strategy. DOE G 413.3-21 11 5-9-2011 NOTE Performance-based contracting could be a preferred contracting method that would require discrete, quantifiable, and measurable objectives tied to an incentive for which the development of discrete quantifiable estimates tied to the measurable objectives would be required. A project baseline (established at CD-2) and near-term contracts, or work packages, should also have characteristics that are discrete, quantifiable, and measurable. Fee is normally associated with reimbursable cost contracts and is determined on the basis of pre-established performance objectives (e.g., meeting target dates, achieving target unit costs, etc.) Once the contract is in place, it will stipulate the fee structure and must be considered when developing or updating the cost estimate. Profit is normally associated with a fixed-price contract and is unknown until all costs have been incurred. Cost estimates developed for this type of contract should assume a reasonable amount of profit based on market conditions and risks involved. DEARS 915.404-4 provide guidance for estimating profit/fees for DOE contracts. Under DEARS 915.404-4-70 it is notable that construction and construction management contracts are subject to fee/profit limits which can only be exceeded after review and approval by the Senior Procurement Executive – important consideration when estimating the full contract price. 3.2.4 Other Project/Program Management Actions Various other project or program management actions, such as development of LCC analyses, cost-benefit analyses, value engineering (VE) studies, earned value analyses, and change requests may require development of cost estimates. LCC estimates may be required for many purposes. As a part of alternative selection, LCC analysis may point to the alternative with the lowest LCC but other analyses and considerations may need to be considered in the decision process. In cases where benefits can be quantified, LCC analyses can support more formal cost-benefit analysis for alternative evaluation and selection. Any time a change in the project is contemplated, or an alternative must be evaluated, LCC analysis should be considered. (Appendix G presents a simplified example of a LCC analysis) Cost estimates are also required to support day-to-day project management decisions. In many cases, alternatives (e.g., changes in the work flow) are considered that do not affect the entire project, but do affect the day-to-day details of managing a project. A design detail change that does not exceed a cost or schedule threshold for management approval is an example. Comparisons of government estimates to other results (e.g., bid opening prices) may require a reconciliation of the figures. Generally, the differences are due to the estimates not being based on consistent, current information, such as weather delay assumptions, productivity assumptions, market conditions for commodities, etc. The reconciliation should clearly state the differences and the rationale for the differences.

12 DOE G 413.3-21 5-9-2011 4.0 COST ESTIMATING CHARACTERISTICS AND CLASSIFICATIONS 4.1 Planning the Cost Estimates Table 4-1 describes the elements of planning required to produce credible cost estimates.7 In a 2006 survey to identify the characteristics of a good estimate, participants from a wide variety of industries– including aerospace, automotive, energy, consulting firms, the Navy, and the Marine Corps–concurred that the characteristics listed in the table are valid (GAO-09-3SP, Chapter 1, page 7). The Government Accountability Office (GAO) also found that despite the fact that these characteristics have been published and known for decades, many agencies still lack the ability to develop cost estimates that can satisfy these basic characteristics. Planning Step Description Clear Identification of Task Estimator must be provided with the scope description, ground rules and assumptions, and technical and performance characteristics. The estimate’s constraints and conditions must be clearly identified to ensure the preparation of a well-documented estimate. Broad Participation in Preparing Estimates The Integrated Project Team and the Integrated Acquisition Team should be involved in determining requirements based on the mission need and in defining parameters and other scope characteristics. Data should be independently verified for accuracy, completeness, and reliability. Availability of Valid Data Use numerous sources of suitable, relevant, and available data. Use relevant, historical data from similar work to project costs of the new work. The historical data should be directly related to the scope’s performance characteristics. Standardized Structure for the Estimate Use of a standard WBS that is as detailed as possible, continually refining it as the maturity of the scope develops and the work becomes more defined. The WBS elements should ultimately drill down to the lowest level, the work package. The WBS ensures that no portions of the estimate (and schedule) are omitted or duplicated. This makes it easier to make comparisons to similar work. Provision for Identify the confidence level (e.g., 80 percent) needed to establish a successful planning process. Identify uncertainties and develop an allowance to mitigate cost 7 GAO-09-3SP DOE G 413.3-21 13 5-9-2011 Planning Step Description Uncertainties and Risk effects of the uncertainties. Include known costs and allow for historically likely but specifically unknown costs. (Reference: DOE G 413.3-7A, Risk Management Guide) Recognition of Escalation Ensure that economic escalation is properly and realistically reflected in the cost estimate. Escalation is schedule driven, and scheduling assumptions need to be clearly noted. NOTE: Project teams may use specific rates relative to the site when available. In any case, the source of escalation information used should be identified and the applicability of the rates should be explained/justified. Recognition of Excluded Costs Include all costs associated with the scope of work; if any cost has been excluded, disclose and include a rationale. Independent Review of Estimates Conducting an independent review of an estimate is crucial to establishing confidence in the estimate. The independent reviewer should verify, modify, and correct an estimate to ensure realism, completeness, and consistency. Revision of Estimates for Significant Changes

Update estimates to reflect changes in the design requirements. Large changes that affect costs can significantly influence decisions. Table 4-1. Basic Characteristics of Credible Cost Estimates 4.2 Cost Estimate Classifications Most cost estimates have common characteristics, regardless of whether the technical scope is traditional (capital funded, construction, equipment purchases, etc.) or nontraditional (expense funded, research and development, operations, etc.). The most common characteristics are levels of definition, requirements (end usage/purpose), and techniques used. These characteristic levels are generally grouped into cost estimate classifications. Cost estimate classifications may be used with any type of traditional or nontraditional project or work and may include consideration of (1) where a project stands in its life cycle, (2) level of definition (amount of information available), (3) techniques to be used in estimation (e.g., parametric vs. definitive), and/or (4) time constraints and other estimating variables. Typically, as a project evolves, it becomes more definitive. Cost estimates depicting evolving projects or work also become more definitive over time. Determination of cost estimate classifications helps ensure that the cost estimate quality is appropriately considered. Classifications may also help determine the appropriate application of contingency, escalation, use of direct/indirect costs (as determined by cost estimate techniques), etc. Widely accepted cost estimate classifications are found in the Association for Advancement of Cost Engineering International (AACEI), Recommended Practice (RP) No. 17R-97 and RP No. 18R-97; see Appendix H). Appendix H includes a complete description of AACEI’s classifications. The five suggested cost estimate classifications are listed in Table 4-2 along with their primary characteristics. Table 4-3 lists the secondary characteristic and the estimate 14 DOE G 413.3-21 5-9-2011 uncertainty range, as a function of the estimate class; that could be used for contingency evaluations (estimate uncertainty contributes to both cost and schedule contingency) as part of the risk analysis for the project.8 DOE’s cost estimate classifications generally follow these recommended practices, although historically the more common cost estimate classifications are order of magnitude, preliminary, and definitive, which approximately equate to the AACEI’s Classes 5, 3 and 1, respectively. Table 4.4 provides an example of the typical suggested types of cost estimates for each DOE Critical Decision as compared with the AACEI classification. Figure 4.1 provides an example of the variability in uncertainty ranges for a process industry estimate versus the level of project/scope definition. (Reference: AACEI RP No. 18R-97) A project cost estimate may comprise separate estimates of differing classifications. Certain portions of the design or work scope may be well defined, and therefore warrant more detailed cost estimating techniques and approaches, while other areas are relatively immature and therefore appropriately estimated using parametric or other less definitive techniques. Cost Estimate Classification Primary Characteristics Level of Definition (% of Complete Definition) Cost Estimating Description (Techniques) Class 5, Concept Screening 0% to 2% Stochastic, most parametric, judgment (parametric, specific analogy, expert opinion, trend analysis) Class 4, Study or

Feasibility 1% to 15% Various, more parametric (parametric, specific analogy, expert opinion, trend analysis) Class 3, Preliminary, Budget Authorization 10% to 40% Various, including combinations (detailed, unit- cost, or activity-based; parametric; specific analogy; expert opinion; trend analysis) Class 2, Control or Bid/Tender 30% to 70% Various, more definitive (detailed, unit-cost, or activity-based; expert opinion; learning curve) Class 1, Check Estimate or Bid/Tender 50% to 100% Deterministic, most definitive (detailed, unit-cost, or activity-based; expert opinion; learning curve) Table 4-2. Generic Cost Estimate Classifications and Primary Characteristics 8 DOE G 413.3-7A, Risk Management Guide, dated January 2011. DOE G 413.3-21 15 5-9-2011 Table 4.3 – Cost Estimate Classification for Process Industries Critical Decision Suggested Estimate AACEI Estimate Classification CD-0 Cost estimate range Class 5 Estimate of costs to be incurred prior to CD-1 Class 3 CD-1 Estimate of near term preliminary design cost Class 3 LCC of likely alternatives that are being considered Class 5 TPC range Class 4 CD-2 Single point estimate representing entire project: Low risk projects Class 3 High risk projects Class 2 CD-3 Cost estimate based on Final Design [or sufficiently mature to start construction]: Low risk and final design complete Class 1 Low risk and final design not complete Class 2 High risk (final design or not) Class 2 CD-4 N/A Table 4.4 – Generic Suggested Types of Estimates for DOE Critical Decisions 16 DOE G 413.3-21 5-9-2011 Figure 4.1 – Example of the Variability in Accuracy/Uncertainty Ranges for a Process Industry Estimate As a general rule, particularly for projects that are in the early stages of development, a combination of estimate classifications must be used to develop the entire estimate. In these situations, estimators should use a combination of detailed unit cost estimating (Class 1) techniques for work that will be executed in the near future, preliminary estimating (Class 3) techniques for work that is currently in the planning stages but less defined, and order of magnitude estimating (Class 5) techniques for future work that has not been well defined. As a DOE G 413.3-21 17 5-9-2011 project progresses through the Acquisition Management System (initiation, definition, execution, and transition/closeout phases) and the project development and planning matures, the life-cycle cost estimate becomes more definitive. This may be referred to as “rolling-wave” planning, where detailed planning of future work is done in increments, or waves as the project progresses through phases. 4.3 Cost Estimate Ranges The Department’s Acquisition Management System includes Critical Decisions (CDs) that define exit points from one phase of project development and entry into the succeeding project phase. Prior to CD-2 approval, DOE O 413.3B requires the use of ranges to express project cost estimates. These ranges should depict TPCs in the early stage, even at CD-0. Ranges may be determined or based upon various project alternatives, project identified risks, and confidence levels. LCC estimates that are developed early in a project’s life may not be derived from detailed engineering, but must be sufficiently developed to support budget requests for the remainder of the project definition phase. In addition, ranges should include all anticipated resources, using appropriate estimating techniques that are necessary to acquire or meet the identified capability.

During the project definition phase, at the conclusion of the concept exploration process, the alternative selected as the best solution to a mission need is presented for approval. The solution presented includes the TPC range, a schedule range with key milestones and events, and annual funding profiles that are risk-adjusted and define all required resources necessary to successfully execute the planned work. The estimate range (lower and upper bounds) as defined in DOE G 413.3-13, U.S. Department of Energy, Acquisition Strategy Guide for Capital Asset Projects, dated 7-22-08, is determined by independently assessing the lower and upper cost estimate range for each of the major WBS elements. In some situations, the range may in part be a function of scope variability; e.g., if a decision to add five or 10 glove-boxes is pending. The range can also be established by the project team considering the cost and schedule estimate uncertainties as part of the risk analysis. A risk analysis is analytical in nature and, although simulation tools aid the analyst in assessing impact and consequences, no simulation tool can substitute for a thorough logical deterministic process. The risks are identified by the likelihood of occurrence and the probable impact. The lower bound of the cost range may represent a scenario where the project team has determined a low likelihood of occurrence and low impact of the identified risks, and a higher likelihood of opportunities occurrence. The risks may be accepted; therefore it is not necessary to include resources to mitigate them. 18 DOE G 413.3-21 5-9-2011 The upper bound of the cost range may represent a scenario where the project team has determined a low likelihood of occurrence, but the impact is significant of the identified impact risks. The risks will be managed and appropriate resources identified to mitigate each risk.9 5.0 COST ESTIMATING METHODS Many cost estimating methods/techniques are available to facilitate the cost estimating process. Depending on project scope, estimate purpose, project maturity, and availability of cost estimating resources, the estimator may use one, or a combination, of these techniques. As shown in Table 4.3, as the level of project definition increases, the estimating methodology tends to progress from conceptual (stochastic/parametric) techniques to deterministic/definitive techniques. The following sub-sections include techniques that may be employed in developing cost estimates. 5.1 Detailed Estimating Method Activity-based, detailed or unit cost estimates are typically the most definitive of the estimating techniques and use information down to the lowest level of detail available. They are also the most commonly understood and utilized estimating techniques. The accuracy of activity-based detailed or unit cost techniques depends on the accuracy of available information, resources spent to develop the cost estimate and the validity of the bases of the estimate. A work statement and set of drawings or specifications may be used to identify activities that make up the project. Nontraditional estimates may use the WBS, team input and the work statement to identify the activities that make up the work.

Each activity is further decomposed into detailed items so that labor hours, material costs, equipment costs, and subcontract costs are itemized and quantified. Good estimating practice is to use a verb as the first word in an activity description. Use of verbs provides a definitive description and clear communication of the work that is to be accomplished. Subtotaled, the detailed items comprise the direct costs. Indirect costs, overhead costs, contingencies and escalation are then added as necessary. The estimate may be revised as known details are refined. The activity-based detailed or unit cost estimating techniques are used mostly for Class 1 and Class 2 estimates, and they should always be used for proposal or execution estimates. Activity-based detailed cost estimates imply that activities, tasks, work packages, or planning packages are well-defined, quantifiable, and are to be monitored, so that performance can be reported accurately. Quantities should be objective, discrete, and measurable. These quantities provide the basis for an earned value measurement of the work within the activities and the WBS. 9 A more thorough discussion on the risk management process can be found in DOE G 413.3-7A, Risk Management Guide, January 2011. DOE G 413.3-21 19 5-9-2011 Advantages in using activity-based detailed or unit cost estimating methods include:  a greater level of confidence  more detail that can be used for better monitoring, change control, etc.  enhanced scope and individual activity definition  detailed quantities to establish more accurate metrics  better resource basis for the schedule Disadvantages include:  more time needed to develop the estimate  more costly to develop than relationship estimating 5.2 Parametric Estimating Techniques A parametric model is a useful tool for preparing early conceptual estimates when there is little technical data or engineering deliverables to provide a basis for using more detailed estimating methods.10 A parametric estimate comprises cost estimating relationships and other cost estimating functions that provide logical and repeatable relationships between independent variables, such as design parameters or physical characteristics and cost, the dependent variable. Capacity factor and equipment factor are simple examples of parametric estimates; however, sophisticated parametric models typically involve several independent variables or cost drivers. Parametric estimating is reliant on the collection and analysis of previous project cost data in order to develop the cost estimating relationships. 5.2.1 Cost Estimating Relationships Cost estimating relationships (CERs), also known as cost models, composites, or assemblies/subassemblies, are developed from historical data for similar systems or subsystems. A CER is used to estimate a particular cost or price by using an established relationship with an independent variable. For example, a CER of design hours per drawing may be applied to the estimated number of drawings to determine total design hours. Identifying an independent variable (driver) that demonstrates a measurable relationship with contract cost or price develops a CER. That CER may be mathematically simple in nature (e.g., a simple ratio), or it may involve a complex equation.

Parametric estimates are commonly used in conceptual and check estimates. A limitation to the use of CERs is that to be most effective, one must understand completely how the CER was developed and where and how indirect costs, overhead costs, contingency, and escalation are applicable. The parametric estimating technique is most appropriate for Class 5, 4, and 3 cost 10 It is recommended that when using these cost estimating models that they should be verified and validated by recognized standard industry practices such as the Tri Services Parametric Cost Model Standard . 20 DOE G 413.3-21 5-9-2011 estimates. The parametric technique is best used when the design basis has evolved little, but the overall parameters have been established. There are several advantages to parametric cost estimating. Among them are:  Versatility—If the data are available, parametric relationships can be derived at any level (system, subsystem component, etc.). As the design changes, CERs can be quickly modified and used to answer “what-if” questions about design alternatives.  Sensitivity—Simply varying input parameters and recording the resulting changes in cost will produce a sensitivity analysis  Statistical output—Parametric relationships derived through statistical analysis will generally have both objective measures of validity (statistical significance of each estimated coefficient and of the model as a whole) and a calculated standard error that can be used in risk analysis. This information can be used to provide a confidence level for the estimate based on the CERs predictive capability. There are also disadvantages to parametric estimating techniques, including:  Database requirements—The underlying data must be consistent and reliable. In addition, it may be time-consuming to normalize the data or to ensure that the data were normalized correctly. Without understanding how data were normalized, the estimator is accepting the database on faith, thereby increasing the estimate’s risk.  Currency—CERs must represent the “state-of-the-art;” that is, they must be periodically updated to capture the most current cost, technical, and programmatic data.  Relevancy—Using data outside the CER range may cause errors because the CER loses its predictive capability for data outside the development range.  Complexity—Complicated CERs (e.g., non-linear CERs) may be difficult for others to readily understand the relationship between cost and its independent variables. 5.2.2 End Products Unit Method The End Products Unit Method is used when enough historical data are available from similar work based on the capacity of that work. The method does not take into account any economies of scale, or location or timing of the work. Consider an example of estimating the construction cost of a parking lot. From a previous project the total cost was found to be $150,000 for 100 parking stalls, or $1,500/stall. For a new parking lot of 225 parking stalls, the estimated cost would be $1,500/parking stall x 225 parking stalls = $337,500. 5.2.3 Physical Dimension Method The Physical Dimension Method is used when enough historical data is available from similar work based on the area or volume of that work. This method uses the physical dimension relationship of existing work data to that of the physical dimensions of similar new work. The method does not take into account any economies of scale, or location or timing of the work

DOE G 413.3-21 21 5-9-2011 To consider the example in section 5.3, the total cost of the previous project was $150,000 for a 3,000 square feet parking lot. The new parking lot is to be 7,000 square feet; therefore, ($150,000/3,000 square feet = $50/ square feet for the previous project so the estimated cost of the new project is $50/ square feet x 7,000 square feet = $350,000. 5.2.4 Capacity Factor Method The Capacity Factor Method is used when enough historical data are available from similar work based on the capacity of that work. The method uses the capacity relationship of existing work data to that of the capacity of similar new work. It accounts for economies of scale, but not location or timing of the work. For example, consider a known power plant that produces 250 MW(t)/hour and costs $150,000,000 to construct. A new plant will produce 300 MW(t)/hour. From historical data, 0.75 is the appropriate capacity factor. Using the equation Cost (new) = Cost (known) (Capacity (new)/ Capacity (known)e Where: e = capacity factor derived from historical data Cost (new) = $150,000,000 (300/250).75 Cost (new) = $172,000,000 (rounded) 5.2.5 Ratio or Factor Method The Ratio or Factor Method is used when historical building and component data are available from similar work. Scaling relationships of existing component costs are used to predict the cost of similar new work. This method is also known as “equipment factor” estimating. The method does not account for any economies of scale, or location or timing of the work. To illustrate, if a plant that cost $1,000,000 to construct has major equipment that costs $300,000, then a factor of 3.33 represents the plant cost to equipment cost “factor.” If a proposed new plant will have $600,000 of major equipment, then the factor method would predict that the new plant is estimated to cost $600,000 x 3.33 = $2,000,000. 5.3 Other Estimating Methods 5.3.1 Level of Effort Method A form of parametric estimating is based on level of effort (LOE). Historically, LOE is used to determine future repetitive costs based on past cost data, as in, “we spent ~$10M on operations last year, so we need ~$10M next year.” Often LOE estimates have few parameters or performance objectives from which to measure or estimate, but are carried for several time periods at a similar rate (e.g., the costs of operations, such as X number of operators for Y amount of time). LOE estimates are normally based on hours, full-time equivalents (FTEs), or “lot.” Since they are perceived to have little objective basis, LOE estimates are often subject to scrutiny. The keys to LOE estimates are that they should generally be based on known scope 22 DOE G 413.3-21 5-9-2011 (although quantities may be assumed) and have a basis, even if it is simply the opinion of an expert or a project team. Variations on LOE techniques are numerous and should be considered carefully before deciding to employ a specific technique. For instance, using LOE for installing a piece of equipment may raise questions about why it does not include the circumstances surrounding the installation (contamination and security issues and related productivity adjustments). Also questionable in LOE estimates are indirect costs, overhead costs, profit/fee, and other assumptions. 5.3.2 Specific Analogy Method Specific analogies use the known cost or schedule of an item as an estimate for a similar item in a new system. Adjustments are made to known costs to account for differences in relative complexities of performance, design, and operational characteristics.

A variation of this technique is the “review and update technique,” where an estimate is constructed by examining previous estimates of the same or similar projects for logic, scope completion, assumptions, and other estimating techniques, and then updated to reflect any pertinent differences. The specific analogy technique is most appropriate in the early stages of a project; that is, for Class 5 and 3 cost estimates. There are several advantages to using the analogy method, including:  It can be used before detailed program requirements are known;  If the analogy is strong, the estimate will be defensible;  An analogy can be developed quickly and at minimal cost; and  The tie to historical data is simple enough to be readily understood. There are, however, also some disadvantages in using analogies, such as:  An analogy relies on a single data point;  It is often difficult to find the detailed cost, technical, and programmatic data required for analogies; and  There is a tendency to be too subjective about the technical parameter adjustment factors. The last disadvantage can be better explained through an example. If a cost estimator assumes that a new component will be 20 percent more complex, but cannot explain why, this adjustment factor is unacceptable. The complexity must be related to the system’s parameters, such as the new system will have 20 percent more data processing capacity or will weigh 20 percent more. (GAO) 5.3.3 Expert Opinion Method As stated in the GAO Cost Estimating and Assessment Guide, “expert opinion, also known as engineering judgment, is commonly applied to fill gaps in a relatively detailed WBS when one or more experts are the only qualified source of information, particularly in matters of specific DOE G 413.3-21 23 5-9-2011 scientific technology.” Expert opinion is an estimating technique whereby specialists are consulted until a consensus can be established regarding the cost of a program, project, sub-project, task, or activity. The expert opinion technique is most appropriate in the early stages of a project, or for Class 5, 4, and 3, cost estimates. These cost estimates document a list of the experts consulted, their relevant experience, and the basis for their opinions. A formalized procedure, the Oracle Method, has been used to forecast cost based on expert opinion. Six or more experts are given a specific, usually quantifiable, question. Each expert sees the estimates produced by the others and modifies his or her previous estimate until a consensus is reached. If after four rounds there is no consensus, the original question may be broken into smaller parts for further rounds of discussion or a moderator may attempt to produce a final estimate. This technique may be used for either portions of or entire estimates and activities for which there is no other sound basis. A limitation arises when a cost estimator’s or project manager’s status as an expert is questioned. The advantages of using an expert opinion are:  It can be used in the case where there are no historical data available;  The approach takes minimal time and is easy to implement once the experts are assembled;  An expert may provide a different perspective or identify facets not previously considered leading to a better understanding of the program; and  It can be useful as a cross-check for CERs that require data significantly beyond the data range. The disadvantages associated with an expert opinion include:

 It should be used as a last resort due to its lack of objectivity;  There is always a risk that one expert will try to dominate the discussion and sway the group toward his/her opinion; and  This approach is not considered very accurate or valid as a primary estimating method. The bottom line is that, because of its subjectivity and lack of supporting documentation, expert opinion should be used primarily for confirming that the estimate does not contain elementary mistakes or invalid assumptions. 5.3.4 Trend Analysis Method Trend analysis method is an estimating technique for current, in-progress work, and is also used to explain quantitatively how a project is progressing. It is especially useful when large quantities of commodities are a significant part of a project, (e.g., mass excavations, mass concrete placement, structural steel fabrication/installation, etc.) A trend is established using an efficiency index derived by comparing originally planned costs (or schedules) against actual costs (or schedules) for work performed to date. For example, a project’s actual costs to date, 24 DOE G 413.3-21 5-9-2011 divided by the number of units produced provides a measure of current costs per unit. Variations in this measure from previous periodic trending information can be used to adjust the estimate for the remaining work, as well as to help project managers with decisions regarding resources (people, equipment, etc.) and make near term planning adjustments. The trend analysis technique can be used at almost any stage of project development and can even be used to update cost estimates developed using other techniques. It should be remembered, however, that during a long project activity, productivity rates may vary, with less than optimal productivity occurring as project activity begins, improved productivity developing until an optimum sustained level can be achieved, and then less than optimal productivity encountered near the end of the project as problems are resolved and final activities are completed. Thus trend analysis estimates should consider the current stage and remaining stage of a project activity carefully before extrapolating current productivity or cost values. 5.3.5 Learning Curve Method The learning curve is a way to understand the efficiency of producing or delivering large quantities. Studies have found that people engaged in repetitive tasks will improve their performance over time, i.e., for large quantities of time and units, labor costs will decrease, per unit. The aircraft industry first recognized and named the learning curve and successfully used it in estimating. It can be used most effectively when new procedures are being fielded and where labor costs are a significant percentage of total unit cost. But it should always be understood that the learning curve applies only to direct labor input. Materials and overhead will not necessarily be affected by the learning curve. Figure 5-1 illustrates a hypothetical learning curve. Figure 5-1. The Learning Curve Method Typical learning curves start with high labor costs (hours) that decrease rapidly on early production units, and then flatten as production continues. This exponential relationship between U ni ts o f Pr od uc tio n Average Unit Cost DOE G 413.3-21 25 5-9-2011

labor productivity and cumulative production is expressed in terms of labor reduction resulting from production increases. For example, a 90-percent learning curve function requires only 90 percent of the labor hours per unit each time production doubles. When a total of 200 units are produced, labor costs for the second 100 units will be only nine tenths the costs of the first 100. Increased productivity allows for lower labor costs later in a project, and should result in a lower overall project cost. Subsequent similar projects should have fewer labor hours for each unit of production also, which could result in both more contractor profit and lower government contract costs. No standard reduction rate applies to all programs, and learning curve benefits will vary. When labor hour reductions of the first units are known, an accurate percentage reduction can be calculated and extended to subsequent units. If no data exists, it may be risky to assume that learning curve savings will be experienced. The learning curve estimating technique can be considered for all traditional and nontraditional projects. The learning curve is most effective when applied to repetitive activities, and can also be used to update labor hours calculated in earlier estimates. 5.4 Methods of Estimating Other Life-Cycle Costs Different methods may be used to estimate other project/program support costs, including design, engineering, inspections, ES&H, etc. Some common methods are counting drawings and specifications, FTE, and percentage. 5.4.1 Count Drawings and Specifications Method The estimator calculates the number of drawings and specifications representing a specific project. The more complex a project is, the more drawings and specifications it will require meaning that associated design costs will be higher. 5.4.2 Full-Time Equivalent Method The number of individuals anticipated to perform specific functions of a project forms the basis. The man-hour quantity is calculated and multiplied by the cost per labor hour and the duration of the project function to arrive at the cost. 5.4.3 Percentage Method The estimator calculates a certain percentage of the direct costs and assigns this amount to the other project functions (such as design, project management, etc.). Some possible benchmarks for DOE projects include:  Total design percentages are usually 15-25 percent of estimated construction costs for DOE projects. Non-traditional, first of a kind projects may be higher, while simple construction such as buildings will be lower than this range (on the order of 6 percent); 26 DOE G 413.3-21 5-9-2011 the more safety and regulatory intervention is involved, the higher the percentage.  Project management costs range from 5 to 15 percent of the other estimated project costs for most DOE projects, depending on the nature of the project and the scope of what is covered under project management. The work scope associated with this range should be defined very specifically and clearly. 6.0 COST ESTIMATING DEVELOPMENT PROCESS 6.1 Overview of the Cost Estimating Process The overall Cost Estimating Process Model followed here was described graphically by Figure 2.1 in Section 2.2. The cost estimating development process discussed in this section follow the 12 steps model recommended by GAO11and are part of the of the circle of iterative activities in Figure 2.1 for developing the cost estimate. Figure 6-1 depicts the 12 step GAO model. Table 6-1 further identifies the implementing tasks related to the GAO-12 step cost estimating development process. Systematically conducting these tasks enhances the reliability and validity of cost estimates. The process is iterative.

11 GAO-09-3SP Figure 6.1. The GAO 12 Steps Cost Estimating Development Process Model SOURCE: GAO-09-3SP Note: A crosswalk between the GAO 12 Steps and the different sections in this Guide is shown in Appendix J. D O E G 413.3-21 27 5-9-2011 28 DOE G 413.3-21 5-9-2011 Table 6-1. The GAO Cost Estimating Development Process Step Description Associated Tasks 1 Define the Estimate’s Purpose - Determine the estimate’s purpose. - The level of detail required. - Determine who will receive the estimate. - Identify the overall scope of the estimate. 2 Develop the Estimating Plan - Determine the cost estimating team. - Outline the cost estimating approach. - Develop the estimate timeline. - Determine who will do the independent cost estimate. - Develop the team’s master schedule. 3 Define the Program/Project Characteristics of the work Identify the technical and program/project parameters that will bind the cost estimate based on the following information: - The purpose of the project. - Its system and performance characteristics. - Any technology implications. - All system configurations. - Project acquisition schedule. - Acquisition strategy. - Relationship to other existing systems. - Support (manpower, training, etc.) and security needs. - Identification of risk items. - System quantities for development, test and production. - Deployment and maintenance plans. - Predecessor or similar legacy systems. 4 Determine the Estimating Structure - Define the work breakdown structure (WBS) and define each element in a WBS dictionary. - Choose estimating method best suited for each WBS element. - Identify potential cross-checks for likely cost and/or schedule drivers. - Develop a cost estimating checklist. 5 Identify Ground Rules and Assumptions Clearly define what is included and excluded from the estimate. Identify global, program, and project specific assumptions such as: - The estimate’s base year including its time-phasing and life cycle. - Project schedule information by phase. - Project acquisition strategy - Any schedule or budget constraints. - Inflation assumptions. - Travel costs. - Equipment to be furnished by the government. - Prime and major subcontractors involved. - Use of existing facilities or new modification / development. - Technology refresh cycles. - Technology assumptions and new technology to be developed. - Commonality with legacy systems and assumed heritage savings. - Effects of new ways of doing business. 6 Obtain the data - Create a data collection plan with emphasis on collecting current and relevant technical, programmatic, project, and cost and risk data. - Investigate possible data sources. - Collect and normalize data for cost accounting, inflation, learning, location, quantity, and other adjustments. - Analyze the data to look for cost drivers, trends, and outliers. Compare DOE G 413.3-21 29 5-9-2011 Step Description Associated Tasks results against rules of thumb and standard factors derived from historical data. - Interview data sources and document all pertinent information including an assessment of data reliability and accuracy. - Store the data for future estimates. 7 Develop the Point Estimate - Develop the cost by estimating each WBS element using the best methodology from the data collected. - Include all estimating assumptions. - Express costs in constant year dollars. - Time-phase the results by spreading costs in the years they are expected to

occur based on the project resources and schedule. - Sum each of the WBS elements to develop the overall point estimate - Validate the estimate by reviewing for errors such as double counting and omitting costs. - Compare estimate against the independent cost estimate and examine where and why there are differences. - Perform cross-checks on cost drivers to see if results are similar. - Update the estimate as more data becomes available or as changes occur. Compare results against previous estimates. 8 Conduct Sensitivity Analysis - Test the sensitivity of cost elements to changes in estimating input values and key assumptions. - Identify the effects of changing the project schedule, funding profile, or quantities on the overall estimate. - Based on this analysis determine which assumptions are key cost drivers and which cost elements are the most impacted by changes. 9 Conduct a Risk and Uncertainty Analysis - Determine the level of cost, schedule, and technical risk associated with each WBS element and discuss with technical experts. - Analyze each risk for its probability of occurrence and impact. - Develop minimum, most likely, and maximum ranges for each element of risk. - Use an acceptable statistical analysis methodology (e.g., Monte Carlo simulation) to develop a confidence interval around the point estimate. - Determine type of probability distributions and reason for their use. - Identify the confidence level of the point estimate based on risks that have already been mitigated. - Identify the amount of contingency funding and add this to the point estimate to determine the risk adjusted cost estimate. - This analysis should be performed by the IPT and reflect the latest approved project Risk Management Plan. 10 Document the Estimate - Document all steps used to develop the estimate so that it can be recreated quickly by a cost analyst unfamiliar with the program and produce the same result. - Document the purpose of the estimate, the team that prepared it, and who approved the estimate and on what date. - Provide a description of the project including the schedule and technical baseline used to create the estimate. - Present the time-phased life cycle cost of the program. - Discuss all ground rules and assumptions. - Include auditable and traceable data sources for each cost element. - Document for all data sources how the data was normalized. - Describe in detail the estimating methodology and rationale used to derive each WBS element’s cost (more detail preferred over too little). - Describe the results of the risk, uncertainty and sensitivity analysis and 30 DOE G 413.3-21 5-9-2011 Step Description Associated Tasks whether any contingency funds were identified. - Describe if the contingency and risk analysis was based on mitigated or unmitigated risks. - Document how the estimate compares to the funding profile. - Track how this estimate compares to previous estimates if applicable. 11 Present Estimate to Management for Approval - Develop a briefing that presents the documented life cycle cost estimate for management approval including an explanation of the technical and programmatic baseline and any uncertainties. - Briefing should be detailed enough so the presenter can easily defend the estimate by showing how it is accurate, complete, and of high quality. - Focus should be on the largest cost elements and drivers of cost presented in a logical manner.

- Content should be clear and complete making it easy for those unfamiliar with the cost estimate to comprehend the competence that underlies the estimate results. - Backup slides should be available to answer more probing questions. - Comparisons to an independent cost estimate should also be made and any differences explained. - Feedback from management should be acted upon and documented. - Cost estimating team should request acceptance of the estimate. - Include a comparison of the estimates (LCCE and/or ICE) to the budget. 12 Update the Estimate to Reflect Actual Costs and Changes - Update estimate to reflect any changes in technical, programmatic, or project assumptions or as the project passes through new phases / milestones so that it is always current - Replace estimates with EVM EAC and Independent EAC from the integrated EVM system - Report progress on meeting cost and schedule estimates - Perform a post-mortem and document lessons learned for elements whose actual costs or schedules are different from the estimate - Document all changes to the program and each affects the cost estimate. Source: DOD, DOE, NASA, Society of Cost Estimating and Analysis (SCEA), Industry, DHS 6.2 Estimate Planning Estimate planning (Input in Figure 2.1, Process Model) should include:  Establishing when the estimate is required  Determining who will prepare the estimate  Producing a plan/schedule for estimate completion  Selecting and notifying individuals whose input is required  Collecting scoping documents  Selecting estimating technique  Conducting an estimate kickoff meeting  Visiting the work site Develop Estimate Purpose Statement—The purpose of the estimate should be stated in precise, unambiguous terms. The purpose statement should indicate why the estimate is being prepared and how the estimate is to be used. This should include a description of any relevant DOE G 413.3-21 31 5-9-2011 regulatory or DOE drivers. Prepare Technical Scope Summary—The technical scope summary should provide a detailed description of the work included in the estimate. Additionally, the technical scope should identify the activities included in the cost estimate as well as relevant activities excluded from the cost estimate and the rationale for their exclusion. Determine Approaches to be used to develop the Estimate—Develop the estimate using techniques and methodologies such as the ones described in Section 5. For example, when developing a detailed estimate, the following approach could be followed (among others):  Activity-Based Estimates—Section 5.1 describes detailed estimating methodologies used for preparing activity-based cost estimates. To be activity based, an estimate activity should have discrete quantifiable units of work associated with it. Examples of work items that are activity-based include: o Place 16 CY of concrete o Produce 12 monthly reports o Perform 100 surveillances o Prepare a lesson plan for a course in safe lifting  Level-of-Effort (LOE)—Certain activities cannot be associated with quantifiable units of work. Instead, these activities should be expressed as a defined level of expenditure over time. Estimates that include LOE activities should be closely scrutinized, and the use of LOE estimates minimized. Examples of LOE activities include: o Secretarial support o Site safety program o Clerical support 6.3 Cost Estimate Inputs 6.3.1 Sources of Data Input

Since all cost estimating methods are data-driven, it is critical that the estimator know the best data sources (Input in Figure 2.1, Process Model). Whenever possible, estimators should use primary data sources. Primary data are obtained from the original source, are considered the best in quality, and are ultimately the most useful. They are usually traceable to an audited document. Secondary data are derived, rather than obtained directly from a primary data source. Since they were derived (and thus changed) from the original data, they may be of lower overall quality and usefulness. In many cases, data may have been “sanitized” for a variety of reasons that may further complicate its use as full details and explanations may not be available. Cost estimators must understand if and how data were changed before determining if they will be useful or how that data can be adjusted for use. Furthermore, it is always better to use actual costs, rather than estimates as data sources since actual costs represent the most accurate data available. While secondary data are not the first choice, they may be all that are available. Therefore, the cost estimator must seek to understand how the data were normalized, what the data represent, 32 DOE G 413.3-21 5-9-2011 how old the data are, and whether the data are incomplete. If these questions can be answered, the secondary data should be useful for estimating and would certainly be helpful for cross- checking the estimate for reasonableness. Some specific sources of data are the following: Estimating Manuals—The construction industry produces numerous costing manuals to assist in the pricing of work. RS Means and Richardson are two readily available manuals. Data Bases—Commercial and in-house data bases provide the estimator with the ability to retrieve data to be used for estimating. Commercial data bases are readily available. In-house data bases more accurately reflect the parameters that influence local costs. Vendor Quotes—Vendor quotes provide for a greater confidence of real time accuracy. Use caution when using vendor quotes. Often the vendors provide quotes with either incomplete or preliminary information. Other times only one vendor is polled, possibly skewing the information. In other situations, market conditions may drastically change from the time vendor quotes were obtained. Level of Effort Data—As discussed in Section 5.3.1, LOE activities are of a general or supportive nature usually without a deliverable end product. Such activities do not readily lend themselves to measurement of discrete accomplishment. LOE is generally characterized by a uniform rate of activity over a specific period of time. Value is earned at the rate that the effort is being expended. LOE activities should be kept at a minimum for Class 1 and 2 estimates. Expert Opinions (Subject Matter Experts)—As described in Section 5.3.3, expert opinions can provide valuable cost information in the early stages of a project, for Class 5, 4, and 3 cost estimates. The data base should include a list of the experts consulted, their relevant experience, and the basis for their opinions. If a formalized procedure was used, such as the Oracle Method, it should be properly documented.

Benchmarking—Benchmarking is a way to establish heuristics, or rules-of-thumb. Benchmarks may be useful when other means of establishing reasonable estimates are unavailable. An example of a benchmark is the statistic indicating that design should be 6 percent of construction cost for non-complex facilities. If construction costs can be calculated (even approximately) using a parametric technique, design should be approximately 6 percent. Typical benchmarks include such rules as:  Large equipment installation costs should be X percent of the cost of the equipment  Process piping costs should be Y percent of the process equipment costs  DOE facility work should cost approximately Z percent of current, local, commercial work Team/Individual Judgment Data—Team/Individual judgment data are used when the maturity of the scope has not been fully developed and/or the ability to compare the work to historical or published data is difficult. This involves the reliance of information on individuals or team DOE G 413.3-21 33 5-9-2011 members who have experience in the work that is to be estimated. This process may involve interviewing the person(s) and applying their judgment to assist in the development of the cost estimate. Because of its subjectivity and usually the lack of supporting documentation, team/individual judgment should be used sparingly. Trend Analysis Data—As described in Section 5.3.4, trend analysis can provide data for comparing the original planned baseline costs (or schedules) and the per unit value against actual costs (or schedules) and the per unit value for work performed to date. Trend analysis data can be used at almost any stage of work and can even be used as a basis for cost estimates developed using other techniques. The Learning Curve Data—As described in Section 5.3.5, learning curve data are useful for understanding the efficiency of producing or delivering large quantities. Numerous sources are available from trade associations and governmental organizations. 6.3.2 Considerations for Cost Estimate Development When given the task of developing an estimate, an estimator must first gather general project information, including:  project background,  where the project stands in its life cycle,  general description of the technical scope,  pertinent contract or sub-contract information,  estimate purpose, classification, how the estimate will be used, and techniques anticipated, and  Approximate time frame for the work to be performed. Some specific inputs to the cost estimating process include:  Mission Need Statement  Critical Decision approval documents  Acquisition Strategy  Project Execution Plan  Work Breakdown Structure (WBS)  Code of Accounts (COA; also known as account code)  Key Milestone Activities and Proposed Dates  Functional Design Criteria  Functional Performance Requirements  Conceptual Design Report  Preliminary Design  Definitive Design  Risk Analysis and Register  Historical Information and Other Sources of Information, including previous cost 34 DOE G 413.3-21 5-9-2011 estimates  Results of Alternative and Requirements Analyses  Applicable Resources and Labor Rates  Applicable Indirect Rates  Assumptions o Estimate ground rules and constraints; e.g., 4 day work-weeks, 10 days of weather shutdowns per year, site access limitations, acquisition strategies and associated contractor markups, and all other assumed conditions under which the estimator believes project work will be performed.

o Assumptions made by the estimator to fill gaps and inconsistencies in the technical scope, sources of materials, etc.  Estimate Allowances (see 6.4.2.3)  Exclusions (a clearly stated list of excluded items such as furnishings, equipment, finishes, landscaping, etc.)  Government supplied equipment  Construction and Operations Input From this information, whether provided by others or developed by the estimator as an assumption, appropriate estimating techniques may be determined. 6.4 Cost Estimate Production The principle step in the estimating process is producing the cost estimate and its corresponding schedule and basis of estimate. It is important that scope development, documentation, and control be coordinated with the cost estimate production as key iterative processes. Cost estimate production includes several steps that should be based on requirements, purpose, use, classification, and technique, including:  Identify the scope of work.  Identify the project, subprojects, milestones, activities, and tasks.  Document all bases of the estimate, assumptions, allowances, risks, etc. during the estimating process.  Perform quantity takeoffs and field walk-downs.  Develop the detail items or models that make up the activities.  Assign measurable quantities to the detail items or models.  Obtain budgetary or vendor information, conduct market research, or establish other pertinent sources of information.  Establish productivity rates or perform task analyses.  Calculate all applicable costs, including direct costs, indirect costs, contingency, and escalation (utilizing the schedule to calculate years for escalation).  Produce all applicable detail and summary reports.  Establish a funding profile utilizing the work breakdown structure and time phasing from the schedule.  Determine what risks (and to what extent) should be mitigated with activities (or assumptions) in the cost estimate. DOE G 413.3-21 35 5-9-2011  Consider other inputs, including schedule information, risk management plan, and peer reviews, as appropriate. 6.4.1 Schedule Development A project plan and schedule should be developed as a key basis for any cost estimate. By going through the process of schedule development, the activities needed to execute a project are clearly identified and appropriately sequenced. This then forms a basis for estimating the resources and costs needed to accomplish the project plan. That process in turn provides a basis for estimating activity durations used to construct the schedule. As this process indicates, the development of schedule and cost estimates is a highly iterative and inter-related process. However, it is difficult to generate a credible and realistic cost estimate without at least a basic understanding of the project plan and the activities that comprise the project schedule. After both the schedule and cost estimates have been developed, the project schedule is also used to determine a cost estimate over time in order to calculate escalation, identify available resources, and establish budget requirements. This process can result in further iteration, both to refine the schedule (to accommodate resource and budget constraints) and to finalize the estimate (to adjust escalation allowances and other time-based costs, e.g., management staffing). A project’s schedule should not only reflect activities in a cost estimate, but it should also indicate project milestones, deliverables, and relationships between activities.

6.4.2 Direct Cost Development Direct Costs include any costs that can be attributed solely to a particular project or activity, including labor, materials, subcontracts, equipment, salaries, and travel. Emphasis is placed on the term activity, which typically in standard practice equates to a lowest WBS element, account code, work package, or planning package. Commonly recognized direct costs include:  Common construction activities to include mobilization and de-mobilization, site work, concrete work, masonry work, etc.  Operations labor, materials, equipment, subcontract costs, premium pay, and similar productivity adjustments, such as those for contamination or security restrictions.  Maintenance labor, materials, equipment, subcontract costs, premium pay, and similar productivity adjustments, such as those for contamination or security restrictions.  Common routine and preventive maintenance activities include minor facility repairs and/or upgrades, minor paving or landscaping, etc.  Decontamination, decommissioning, dismantling, and demolition.  Project management  Construction management  Design, development, and start-up  Security escorts and restrictions  Special (capital) and standard (capital or non-capital) equipment 36 DOE G 413.3-21 5-9-2011  Freight, packaging, and transportation  Health physics support, radiological controls support, protective clothing/PPE, and industrial safety/health  Sales and use taxes Some items that may be included within direct costs as a part of a loaded labor rate include:  Holiday and vacation pay  Payroll taxes and insurance  Fringe benefits or labor burdens  Contract fee/profit 6.4.2.1 Resources and Crews and Quantities Cost estimators should be familiar with any site or project-specific labor agreements, and if applicable, reflect these labor agreements in the cost estimate. Resources include the labor, material, equipment, services, and any other cost items required to perform a scope of work. One or more resource can be assigned to an activity. A list of the resources and their associated unit prices needs to be defined before applying resources to activities.  Rates for labor should include wages, taxes, insurance, fringe benefits, overtime, and shift differential as applicable.  Unit prices for material should include the material price, sales tax, and shipping costs as applicable.  Equipment may be previously purchased by the Government; the hourly rate in these cases should only include operation and maintenance costs (not capital cost of ownership). The Site may have some pre-arranged pool and the equipment rate should correspond with current pool service rates. Crews are groupings of the various labor classifications along with the tools and equipment (not installed equipment) required to accomplish activities. A production rate for each crew is identified. A crew used to place concrete slabs might include a foreman, laborers, cement finisher, concrete vibrators, forms, and air compressor. In addition, the crew’s production rate should be established (e.g., 110 cubic yards per day).  Estimators should examine the production rate for each crew and make adjustments for local conditions if necessary. Working with crews, rather than the individual cost elements, allows the estimator to estimate work activities more quickly. Quantities are the units of measure and number of units associated with each activity. Each activity needs to have an identifiable unit of measure and a quantity associated with that

DOE G 413.3-21 37 5-9-2011 activity (e.g., 200 tons, 75 linear feet, etc.) For LOE activities, the quantity may be “one” and the unit of measure “lot.” 6.4.2.2 Assigning Resources to Activities Detailed Work Scope. Once activities have been defined, units of measure identified, and quantities determined, resources are assigned to each activity. Unit rates are used to assign resources to estimate activities. The resources assigned should correspond with the resources that will be used to complete the work. Such distinctions are especially important when detailed schedules are required, but less important for Rough Order of Magnitude (ROM) or Conceptual Estimates. Unit rates can be expressed as dollars per unit, labor hours per unit, or a percentage of an associated cost. Direct Labor. Unit rates expressed as labor hours per unit require that the type of labor (carpenter, engineer, secretary, etc.) be identified by associating a labor type or a crew with each unit rate. A crew is defined by the various labor types that make up the crew. Each labor type has a corresponding wage rate to allow calculation of cost in dollars. The wage rates for each labor type includes the base rate, taxes and insurance, fringe benefits, travel or subsistence, and adjustment for overtime, if required. Percentages. Some activities may use percentages to assign resources. The appropriateness of using percentages for such items as project management and construction management will depend on the level of maturity in the work scope definition. Examples of cost items where percentages are often used include:  Plan of the day (POD) meetings  Small tools  Consumable materials  Labor insurance  Project management  Construction management Regardless of the method used to assign resources to an activity, the following is true for each activity; all costs are identified, labor hours, when applicable, are identified, and labor type for all labor hours is identified. Summary Work Scope. When details of the work scope are not known, the work scope may be estimated by using the analogy technique or the parametric technique. These techniques may use unit rates expressed as dollars per unit, labor hours per unit, or percentages. Costs Included in Unit Rate. All costs should be “fully burdened.” A description of what is included in the burdened rate should be included because the definition of “fully burdened” frequently varies. Unit Rate Adjustments. The development and/or use of estimating factors to adjust unit rates require the skills of an experienced cost estimator. Such adjustments allow use of a database 38 DOE G 413.3-21 5-9-2011 with known productivity or costs, which are then adjusted to reflect the project specific activities and the conditions under which the work is to be performed. Situations that might affect productivity include type of work, weather conditions, level of confinement, security posture, etc. Examples of estimating factors (or unit rate adjustments):  Add 25 percent to labor for work in radiation zones.  Reduce labor for shop work by 20 percent.  Add 20 percent to labor for work requiring use of a respirator. Estimating factors are available from published sources or estimators can develop them. For example, the U. S. Army Corps of Engineers, “Productivity Study for Hazardous, Toxic and Radioactive Waste (HTRW) Remedial Action Projects,” dated October 1994, provides suggested labor productivity adjustment factors considering levels of worker protection and temperature.

6.4.2.3 Allowances In planning projects, it is normal to include allowances for activities for which there is little or no design basis, especially in the earliest stages. These are not considered contingency costs. Allowances should be included at the discretion of the Federal Project Director, project manager, and IPT to cover anticipated costs associated with a known technical requirement or activity. Any allowances included in cost estimates should include a basis for these costs within the supporting Basis of Estimate (BOE) document. For instance, in a Class 5 cost estimate (order of magnitude), it would be appropriate to see a line item (cost account or activity) such as “utility relocation, 1 lot, $1M material and $1M labor,” indicating that some utilities needed to be relocated as part of this project. Documentation supporting these costs should include approximate quantities, basis for those quantities, and source of the projected costs (e.g., consensus of the project team) proportional to the significance of the activity. Allowances also may be included in a project to cover costs associated with productivity adjustments, anticipated subcontract changes, anticipated design changes, and similar elements of known scope and costs. 6.4.2.3.1 Allowances for Special Conditions Consideration must be given to all factors that affect a project or program. Some of these factors are:  Availability of skilled and experienced manpower and its productivity  The need for overtime work  The anticipated weather conditions during the period of performance  Work in congested areas  Working under the authorization basis  Work in radiation areas  Security requirements imposed on the work area  Use of respirators and special clothing DOE G 413.3-21 39 5-9-2011  Training  Site access Special conditions may be estimated by applying a factor. For example, 10 percent applied to labor hours for loss of productivity due to work in a congested area. Other items may be calculated by performing a detailed takeoff. An example would be an activity that could only be performed over a 2-days period. Overtime would be required to complete the activity and the number of hours and rates could be calculated. An estimator should be vigilant that there is no duplication of costs—for example, if the control account manager who provided the cost data to the estimator already included unit rate adjustments such as productivity factors, additional allowances for productivity should not be included or the cost estimate may be inflated. All allowances applied or used to develop the cost estimate should be documented in the Basis of Estimate (BOE). 6.4.2.4 Design Costs To estimate design costs, the estimator should understand what activities are included. Table 6-2 lists typical design-related activities. Design-Related Activities Preliminary and final design calculations and analyses Surveys (surveying), topographic services, core borings, soil analyses, etc., to support design Design studies required to support safety analysis if not included in the Conceptual Design Report Preparation of as-built drawings Travel to support design Acceptance procedures Outline specifications Reproduction during design Design Reviews (not third party) Construction cost estimates Design kickoff meeting Certified engineering reports Computer-Aided Drafting and computer services Constructability reviews Bid package preparation

A/E internal design coordination Safety reviews by A/E Bid evaluation/opening/ award Design cost and schedule analyses and control Value engineering Inspection planning Design progress reporting Identification of long lead procurements Inspection services Regulatory/code overview by A/E Design change control Review shop drawings Procurement and construction specifications Modification of existing safety analysis report Preliminary and final plans and drawings Table 6-2 Typical Design-Related Activities Design costs are normally directly related to the magnitude and complexity of a project. Table 6-3 lists factors that should be considered when assessing design costs for the design-related activities due to the magnitude and complexity of a particular project. 40 DOE G 413.3-21 5-9-2011 Factors Impacting Design Costs Comprehensive functional requirements Off-site architecture/engineering Quality level Overtime Design planning Adequacy of plans and specifications Design layout Off-site fabrications Drafting and CADD methodologies Travel and per diem Project reviews Guidelines Design reviews Performance specification Safety analysis requirements Cost estimating Activities Reporting requirements Inspection Requirements Government furnished equipment Schedule Analysis Complexity Labor density Table 6-3 Factors Impacting Design Costs All factors in Table 6-3 bear upon the cost of a project design phase. For EM projects, the regulatory process requires rigorous examination of design alternatives before the start of cleanup design, especially for remedial investigation/feasibility studies under CERCLA to support a record of decision (ROD) or for corrective measure studies under RCRA to support issuance of a permit. Cleanup design executes a design based on the method identified in the ROD or permit, which often narrows the scope of preliminary design and reduces the cost and schedule requirements. On EM projects, the estimator should assess the extent to which design development is required or allowed in cleanup design. In some cases, the ROD or permit will be specific, such as for a disposal facility where all features such as liner systems and configuration, are fixed. When treatment options such as incineration are recommended, considerable design effort may be required. Requirements for construction engineering, including observation, design of temporary facilities, quality control, testing, and documentation, will often be higher than for conventional construction because of requirements to comply with rigid regulations governing health and safety, quality assurance and other project requirements. 6.4.2.5 Construction Management Costs A construction management (CM) firm, whether in the form or a subcontractor or as a function of an M&O contractor, is responsible for construction activities, including coordination between prime contractors and subcontractors. This responsibility includes subcontracting, purchasing, scheduling, and often a limited amount of actual construction. The cost estimate for this function must include all CM costs for site management and force account labor wages, payroll taxes, overheads, and procurements for which the CM is DOE G 413.3-21 41 5-9-2011 responsible. 6.4.2.6 Project Management Costs

The estimates for project and program management must consider project duration from start of preliminary design through completion of the construction for the project. Other factors to consider are the complexity of the project, the specific design group, the organization for which the project is to be performed, and the extent of procured items. The encompassed functions include:  management and integration  program/project management  administrative services  peer review  records management  training  information resources management  project controls  quality assurance  licensing  communications  travel by management staff Management functions associated with environmental restoration projects parallel construction project management. 6.4.2.7 Construction Coordination Costs Construction coordination comprises field engineering services, sometimes called “Title III Engineering” services or “Engineering Support during Construction”. Field engineers should be involved in the review of the design documents, as well as in the coordination of field construction and resolution of design conflicts encountered during the construction phase. Other responsibilities may include furnishing and maintaining governing lines and benchmarks to provide horizontal and vertical controls to which construction may be referred; checking and approving or requiring revision to all vendor shop drawings to assure conformity with the approved design, working drawings and specifications; inspecting the execution of construction to assure conformance with approved drawings and specifications, and with established requirements for workmanship, materials and equipment; and providing field or laboratory tests of construction workmanship, materials and equipment as may be required. 6.4.2.8 Research and Development (R&D) Costs Traditionally, cost estimating involves the use of historical cost data to correlate and validate existing estimating methodologies. Historical cost data lend some accuracy and credibility to a 42 DOE G 413.3-21 5-9-2011 cost estimate. When a cost estimate is required for new, innovative, state-of-the-art, first-, or one-of-a-kind projects, historical data are not always available. For these projects, knowledge of the processes involved should help the cost estimator to prepare an accurate and credible cost estimate. In the absence of accurate cost information, process knowledge can focus the estimator toward parts of the project that are significant contributors to overall project cost. Personnel Costs—Personnel costs are usually the largest R&D expense. R&D personnel are often well-educated and may have a correspondingly higher pay scale than personnel for conventional projects. Personnel resources include those needed to construct R&D facilities; purchase supplies, materials, and equipment; operate equipment, prototypes, pilot plants or laboratories; develop software; information technology operations; and other labor functions needed to complete R&D efforts. Equipment Costs—Equipment costs for R&D projects can be divided into hardware (for prototypes and pilot plants as well as other activities) and software costs (including computer models discussed below). Hardware includes machinery, computers, and other technical equipment. Equipment costs increase with increasing project complexity and a lengthy testing and verification phase may be required. Vendor quotes can sometimes be obtained to support early-stage cost estimates, but expert opinion is often the only recourse to obtain Class 5 cost estimates for equipment with no precedent.

Prototypes and Pilot Plants—In some instances, it will be cost effective to develop a prototype or a pilot plant for an R&D project. A cost estimate for a prototype or a pilot plant will have to account for the following major items:  Procurement and/or construction of the equipment or plant  Operation of the equipment, including necessary utilities  Development of test criteria for plant studies  Analysis of test results  Computer simulation of plant processes  Supplies and materials used for testing The cost estimate may also need to include costs for project management and other personnel during the pilot plant study or prototype testing. Scaled and Computer Models—Scaled or computer-generated 3D models may need to be created for some projects. For example, if the project goal is to construct a new incinerator for mixed waste, site-specific air-dispersion modeling may be required to demonstrate that emissions from the incinerator will not have an adverse impact on public health or the environment. Groundwater modeling may be required for some remediation sites (e.g., groundwater contamination has been found at a site, and several technologies are being proposed). Modeling can be used to select the best technology or determine the optimum locations for equipment. Some models can be quite complex and require specialized technical expertise. DOE G 413.3-21 43 5-9-2011 R&D Disposition – Finally, it is important to consider the cost of disposing of all equipment, chemicals, products, materials, facilities, etc., used during the R&D phase. The assumption that another project will pay for the “cleanup” of an experiment, bench-scale demonstration or even a pilot scale facility has often resulted in low initial government life-cycle estimates. The initial government life-cycle estimate should consider the R&D disposition estimate attributable to the project or share of the R&D disposition estimate when attributable to multiple projects. 6.4.2.9 Regulatory Costs Environmental, safety and health (ES&H) regulatory compliance is required for all projects thus, an estimate should contain sufficient provisions for ES&H compliance costs. Regulatory costs should include the cost of coordination and negotiation with regulators, documentation costs, site characterization analysis, stakeholder meetings and other related activities. For Government projects, the facility must satisfy all Federal, state, and local requirements (i.e., building permits, energy conservation and the Leadership in Energy and Environmental Design (LEED) requirements, waste disposal, wastewater effluent disposal, and air emission limitations) imposed by the other agencies. Regulations are even more stringent for facilities that process or store radioactive materials. Construction sites must follow Occupational Safety and Health Administration (OSHA) rules. Familiarity with applicable regulations is required so that a plan may be developed for the project to comply with those regulations. Environmental Compliance Costs The number and requirements of environmental regulations have increased dramatically in the past 30 years. When preparing cost estimates for environmental compliance activities, the following should be considered.  type of project  project location  waste generation  effluent characteristics  air emissions  noise requirements  project start-up or completion date

Location is significant to project cost when a wetlands area will be disturbed, or the project is located in an area with extensive environmental regulations (e.g., California). Increased environmental compliance costs should be factored into projects in such locations. Knowledgeable design staff and personnel familiar with environmental regulations that will affect the project should be consulted when composing an estimate. Knowledge of wastes or air emissions generated during the project will facilitate the identification of environmental compliance design requirements and subsequent costs. For example, wastewater treatment 44 DOE G 413.3-21 5-9-2011 may be required prior to effluent discharge into a stream or publicly owned treatment works. Air pollution control devices may be required for process equipment. Permitting costs could include  labor for data gathering  equipment for testing  analytical tests  data analysis and writing or completing documents  time for interface with project personnel and outside consultants  time for interaction and negotiation with regulator and stakeholders  application and/or permit fees  annual permitting costs  upgrades to existing equipment  new pollution control equipment Once a plan for regulatory compliance has been established, the regulatory costs can be estimated. This will establish a baseline for the regulatory costs such that changes that affect the baseline can be tracked and estimated throughout the project’s life. For some projects, a permit is required before work can commence. For example, construction projects that will disturb more than 5 acres are required to obtain a storm water permit before commencing construction. Project scheduling can be affected if operating permits are not received in a timely manner. Facilities may be shut down for violations of operating permits or failure to comply with existing regulations. The time required for regulatory review of the permit application also must be factored into the cost estimate. Health and Safety Compliance Costs Employee health and safety regulations have also increased. As allowable limits for worker exposure decrease, design cost estimates must account for specific engineering controls to minimize employee exposures to toxic or hazardous substances in the workplace, especially for facilities with radioactive materials. Planning for environmental controls is essential because retrofit costs can exceed original installment costs. State-of-the-art, high- technology facilities may require initial employee exposure monitoring if unknown factors are encountered. Protective equipment must also be supplied and maintained for the employee. Past experience with increased regulatory rigor within DOE has shown that the costs associated with employee workspace controls, including industrial hygiene monitoring, is the most significant cost factor in a rigorous health and safety program. The trend will probably continue. Health and safety compliance issues may involve strict health and safety requirements, including routine medical surveillance, preparation of health and safety plans, and employee training. Employees may not be able to work 8 hours per day if daily personnel and equipment decontamination is mandatory. DOE G 413.3-21 45 5-9-2011 Other Regulatory Costs In addition to the costs described above, there are QA, security, and other ES&H requirements that the project must consider. 6.4.3 Indirect Costs

Indirect costs are incurred by an organization for common or joint objectives that cannot be specifically identified with a particular activity or project. Indirect costs are those resources that need to be expended to support the activity or asset but that are also associated with other activities and assets. In other words, indirect costs are “Any costs not directly identified with a single final cost objective but identified with two or final cost objectives.” Consequently, allocate indirect costs to an activity or asset based upon some direct cost element, such as labor hours, material cost or both (see Section 6.4.3.1) Some typical indirect costs are:  facilities, operating equipment, small tools, and general maintenance;  temporary facilities (e.g., water, compressed air, and power);  motor pool, camp, and aircraft operations;  warehousing, transfer, and relocation;  safety, medical, fire protection, and first aid;  security;  administration, accounting, procurement, and legal;  personnel expenses, office supplies, and time reporting  site-wide permits and licenses;  contributions to welfare plans and signup/termination pay; and  contract fee/profit, bond costs (performance and material payment).  contract fee/profit, bonds costs (performance and material payment). 6.4.3.1 Indirect Rates The development of indirect rates is usually the responsibility of both the financial accounting organization and the cost estimator. Indirect rates should be developed in accordance with Cost Accounting Standards. The financial accounting organization determines rates for organizational overheads and general and administrative (G&A) cost, while the cost estimator usually estimates rates for project management, construction management, and subcontract costs. The estimator, however, should clearly understand how to allocate all indirect rates in the estimate to avoid duplication or omission, as well as document what is included in the indirect rates. Indirect rates for work to be performed by contractors should be developed by the contractor for review and approval by DOE. Backup information that clearly describes how the indirect rates NOTE: Do not double count costs. For example, if acquisitions personnel are costed with the pilot plant activity ensure that this person is not also included as part of Indirect Costs. 46 DOE G 413.3-21 5-9-2011 were developed should be provided to DOE and maintained by the contractor. Indirect rates should be evaluated and revised on a periodic basis as necessary. Indirect rates estimated for subcontract work such as Architect/Engineer services, construction, and remedial actions should be estimated and documented at a level of detail appropriate to the type of cost estimate being prepared. There is no uniform standard for establishing indirect rates; a typical method for applying indirect rates calculates indirect costs as a percentage of a category of work. For example, quality control inspection could be estimated as 6 per cent of direct craft labor, consumable materials at 6 per cent of direct craft labor, and administrative support for engineering at 38 per cent of direct engineering, etc.

The basis for applying individual indirect rates will vary greatly depending on the specific costs included in the rate. Allowances for small tools or consumable materials would typically use the direct labor cost of the appropriate construction craft, operations or maintenance activities as its base. General and administrative cost is usually estimated using the sum of all direct and indirect costs for the specific items of work as its base. Indirect rates should be documented in detail so that what is included (and excluded) in each rate is clear. A separate line item in the estimate should exist for each rate used. 6.4.4 Escalation Escalation costs change continuously following changes in: such as technology, availability of resources, and value of money (e.g., inflation). Historical cost indices and forecast escalation indices have been developed to document and forecast changing costs. The use of an established escalation index is required to consistently forecast future project costs. To ensure proper use of an index, estimators must understand its bases and method of development. Escalation is the provision in a cost estimate for increases in the cost of equipment, material, labor affected by continuing price changes over time. Escalation may be: forecasted, to estimate the future cost of a project based on current year costs; or historical, to convert a known historical cost to the present. Although the forecasted and historical escalation rates may be used in succession, most cost estimating is done in current dollars and then escalated to the time when the project will be executed. This section discusses the use and calculation of escalation and historical cost indices. An example of the calculation and use of escalation can be found in Appendix F. 6.4.4.1 Forecasted Escalation Rates Forecasted escalation rates may be obtained from commercial forecasting services, such as Global Insight, which supplies its most current predictions using an econometric model of the United States economy. The forecast escalation index is the ratio of the future value to the current value expressed as a decimal. DOE G 413.3-21 47 5-9-2011 Forecasted escalation rates are simply the percentage change from one year to the next, typically prepared for various groups, utilizing different sources of data. Because larger projects extend over several years, it is necessary to have a method for predicting budgets that must be made available in the future. This is where forecasted escalation rates are used. The current year cost estimate is divided into components and then multiplied by the appropriate escalation rate to produce an estimate of the future cost of the component. The future costs of these components are then summed to give the total cost of the project. To properly apply escalation, the following data are required:  reference date the estimate was prepared and base date of costs:  escalation index, or cumulative rates, to be used (including issue date and index); and  schedule, with start and completion dates of scheduled activities Escalation could be applied for the period from the date the estimate was prepared to the midpoint of the performance schedule or the activity being escalated. There are many other more detailed methods of calculating escalation, but care should be taken not to make this calculation too complex. Remember, someone external to the project may need to review this calculation. Regardless of the method used, the process should be well-documented.

“Which comes first, contingency or escalation?” If a project includes a contingency that is based on risks, and those risks have associated costs, this may imply use of the same base-year dollars. And generally, performance periods can be associated with those risks within components, so, escalation may be applied to contingency. However, if contingency is not easily discernable by WBS element (or cost elements) or cannot be associated with a time period, it may not be appropriate to escalate contingency. Also, the accuracy of an escalation forecast can also be considered a risk, with appropriate cost impacts that are then included in contingency allowances. The cost estimate should ultimately represent total escalated costs, or “then-year dollars.” 6.4.4.2 Historical Escalation Generally, historical escalation is generally easily evaluated. For example, the cost of concrete increased between 1981 and 2002. The ratio of the two costs expressed as a percentage is the historical escalation rate, or expressed as a decimal number is the historical cost index. Several commercial historical cost indices are available. To properly apply a historical cost index to make price more current, the following data are required  The prior cost or price, with a reference date, such as an actual price for a known project or a component. This cost or price may include direct material and/or labor cost, and it should be known to what extent indirect costs (sales taxes, freight, labor burden, etc.), overheads, and profit were included.  An applicable historical cost index. 48 DOE G 413.3-21 5-9-2011 6.4.4.3 Escalation Calculations Most costs are estimated in “current dollars” and then escalated to the time when the work is expected to be performed. The escalation rates are used for developing project performance baselines. Rates should be evaluated for global, regional, and local conditions; should have a maximum period of 1 year; and should be clearly documented including the basis. The following are some suggested sources of major indices and escalation (recognized by industry best practices).  U.S. Department of Labor, Bureau of Labor Statistics, Inflation & Prices, http://www.bls.gov/bls/inflation.htm  U.S. Department of Labor, Bureau of Labor Statistics, Contract Escalation, http://www.bls.gov/bls/escalation.htm  Engineering News Record, Economics, http://enr.construction.com/economics/  RSMeans, Cost Books, http://rsmeans.reedconstructiondata.com/CostBooks.aspx  RSMeans, Market Analytics, http://rsmeans.reedconstructiondata.com/MarketAnalytics.aspx  The Richardson Construction Estimating Standards, http://www.costdataonline.com/  IHS Global Insight, http://www.ihsglobalinsight.com 6.4.5 Contingency This section is compatible with the guidance provided in DOE G 413.3-7A, Risk Management Guide, dated January 2011, for the consistent use and development of Contingency and Management Reserve (MR) in capital asset projects cost estimates. Contingency and MR are project cost elements directly related to project risks and are an integral part of project cost estimates. For further detailed guidance and examples of calculations refer to DOE G 413.3-7A.

The specific confidence level (CL) used to develop a project performance baseline estimate is determined by the project’s FPD/IPT and approved by the Acquisition Executive. The project confidence level should be based on but not limited to the project risk assumptions, project complexity, project size, and project criticality. At a minimum, it is recommended that project performance baselines should be estimated, budgeted, and funded to provide a CL range of 70 - 90 percent for DOE capital asset projects. FPDs should confirm with their program sponsor whether additional guidance is to be provided. The CL for Major Items of Equipment may be significantly different from the construction of conventional facilities that will house the equipment. If a project has an approved performance baseline change, the FPD should consider reanalyzing the risks at a higher CL for budgetary requests and funding profiles to ensure project completion. The DOE G 413.3-7A defines four categories of contingency, each of which is briefly described below:  DOE contingency budget is identified as funded contingency for use by the FPD. Contingency is the risk based, quantitatively derived portion of the project budget that is available for managing risks within the DOE performance baseline. At a minimum, it is DOE G 413.3-21 49 5-9-2011 recommended that DOE capital asset project costs should be estimated to provide a CL range of 70 - 90 percent.  DOE schedule contingency is the risk-based, quantitatively derived portion of the overall project schedule duration that is estimated to allow for the time-related risk impacts and other time-related project uncertainties. It is recommended that project schedule contingency should be estimated to provide a CL range of 70 - 90 percent.  Contractor MR budget is the risk-based quantitatively derived portion of the contract budget base (CBB) that is set aside for management purposes to handle risks that are within the contractor’s contractual obligations. Once the CBB has been established, it is allocated to MR and the Performance Measurement Baseline (PMB). The MR is not intended to justify a post contract increase to the CBB. MR is maintained separately from the PMB and is utilized through the contractor’s change control process. MR is not used to resolve past variances (positive or negative) resulting from poor contractor performance or to address issues that are beyond the scope of the contract requirements. Use of MR should follow EVMS rules as per ANSI/EIA-748A.  Contractor schedule reserve is the risk-based quantitatively derived portion of the overall contract schedule duration estimated to allow the contractor time to manage the time- related impacts of contractor execution risks and other contractor duration uncertainties within the contract period. Contractor schedule reserve does not add time or schedule duration to the contracted end date. The quantitative method used to analyze project contingency and MR should consist of objective analysis of cost and schedule estimate uncertainties and discrete project risks. The analysis should aggregate the probability and consequences of individual risks, and cost and schedule uncertainties to provide an estimate of the potential project costs. The quantitative risk analysis determines a risk-based project budget and completion date using statistical modeling techniques such as Monte Carlo, Quasi-Monte Carlo, sensitivity simulations, and other stochastic methodologies depending upon the project data.

While the Monte Carlo simulation is one standard used by DOE, alternate forms of quantitative analysis may be used. Other recognized forms of quantitative analysis include: decision trees, influence diagrams, system dynamics models, and neural networks. Figures 6-4 and 6-5 show the typical components of the DOE project performance baseline. 50 DOE G 413.3-21 5-9-2011 Figure 6-4. Total Project Cost Composition. Note: CL = Recommended Confidence Level Figure 6-5. DOE and Contractor Budget Baseline 6.4.5.1 Quantitative Contingency Analysis DOE O 413.3B requires that DOE project estimates be developed based on qualitative and quantitative analysis of project risks and other uncertainties. The DOE qualitative and quantitative analysis process begins in the project’s planning stage with the identification of project risks during the initial project planning phase prior to the first CD point (approval of mission need). After CD-0, project development and planning documentation are prepared that DOE G 413.3-21 51 5-9-2011 includes the initial Risk Management Plan (RMP). During this phase of the project, development of the project risk register is initiated with the identification of potential project risks and enabling assumptions. At CD-1, the baseline scope is refined enough to develop a preliminary baseline cost range and schedule. The RMP continues to evolve as the project scope is refined, new risks are added to the risk register and existing risks are re-examined and the project knowledge base increases. In preparation for the CD-2, the performance baseline estimate is refined to include costs to be incurred in executing the risk handling strategies. The baseline estimate is also evaluated, and adequate contingency allowance incorporated, to determine the project budget needed to provide an appropriate CL so that the project execution will be successful as defined in DOE O 413.3B. This document assumes Monte Carlo methodologies will be used to develop the cost and schedule baselines. The diverse and unique nature of DOE projects characterized by an assortment of distinct technologies, physical locations, project duration, and project size has a significant impact on the risk profile that makes it impossible to establish a prescriptive procedure or single quantitative risk model for determining a project’s contingency needs. Consequently, only a basic framework is used to outline considerations essential in the development of DOE contingencies. 6.4.5.2 Cost and Schedule Risk Models Contingency risk models are used to evaluate the probability and effects of risk impacts, and estimate uncertainties on project cost and schedule performance baselines. The results of the risk analysis are used to establish the cost and schedule contingency needed to provide a suitable confidence level for DOE project success. The analyses may use one or more risk models to evaluate the cost impacts and the associated schedule impacts. For each risk, a percent or percentage distribution is assigned to the probability (the likelihood of the risk occurring), a dollar value or dollar value distribution is assigned to the cost impact, and a schedule duration impact or schedule duration distribution is assigned to the affected activity in the schedule. In general the concept is implemented as: EV = ∑PRi x CIRi (or SIRi)

Where: EV = Expected Value of cost impact (or duration impact) of all risks PRi = Probability distribution function of a risk occurring CIRi = Cost Impact distribution function of a risk occurrence SIRi = Schedule Impact distribution function of a risk occurrence. [Note: ∑ is not the summation of individual expected values for each risk, but represents a stochastic process (e.g., Monte Carlo simulation) using the collective probabilities and cost/schedule impacts for all identified risk events.] Figure 6-6 is a sample from a DOE construction project risk register showing the residual risk 52 DOE G 413.3-21 5-9-2011 data elements used for modeling the probability of occurrence (probability percentage) and the triangular distribution representing a three-point estimate of the anticipated range of cost and schedule impacts (the assumption in this example is of a triangular distribution of cost and schedule impacts; other distributions can be used, such as step, rectangular, etc.). Figure 6.6. Sample Risk Register Best Case Most Likely Worst Case Best Case Most Likely Worst Case T47 Federal Nonperformance of contract to provide shielded overpack containers leads to project delays and cost. Unlikely Significant Moderate 40 850,000 3,000,000 6,000,000 0 0 0 T52 Federal Overnight organizations interpret requirements different than implementation, leading to cost and schedule impacts. Likely Significant Moderate 60 -- 3,000,000 6,000,000 0 30 90 T12 Contractor Failure of crane results in delayed removal of canisters, impacting schedule. Unlikely Marginal Low 40 100,000 200,000 1,400,000 1 2 14 T61 Contractor Calibration services are unavilable causing shut down of operations. Very Unlikely Marginal Low 10 100,000 410,000 715,000 1 4 7 T266 Contractor Hot cell cannot be designed to meet active ventilation strategy increasing design and construction costs. Very Unlikely Critical Moderate 10 3,200,000 7,000,000 20,000,000 30 60 150 Risk # Likelihood Consequence Risk Score/Rank Probability (%) Residual Risk Cost Impacts ($) Schedule Impacts (Days)Risk DescriptionOwner DOE G 413.3-21 53 5-9-2011 The results of Monte Carlo analyses are generally summarized by a probability distribution function (PDF) and a cumulative distribution function (CDF), as shown in Figure 6-7. The PDF represents the distribution of the analytical model outcomes. As an example, the Monte Carlo analysis may be designed to estimate the cost or duration of a project. The PDF represents the number of times a certain cost or duration is achieved. The CDF is a statistical function based on the accumulation of the probabilistic likelihoods of the analytical analysis. In the case of the DOE risk analysis, it represents the likelihood that at a given probability the project cost or duration will be at or below a given value. As an example, the x-axis might represent the range of potential project cost values evaluated by the Monte Carlo simulation, and the y-axis represents the project’s probability of success. Figure 6-7. Sample PDF and CDF Curves An advantage of an integrated cost and schedule risk model is the ability to capture schedule- related costs impacts, such as LOE support activities that increase project costs as schedule- related risk impacts delay or extend work efforts. Ideally, the integrated risk model is based on a life-cycle resource-loaded critical path schedule to which cost and schedule risks and cost and schedule uncertainties are applied. Integrated risk models increase the flexibility of the risk analysis and reduce the amount of manual coordination needed to model cost and schedule risk impacts.

Project risks and the associated cost and schedule impacts are the primary inputs to the risk model and are maintained within the project’s risk register. Figure 6-8 depicts a conceptual risk model showing typical inputs and outputs. Contractor Budget Base 305 244 183 122 61 0 F re q u en c y o f O c c u rr e n ce C u m u la tiv e P ro b a b ili ty — 100 % — 95 % — 90 % — 85 % — 80 % — 75 % — 70 % — 65 % — 60 % — 55 % — 50 % — 45 % — 40 % — 35 % — 30 % — 25 % — 20 % — 15 % — 10 % — 5 % 500 600 800 PDF Curve 500 600 700400300 800 900 1000 1100 1200 CDF Curve 54 DOE G 413.3-21 5-9-2011 Figure 6-8. Conceptual Risk Analysis Process An important consideration when identifying project risks is the careful analysis of the assumptions upon which the cost estimate and schedule are predicated. Each assumption made by the estimator, scheduler, or the project team should be analyzed by the IPT to determine if there is a risk (threat or opportunity) that the assumption may not be valid or representative of the actual conditions realized during project execution. In such cases, the probability of alternative situations should be assessed and the impacts of those situations occurring should be quantified and analyzed. These impacts can be an important element in both the cost and schedule risk models and the determination of cost and schedule contingency allowances appropriate for the project. For example, if the estimate is based upon an assumption of full and open competition for the construction contract, with a suitably large number of bidders, and with incentive clauses built into the contract for schedule completion, it is likely that there will be fairly low contractor markups included in that estimate for the contractor’s overhead and profit adders. If the actual bidding documents then require a small business award, and even include a liquidated damages clause for missing schedule milestones (rather than incentives), the actual contractor markups will most likely be significantly higher than had been estimated. In such a case, the baseline will not be adequate unless appropriate cost and schedule contingency allowances had been included because the threat of this alternative approach had been identified and modeled. It should also be noted that Monte Carlo simulations are based on estimates of probability of occurrence and estimated impacts when risk events do occur. As such, the quality of the output is dependent on the quality and accuracy of these inputs. Inaccurate estimates of either probability or impact will lead to erroneous project probability outputs and misstatement of needed contingency allowances and/or CL. Another issue that can lead to poor Monte Carlo analysis results is a failure to identify significant project risks. Only if all significant risks are identified and properly evaluated can the Monte Carlo model be expected to provide realistic forecasts of project outcomes and the contingency allowances needed to achieve the desired CL. DOE G 413.3-21 55 5-9-2011 6.4.5.3 Cost Risk Model DOE capital asset projects should be estimated to provide a CL which is adequate to support project success and reflects evaluation of all project risks, with reasonable estimates of cost and schedule impacts. Risk models should include all risks (DOE, contractor and subcontractor assumed risks). The risk cost model should provide an estimate of the performance baseline with a CL range of 70 - 90 percent for success (recommended), which includes the contractor’s CBB, profit/fee, and government contingency and other direct costs. The contractor MR is determined by the contractor and represents the amount of the CBB that will be used for project management purposes for accomplishing the work scope within the contractor’s PMB.

When developing risk models, care should be exercised to assure the risk models are developed using appropriate performance baseline information and project risk assumptions. The recommended cost risk model should:  Include all risks, especially significant risks;  Use reasonable estimates of cost impacts;  Include estimate uncertainties (cost and schedule) that are within the project baseline;  Contain enough detail to allow identification of risk owners;  Contain enough detail to allow project risks to be associated with the WBS they affect;  Include a provision for uncertainty ranges in cost escalation rates for the project;  Allow correlated risks that affect multiple cost elements, e.g., escalation rates, to be modeled at a high level to preserve the dependent relationship among correlated risks;  Include sufficient information to estimate costs associated with uncertainties in task durations consistent with the schedule risk model;  Allow for inclusion of threats and opportunities; and  Allow risk impacts to be placed in the appropriate fiscal year to support the identification of annual contingency budgeting and reporting requirements. 6.4.5.4 Schedule Risk Model Schedule risk models should be based on the project performance baseline schedule. If practical, the schedule risk model should be developed to include the schedule impacts of all risks that impact the project, as well as any schedule duration uncertainties. The recommended schedule risk model should:  Include all significant risks;  Use reasonable estimates of schedule impacts;  Contain enough detail to allow identification of risk owners;  Contain enough detail to distinguish among schedule activities that have different degrees of schedule uncertainty and should include estimate uncertainties;  Contain enough detail to allow specific risk events to be associated with the schedule activity that they affect;  Estimate the schedule impact on LOE activities so cost increases associated with 56 DOE G 413.3-21 5-9-2011 schedule slippages can be calculated and incorporated into the contingency estimates; and  Allow for alterations in activity duration that result from implementation of risk handling strategies or opportunities. 6.4.5.5 Estimate Uncertainty Estimate uncertainty is part of the risk analysis process for the development of contingency estimates as was illustrated in Figure 6-8. Estimate uncertainties are fundamental contributors to cost growth and are expected to decrease over time as the project definition improves and the project matures. Estimate uncertainty is a function of, but not limited to, the quality of the project scope definition, the current project life-cycle status, and the degree to which the project team uses new or unique technologies. Estimate uncertainties occur throughout the DOE baseline. One approach to account for estimate uncertainty is to use uncertainty ranges established by the professional societies such as the Association for the Advancement of Cost Engineering International (AACEI), Table 6-2, or other estimating guidance. Estimate uncertainty contributes to both cost and schedule contingency. Table 6-2 could be used for both cost and schedule estimate uncertainty and should be done separately for evaluating quantitative impacts on project contingency. Class of Cost Estimate Estimate Uncertainty (Low Range) Estimate Uncertainty (High Range) Class 5 – Concept Screening -20% to -50% +30% to +100%

Class 4 – Study or Feasibility -15% to -30% +20% to +50% Class 3 – Budget Authorization -10% to -20% +10% to +30% Class 2 – Control or Bid -5% to -15% +5% to +20% Class 1 – Check Estimate -3% to -10% +3% to +15% Table 6-2. Estimate Uncertainty Range as a Function of Estimate Class 6.4.5.6 Determining Cost Contingency Amounts A common method to evaluate risk model results is the use of CDF curves, also referred to as S- curves. For a cost risk model, the S-curve represents the probability of completing the project at or below a given project cost baseline. In this example the x-axis represents the range of potential project cost values estimated by the Monte Carlo simulation and the y-axis represents the probability of project success. Figure 6-9 illustrates two S-curves for a hypothetical project. The S-curve on the left is based on the CBB and the S-curve on the right is for the DOE capital asset project performance baseline and includes both the contractor and DOE risks. DOE G 413.3-21 57 5-9-2011 Figure 6-9. S-Curves of Contractor CBB and DOE Performance Baseline 6.4.5.7 Determining Schedule Contingency The DOE schedule contingency is based on the same risks used in the development of the DOE cost contingency. The DOE schedule contingency requirements should be analyzed using a resource-loaded and logically tied schedule, so that impacts to overall schedule duration along the critical path can be fully assessed. As risks and uncertainties are realized, the critical path for the project may possibly change; the model needs to accommodate such situations. Schedule activities that are affected by an identified risk or duration uncertainty are modeled in the schedule risk analysis with an appropriate probability distribution. The calculation of schedule contingency is an iterative process requiring an initial analysis of the schedule to determine the base schedule contingency values followed by a revision of the schedule to adjust work scope to meet the existing selected key milestones and deliverable dates. DOE schedule contingency needs to be added to the overall critical path of the project. This can be completed by applying the DOE schedule contingency incrementally before key milestones or in total before the project completion date. In this way, forecasted completion dates (individual milestones and/or overall project) can be established based on a probabilistic determination of the expected completion date should project risks be realized. This differs from contractor schedule reserve, which cannot add time or schedule duration to the contracted end date. 6.4.5.8 Risk Model Outputs To support the required budgeting, management, and reporting requirements of the project, the contingency analysis should provide the following:  The contingency analysis models should be able to produce a PDF and a CDF for the project.  The contingency analysis models should be able to produce a PDF and a CDF for each Probabilistic Projection of Cost using Monte Carlo Analyses 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% P ro b ab ili ty o f C o m p le ti o n a t a g iv e n P ro je c t C o s t CBB PB Capital Asset Project Cost Based on Contactor Budget Base 80% CL Includes all Contactor Execution Risks & DOE Project Risks Probabilistic Projection of Cost using Monte Carlo Analyses 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% P ro b ab ili ty o f C o m p le ti o n a t a g

iv e n P ro je c t C o s t CBB PB Capital Asset Project Cost Based on Contactor Budget Base 80% CL Includes all Contactor Execution Risks & DOE Project Risks 58 DOE G 413.3-21 5-9-2011 selected milestone.  The models should be capable of performing a sensitivity analysis for project cost and schedule elements. Risk analysis sensitivity results are typically presented as tornado diagrams that provide an analytical and visual representation of risk event impacts.  Ideally, the model should place resulting contingencies in a time frame to allow for fiscal year budgeting of DOE contingency. Figure 6-10 illustrates how contingency budget projections can be depicted. Figure 6-10. Contingency Budget Projection 6.4.5.9 Unknown-Unknowns Because there may not be viable means to quantify certain “unknown-unknowns”, IPTs may not be expected to set aside contingency for them. Unknown-unknowns could be major schedule DOE G 413.3-21 59 5-9-2011 changes or unknown design factors, unanticipated regulatory standards or changes, additions to project scope definition (changes outside a project’s intended scope), force majeure situations, or program budget reductions. These may be considered programmatic risks, which could be applicable to all projects within a respective specific Program. However, there should be clear communication between the project team and their sponsoring Program to communicate and agree to the bounding assumptions for the project. Furthermore, Programs are advised to include appropriate allowances for programmatic contingencies (for risks and events that occur outside project space but that may in fact impact on project execution) in their overall portfolio budgets. 6.4.5.10 Contingency Adequacy Evaluation Numerous tools exist to analyze the adequacy of the contingency valuation that has resulted from the qualitative and/or quantitative analysis of the risks. Various costs estimating guidance documents have been compiled by industry and are available in texts and journals (e.g., AACEI), and are updated on a regular basis. These references provide percent ranges of the base that a contingency should represent in order to be considered adequate. Further, the contingency value should be commensurate with the maturity and type of the project, project size, and risks, including technical and technology uncertainties. It should be cautioned that the recommended contingency levels in these documents do not provide a basis for the recommended confidence levels (70 – 90 percent) in this Guide for the derivation of contingency and management reserve by quantitative risk analysis. If a quantitative risk analysis will not be conducted, estimates for cost and schedule contingency should be provided. As a general rule, the IPT should use various inputs to determine those values. Those inputs may be, but should not be limited to:  Historical records (considering actual costs and time impacts for certain events)  Subject matter experts  Employing Delphi techniques.  Interviewing staff, crafts, retirees, and others familiar with similar work activities at the site or similar sites.  Technical records such as safety analysis documents including the risk and opportunity assessment, quality assessments, and environmental assessments. As the information is gathered and finalized, the data should be analyzed for bias and perception errors. While the data will not be systematically used for a quantitative analysis, it should still be analyzed and perceptions scrutinized.

6.5 Cost Estimate Review Cost estimates should be reviewed for quality and reasonableness before release. Reviews can be either objective, subjective, or a combination of both. As a minimum, all estimates should address the review criteria listed in Appendix E. 60 DOE G 413.3-21 5-9-2011 DOE cost estimates, and the Basis of Estimate (BOE) that supports them should include an assessment of cost realism and reasonableness. In an effort to test the reasonableness and realism of a cost baseline, there needs to be an assessment of the overall cost baseline from the perspective of the primary cost elements that comprise the baseline. Such an assessment evaluates the relative percentages of the total proposed cost baseline and the underlying BOE for each of the significant cost elements. Additionally, primary cost drivers within the estimate consistent with a product oriented WBS, should be identified and compared to established benchmarks for similar items or activities. Such efforts will facilitate independent reviews of cost estimate reasonableness by competent qualified personnel who have not been involved in preparing the estimate. This review should provide an unbiased check of the assumptions, productivity factors, and cost data used to develop the estimate. An independent cost review is a vital step in providing consistent, professionally prepared cost estimates (Step 7, GAO 12 Key Steps Development Process, GAO-09-SP). The review should be documented to indicate:  The name of the reviewer(s) – Office/Agency/Contractor it belongs  The date of the review  Review comments and comment disposition 6.6 Estimate Reconciliation Reconciliation may be necessary to account for changes made between CDs or other life-cycle project milestones. Reconciliations should be organized by WBS and cover all aspects of project documentation (cost estimate, basis of estimate, schedule, and risks). In general, reconciliation should recognize or focus on specific changes in scope, basis of estimate, schedule, and risks. There should be an understanding that, as time progresses, more and better information is expected to be available and used as project or cost estimate documentation. Reconciliations are necessary to mitigate budget shortfalls and may be used to correct deficiencies identified during internal or external reviews. 6.7 Cost Estimate Documentation Well-documented cost estimates are considered a best practice for high-quality cost estimates for several reasons.12  First, complete and detailed documentation is essential for validating and defending a cost estimate.   Second, documenting the estimate in detail, step by step, provides enough documentation so that someone unfamiliar with the program/project could easily recreate or update it.  12 GAO-09-3SP DOE G 413.3-21 61 5-9-2011  Third, good documentation helps with analyzing changes in program costs and contributes to the collection of cost and technical data that can be used to support future cost estimates.   Finally, a well-documented cost estimate is essential if an effective independent review is to ensure that it is valid and credible. It also supports reconciling differences with an independent cost estimate, improving understanding of the cost elements and their differences so that decision makers can be better informed.

 Whenever possible, documentation should be organized into an indexed repository, either physical or digital, with a document control plan and, preferably, a documentation engineer/administrator. To the extent practical, the documentation index should be consistent with the WBS for the project for ease of reference.  6.7.1 Cost Estimate Package A cost estimate package or report should be prepared for all cost estimates. Each estimate package should contain the same categories of information and the same types of documentation; only the level of detail in the estimate package varies. The contractor in coordination with the IPT determines the format used to present this information. A cost estimate package or report supporting baselines, management decisions, and budgetary documents should include the following information. A graded approach to cost estimate packaging and reporting should be used when documenting cost estimates for other purposes.  Estimate Purpose Statement—the reason the estimate was prepared including - Determine the estimate’s purpose - The level of detail required - Determine who will receive the estimate - Identify the overall scope of the estimate  Technical Scope Summary—summary of the technical scope of the project including what is included in the project as well as what is not included.  Qualifications and Assumptions—the key project qualifications and cost assumptions that provide a “bounding” of the estimate and scope. Specifically, the assumed condition under which the estimator believes the project work scope will be performed should be defined. The qualifications and assumptions may describe the types of work expected, the amount of work expected, the source of various materials, conditions in which the work is to be performed (winter, contaminated building, etc.), and any other information that significantly influences the estimate but is not clearly identified in the technical scope description. Major assumptions and exclusions that affect the project or the accuracy of the estimate are also described. In completing this activity, the estimator should identify areas where work scope descriptions have deficiencies, or where key information is missing and has to be 62 DOE G 413.3-21 5-9-2011 assumed. Vital information concerning the project is also identified for those reviewing or using the estimate. Qualifications and assumptions should be described and documented at the most detailed level practical, and they should be clearly described so an individual not intimately involved with the project can understand the estimate’s basis.  Overall Basis of Estimate (BOE)— The dollar amount indicated in a cost estimate is meaningless without understanding the quality of information that led to developing the estimate. With all estimates, the basis is communicated at a higher level in a summary document and at a more specific level within the estimate. Include in the estimate package a high level summary explaining the genesis for the source information for the estimated resources and a breakdown of cost estimate basis. For example, 30% is vendor quote, 20% engineering judgment, 30% historical data, and 20% cost database/cost books. The basis should also describe the design basis, the planning basis (significant features and components, proposed methods of accomplishment, and proposed project schedule), the risk basis, supporting research and development requirements (important when new technologies are contemplated for certain components, equipment or processes), special construction or operating procedures, site conditions, the cost basis, and any other pertinent factors or assumptions that may affect costs.

If the estimate is prepared in support of another formal document that addresses these issues (i.e., a Conceptual Design Report or definitive design document), separate documentation is not required. If the estimate is a standalone document, or deviates substantially from a previous estimate scope, the above issues should be addressed and included in the estimate basis.  Estimate Summary and Detail Reports—a presentation of the estimate details in a variety of ways (e.g., sorted by labor type, by WBS etc.)  Technical Scope Detail—a statement of the details of the technical scope necessary for a thorough understanding of the work. This may be by reference to specific technical documents.  Estimate Specific WBS and WBS Dictionary—a decomposition of the organization and related cost estimates. The initial basis for any cost estimate should be documented at the time the estimate is prepared. The basis should describe or reference the purpose of the project element, the design basis, the planning basis (significant features and components, proposed methods of accomplishment, and proposed project schedule), the risk basis, supporting research and development requirements (important when new technologies are contemplated for certain components, equipment or processes), DOE G 413.3-21 63 5-9-2011 special construction or operating procedures, site conditions, the cost basis, and any other pertinent factors or assumptions that may affect costs. If the estimate is prepared in support of another formal document that addresses these issues (i.e., a Conceptual Design Report or definitive design document), separate documentation is not required. If the estimate is a standalone document, or deviates substantially from a previous estimate scope, the above issues should be addressed and included in the estimate basis. At the WBS level, include quantities, applicable rates and costs. Also, include sources of information, such as historical costs, industry standards, published price lists; cost databases, informal budgetary information, cost estimating relationships, etc. for the WBS. At the WBS level, include the resource and Crew Listing—a listing of the type of resources used in the estimate.  Method and Justification for Use of Indirect Rates—an explanation of how indirect rates were selected and applied.  Method and Justification for use of Allowances—an explanation of how allowances were determined and applied.  Method and Justification for use of Escalation—an explanation of the escalation rates used, how they were obtained, why they were selected and how they were applied.  Schedule—a time-frame for the work to assist in understanding how escalation was applied. The schedule should reflect the same technical scope and cost as the estimate.  Risks—discuss sources of risk and uncertainty, including critical assumptions, associated with the estimate. Identify major risks within the scope of work and how those risks are mitigated. The basis for contingency reserves and how they were calculated is fully documented.  Sensitivity Analysis—describes the effect of changing key cost drivers and assumptions independently. Identifies the major cost drivers that should be closely monitored.  List of Participants—a list of contacts for questions about the estimate. Estimate preparers and reviewers should be identified in the cost estimate documentation.  Documentation of Review and Approval—evidence that the estimate was reviewed and approved.

64 DOE G 413.3-21 5-9-2011  Location of Estimate Files and Reference Information—a location to obtain copies of the estimate, review the original, and review information that was not included in the estimate package. The cost estimate package should include documentation providing the location of the estimate, historical data, technical scope, worksheets and any other pertinent information used to prepare the estimate.  Documentation of Changes to the Estimate—clarification of how and where the estimate was changed, eliminating the need to review the entire estimate. Cost estimates should be updated or modified as necessary. Updates should be promptly documented when significant changes occur. 6.7.2 Cost Classification A specific definition of items to be included as direct costs and indirect costs should be included at the discretion of the DOE program offices and field offices and/or determined by their contractor’s financial system. This would also apply to activities under either Other Project Costs (OPC) or Total Estimated Cost (TEC) (refer to DOE O 413.3B for definitions and requirements for these terms as they apply to projects). It is important to assure that there is no double counting of costs estimated as direct, indirect, or overhead. Generally, all cost estimates include  direct costs,  indirect costs,  contingency, and  escalation. DOE G 413.3-21 65 5-9-2011 Figure 6–11. Contents of a Project Performance Baseline (Project Budget Allocations) Figure 6-12. Typical Project Performance Baseline Including Cost and Schedule 66 DOE G 413.3-21 5-9-2011 6.8 Estimate Maintenance It is important to maintain estimates over the life cycle of the project or program. For projects, the cost estimate is a key element in establishing the Performance Baseline, as depicted in Figures 6-11 and 6-12. The project cost performance baseline consists of a project’s TPC, which includes various contract prices, non-contract costs, profit/fee, and contingency. Project baselines in turn are key elements of overall program planning and budgeting, including portfolio management. As projects are identified and defined, and the cost estimates and baselines evolve, they become key inputs into the management of the program’s life cycle. This may involve multiple projects and/or operational activities (e.g., construction of facilities to treat waste, decommissioning of treatment facilities, waste management, surveillance and maintenance). As such, active maintenance of all estimates is essential – they need to reflect the latest and most realistic projections of cost and resource requirements to facilitate effective program planning. The need to make changes to a cost estimate generally results from determining that the estimate no longer accurately portrays the expected cost for the work. The means to formally control changes to a cost estimate are dependent on the purpose of the estimate. Estimates supporting project baselines must be changed and approved through a formal baseline change process (refer to DOE O 41.3.3B, Appendix A, Section 6, Baseline Management).

Changes require documentation, and as each estimate is updated, modified, or revised, an audit trail must be maintained to show the relationship between the new estimate and the previous estimate. The reason(s) for each change should be identified and may include such things as modification of scope, unexpected increases in labor rates, schedule extensions, variance in escalation rates, project reprioritization, etc. All such changes should be identified in a manner that will permit verification of the specific quantitative change(s) in the cost estimate. Changes may be documented by the use of addenda, officially approved change request documents, or by completion of a new estimate. The method used depends upon the magnitude of the estimated change and the underlying causes. All estimate changes should include the appropriate level of indirect costs, escalation, and allowances, as dictated by the phase of the project when the change was identified. The process of officially revising and updating cost estimates supporting project baselines frequently involves the use of change requests. Change requests are the official means by which all changes to the cost baseline should be documented. Change requests are prepared using standard contractor procedures and forms, which describe proposed changes to approved technical, cost and/or schedule baselines. As work is authorized to proceed, cost estimates become budgets. There is a distinction between budget allocations and cost estimates. The budget forms the basis for work execution. DOE G 413.3-21 67 5-9-2011 7.0 COST ESTIMATING OUTPUTS This Guide defines traditional output coming out of the Cost Estimating Process as shown in Figure 7.1. Outputs include, the traditional change control process, economic and cost-benefit analysis, value engineering, earned-value, and final project cost reports. Figure 7-1. Cost Estimating Process Model 7.1 Cost Estimate Interfaces Cost estimate development is initiated into a process through one-time or iterative inputs. Potential one-time inputs may include (but are not limited to) the project charter, project execution plan, acquisition strategy, and acquisition plan. All of these are inputs to the cost estimating process. Other inputs may evolve through the cost estimating process and use the outputs from the cost estimating process, such as the risk assessment (primarily risk identification and impact assessment), schedule, and scope development. Input from cost estimating peers may improve the quality of a cost estimate, and peer reviews should be required before external reviews are conducted. The cost estimate output provides a key interface to other project processes, including the planning/scheduling, project control, risk management, and project approval processes. Schedule Peer Reviews Input Output Risk Management Plan Scope Of Work Schedule Scope of Work Input Output Risk Management Plan Peer Reviews GAO 12 Key Steps 68 DOE G 413.3-21 5-9-2011 7.2 Estimate Presentations to Management As discussed in Section 3, cost estimates are a primary input into the DOE decision-making and project approval CD process. As a result, a cost estimate is documented and presented to management with an understanding that the quality of the cost estimate adheres to such decisions and approvals. A graded approach to cost estimate packaging and reporting should be used when documenting cost estimates for other purposes. The following is recommended to be included in most presentations of cost estimates to management, whenever such presentations are necessary and warranted:

 Develop a briefing that presents the documented life-cycle cost (LCC) estimate;  Include an explanation of the technical and programmatic baseline and any uncertainties;  Compare the estimate to an independent cost estimate (ICE) and explain any differences;  Compare the estimate LCC estimate or ICE to the budget with enough detail to easily defend it by showing how it is accurate, complete, and high quality;  Focus in a logical manner on the largest cost elements and cost drivers;  Make the content clear and complete so that those who are unfamiliar with it can easily appreciate the competence that underlies the estimate results;  Make backup slides available for more probing questions;  Act on and document feedback from management; and  Request acceptance of the estimate. In many instances, the results of sensitivity analyses should be presented to further management understanding of the reliability and accuracy of the presented cost estimate. Such analyses should focus on key cost drivers and critical assumptions and inform management of the resulting estimate result if those drivers or assumptions were changed. Usually ranges that can bracket potential estimate results are a useful management presentation approach; however, such bracketing must be clearly explained and the potential risks and uncertainties associated fully described for management’s understanding. 7.3 Baselines and Change Control Cost estimates are normally organized by a WBS, account code, and/or some other standardized definition. Standard definitions of direct and indirect costs provide consistency in estimating costs and project reporting. This also benefits program/project management, independent estimates (Government estimates), reviews, and contract/project validations and cost/price analysis. The cost portion of the performance baseline consists of a project’s TPC, including various contract prices, non-contract costs, and contingency. As projects evolve, baselines are established and changes are managed against those baselines. Cost estimates supporting proposed or directed changes should contain the same level of quality as the primary baseline cost estimate. Baselines are expected to remain intact throughout the project execution from approval at CD-2 to completion at CD-4. Changes are expected to remain within the performance baseline as per DOE G 413.3-21 69 5-9-2011 the definition of a successful project at CD-4 in DOE O 413.3B. Cost estimates for the baseline project are modified (updated) when changes are approved. 7.4 Analysis Analysis includes decomposition and examination. In many cases, analysis will provide insight to a decision maker. Such is the case of cost benefit analysis. Cost-benefit analysis is a required element in capital planning within the Federal government. In the contracting community, cost analysis or price analysis is a comparison of either costs or price, respectively (e.g., comparing a proposal to a government estimate). If a contract is competitively bid, cost analysis (which is more detailed and complex than price analysis) may not be required. Analysis could be performed in the life of a project, including cost benefit analysis, cost- effective analysis, economic analysis, LCC analysis, sensitivity analysis and uncertainty analysis. Analyses supporting CDs should be structured and formal; i.e., well documented. Other analyses may be loosely structured and informal.

Normally, analyses require using similar cost estimate structures (i.e., separate cost estimates for each alternative considered); having all costs for all alternatives depicted; and comparing alternatives using net present value or annuities. Normally a written summary of the findings is also prepared to explain the analysis. More information on parametric cost estimates, including the Parametric Estimating Initiative (PEI) Parametric Estimating Handbook, can be found through the International Society of Parametric Analysts (ISPA), at http://www.ispa-cost.org/ More information on cost estimating and analysis can be found through the Society for Cost Estimating and Analysis (SCEA), at http://www.sceaonline.net/ More information on cost engineering can be found through the Association for the Advancement of Cost Engineering International (AACEI), at http://www.aacei.org/ 8.0 COST ESTIMATING EXPECTATIONS This Section summarizes what could be expected from the use of DOE cost estimates for capital asset projects. 8.1 Summary of Expectations A DOE cost estimate, regardless of purpose, classification, or technique employed, should demonstrate sufficient quality to infer that it is appropriate for its intended use, is complete, and has been subjected to internal checks and reviews. It should also be clear, concise, reliable, fair, reasonable, and accurate, within some probability or confidence levels. In addition, it is expected to have followed accepted standards such as the GAO 12 steps of a high quality cost estimating process (GAO-09-3SP). There could be more expectations, depending on the 70 DOE G 413.3-21 5-9-2011 program, project, contract type, specific budget requirements, or other situations. Common elements of good cost estimates are expected to be constant. Suggested review criteria are summarized in Appendix E. DOE expectations for quality cost estimates are summarized in Appendix L. Other expectations are associated with organization of the estimate. Types of cost elements included; resources, material, other direct costs, and sub-contract costs, structure the type of work embodied in the cost estimate. These coded costs facilitate development of management information and earned value assessments, and can provide extremely useful information as projects are completed. Industry standard codes are exemplified by the Construction Specifications Institute’s Uniformat II and Masterformat, for construction projects. The environmental cost element structure (ECES), an ASTM standard for environmental projects, is another common coding structure. Some of these industry standard codes are listed in the appendices. Other formats, such as project data sheets (PDSs) for budget formulation, should be produced, as necessary. More information on the Uniformat II can be found at http://www.uniformat.com/index.html More information on the Masterformat can be found at http://www.masterformat.com/ More information on the ECES can be found at http://www.emcbc.doe.gov/dept/ce&a/aceteam_eces.php More information on DOE Budget Guidance with PDS sample and template, can be found at http://www.cfo.doe.gov/crorg/cf30.htm More information on OMB’s Exhibit 300 forms can be found in OMB A-11, Part 7 at http://www.whitehouse.gov/omb/circulars_all_current_year_all_toc 8.2 Lessons Learned

Lessons learned from experience are essential to structuring increasingly more accurate cost estimates. A reasonable expectation of a cost estimating process is that it systematically collects historical project information in real time, rather than being done at the last minute or by trying to recollect long after the fact. Historical cost information can be collected as lump sum (representing some specific scope of work), unit cost, or productivity (hours per unit, or units per hour) information. Historical costs should be collected for analysis, normalization, and use in future project cost estimates. Lessons learned that can help cost estimators with future cost estimates may be generic in nature or specific to a site, location, contract type, etc. They may apply to a particular scope of work or a cost estimating technique. There are many ways to communicate lessons learned. The point is to document what has been learned from the experience and share it with others, as appropriate (DOE G 413.3-11, Project Management Lessons Learned, dated 8-5-08). 8.3 Independent Cost Estimates and Cost Reviews The following requirements are described in DOE O 413.3B: DOE G 413.3-21 71 5-9-2011 Prior to CD-0, for Major System Projects, or for projects as designated by the SAE, OECM will conduct an Independent Cost Review (ICR). Prior to CD-1, for projects with a TPC ≥ $100M, OECM will develop an Independent Cost Estimate (ICE) and/or conduct an ICR, as they deem appropriate. Prior to CD-2, for projects with a TPC ≥ $100M, OECM will develop an ICE. The ICE will support validation of the Performance Baseline (PB). Prior to CD-3, for projects with a TPC ≥ $100M, OECM will develop an ICE, if warranted by risk and performance indicators or as designated by the SAE. The definitions of ICR and ICE, as provided in DOE O 413.3B, are as follows: Independent Cost Review. An independent evaluation of a project's cost estimate that examines its quality and accuracy, with emphasis on specific cost and technical risks. It involves the analysis of the existing estimate's approach and assumptions. Independent Cost Estimate. A cost estimate, prepared by an organization independent of the project sponsor, using the same detailed technical and procurement information to make the project estimate. It is used to validate the project estimate to determine whether it is accurate and reasonable. In addition to the specific requirements placed on OECM in DOE O 413.3B, a project may be well-served by having its own ICR or ICE completed at various points in the development and execution of the project, no matter the size of the project (for projects less than $100M). Comparison to an ICE is a key element in Step 7 of the GAO Best Practices. Appendix K provides some specific guidance relative to ICRs and ICEs. All ICRs and ICEs should be developed by individuals or organizations that are truly independent of the project. This may be accomplished by issuance of contracts or task orders by OECM, through another DOE direct contract vehicle, or directly by other DOE organizations. However, it may not be generally appropriate for the project proponents (i.e., a DOE site office, a DOE program office, or a DOE contractor) to conduct, or to contract for, and direct an ICE or ICR development. In general, the types of reviews that DOE normally recognizes (the types of reviews may be modified/combined by the size, technology and complexity of the project) are the following:

Documentation Review (Type I)—this type of review is not normally accomplished as an ICR/ICE, nor does it fulfill the requirements as specified in DOE O 413.3B, since it only consists of an assessment of the documentation available to support the estimate. It is merely an inventory of existing documents to determine that the required support documentation exists and to identify any missing data. This type of review can be beneficial for a project team facing an upcoming EIR or ICE, to ensure readiness to proceed with those activities. 72 DOE G 413.3-21 5-9-2011 Reasonableness Review (Type II)—this equates to the DOE O 413.3B ICR For this review the ICR team reviews all available project documentation, receives briefings from the project team, holds discussions with the project team, completes sufficient analysis to assess the reasonableness of the project assumptions supporting the cost and schedule estimates, ascertains the validity of those assumptions, assesses the rationale for the methodology used, and checks the completeness of the estimate, including appropriate allowances for risks and uncertainties. The result is a report that details the findings and recommendations. Parametric Estimating Approach (Type III)—this approach, in addition to incorporating all of the activities needed for a Reasonableness Review, uses parametric techniques, factors, etc., to analyze project costs and schedules, and is usually accomplished at a summary WBS level. The parametric techniques (including CERs and factors) should be based on accepted historical cost/schedule analyses. At a minimum, these tools should be based on historic estimates from which models have been derived, and, where possible, from actual completed projects. An estimate with a minimum of 75 percent of the TPC based on parametric techniques is classified as a parametric estimate. Sampling Approach (Type IV)—this review also begins with the activities needed for a Reasonableness Review, but it also requires the ICE team to identify the key cost drivers. A “cost driver” is a major estimate element whose sensitivity significantly impacts TPC. Detailed, independent estimates should be developed for these cost drivers. Such estimates should include vendor quotes for major equipment, and detailed estimates of other materials, labor, and subcontracts. For the balance of the project costs, the project team’s estimate may be used (if deemed reasonable), or, if appropriate, parametric techniques may be used for certain portions of the project costs. An estimate which provides a detailed cost for all cost drivers is classified as a Sampling Estimate. Bottom-up Estimating Approach (Type V)—this is the most detailed and extensive ICE effort. It begins with the activities needed for a Reasonableness Review. In addition, this approach requires a detailed bottom-up independent estimate for both cost and schedule. This will require quantity take-offs/development, vendor quotations, productivity analysis, use of historical information, and any other means available to do a thorough and complete estimate of at least 75 percent of the project’s cost. It may not be possible to do a completely independent estimate on some portions of the project estimate, and for those portions – which should not exceed 25 percent of the total estimate – the project estimate may be used if it has passed the test of reasonableness. In all cases, the total cost (TEC and TPC) should be developed.

ICEs will often involve a combination of the approaches and techniques described above, due to the varying levels and quality of information available. The accuracy of the ICE will be subjectively determined based on the weighted evaluation of the information available. A key element of any ICE is a comprehensive reconciliation between the ICE and the project team estimate. Such reconciliation identifies areas of significant difference between the estimates and attempts to explain those differences. This information provides a useful basis for subsequent estimate (cost range or baseline) approval or identification of necessary estimate revision and refinement. DOE G 413.3-21 73 5-9-2011 8.4 Independent Government Cost Estimates As described in DOE O 413.3B, an Independent Government Cost Estimate (IGCE) is the government’s estimate of the resources and projected costs that a contractor will incur in the performance of a contract. These costs include direct costs such as labor, supplies, equipment, or transportation and indirect costs such as labor overhead, material overhead, as well as general and administrative expenses, profit or fee. (Refer to FAR 36.203 and FAR 15.406-1) An IGCE should be based on the exact same bidding documents (describing scope, terms and conditions, contract clauses, etc.) as will be used by the contractor. Not only do IGCEs play an important role in the contractor bid evaluation and selection/award processes, but the actual IGCE development can also be a great value in making the actual bid documents and contract language more effective by clearing up ambiguous elements and identifying more cost/schedule efficient contract approaches. The IGCE can play a vital role in helping identify what is “reasonable” because the IGCE is the Government’s best independent estimation of the potential cost of a contract. A detailed and well-documented IGCE is a valuable tool for supporting cost or cost realism analysis. The IGCE also supports a Price Analysis, which is an estimate of the “should pay” price that the Government should reasonably expect to pay based on current competitive market conditions. Additionally, the IGCE is an aid in deciding whether to go ahead with the acquisition as well as provide supportive documentation for the Purchase Request. It should also be understood that IGCEs, by themselves, do not fulfill the requirements for an ICR or ICE. That is because the scope of the estimate needs to be restricted to the contract scope and conditions. As such, an IGCE does not usually represent the full project scope nor does it appropriately incorporate government furnished items or reflect DOE risks and uncertainties. 74 DOE G 413.3-21 5-9-2011 9.0 APPENDICES The objective of this Guide is to provide uniform guidance and best practices for developing high quality cost estimates for capital assets projects while meeting the requirements of DOE O 413.3B, Program and Project Management for the Acquisition of Capital Assets. The project cost estimate is an essential element of a credible project baseline. This Guide provides cost estimating and processes that meet Federal and DOE requirements and are consistent with industry standards and practices, and facilitate local requirements. The Appendices that follow supplement the material presented in the core sections of this Guide. Appendices A and B – Provide the list of the most common acronyms used in this document plus the definition of common terms used with cost estimating.

Appendices C and D – Provide a summary of the most important Federal and DOE requirements for cost estimating. Appendix E – Provide a suggested criteria for reviewing a cost estimate for quality and credibility. Appendix F – Provides a generic example for the calculation and use of economic escalation for a project. Appendix G – Provides a generic simple example for a life-cycle cost analysis for two alternatives in a project. Appendix H – Provides as a reference the AACEI Cost Estimate Classification. Appendix I – Provides a bibliography of references in cost estimating. Appendix J – Provides a crosswalk of the 12 key GAO estimating steps to sections of this Guide wherein each step is described in detail. Appendix K – Provides additional ICE and ICR guidance regarding the timeframe for completion, as well as documentation needs. Appendix L – Provides DOE expectations for checking the quality of cost estimates to meet the four characteristics of quality estimates and the reasonableness of the cost estimating techniques employed. DOE G 413.3-21 Appendix A 5-9-2011 A-1 Appendix A: Acronyms AE Acquisition Executive A/E architect/engineer AACEI Association for the Advancement of Cost Engineering, International ABC activity-based costing ANSI American National Standards Institute AS acquisition strategy ASTM American Society for Testing Materials BOE basis of estimate CD critical decision CDR conceptual design report CER cost estimating relationship CFO Chief Financial Officer CFR Code of Federal Regulations CM construction management CO contracting officer COA code of accounts CPM Contractor Project Manager, otherwise Critical Path Method CSI Construction Specifications Institute DoD Department of Defense DOE Department of Energy EIR external independent review ESAAB Energy System Acquisition Advisory Board ES&H Office of Environment, Safety, and Health EVMS Earned Value Management System FPD Federal Project Director FTE full-time equivalents GFE Government-Furnished Equipment ICE independent cost estimate ICR independent cost review IGCE independent government cost estimate IPT integrated project team IT information technology LEED Leadership in Energy and Environmental Design LCC life-cycle cost LOE level of effort NPV net present value NNSA National Nuclear Security Administration OMB Office of Management and Budget OPC other project costs PARS Project Assessment and Reporting System PBC performance based contracts PDS project data sheet PED project engineering design PHA preliminary hazard analysis Appendix A DOE G 413.3-21 A-2 5-9-2011 PM project management or contractor project manager PMB performance measurement baseline PPBES Planning, Programming, Budgeting and Execution System QA quality assurance QC quality control R&D research and development SME subject matter expert TEC total estimated cost TPC total project cost VE value engineering WBS work breakdown structure DOE G 413.3-21 Appendix B 5-9-2011 B-1 Appendix B: Definitions These definitions of terms are derived within the context of how terms are used in this Guide. Acquisition plan (AP) – is the document that facilitates attainment of the acquisition objectives. The plan must identify: those milestones of which decisions should be made; all the technical, business, management; and other significant considerations that will control the acquisition including, but not limited to, market research, competition, contract type, source selection procedures and socio-economic considerations.

Acquisition strategy (AS) - a business and technical management approach designed to achieve acquisition objectives within the resource constraints; the framework for planning, directing, contracting, and managing a system, program, or project; a master schedule for research, development, test, production, construction, modification, postproduction management, and other activities essential for success; the basis for formulating functional plans and strategies (e.g., acquisition strategy, competition, systems engineering). Once approved, the AS should reflect the approving authority’s decisions on all major aspects of the contemplated acquisition. Activity-based costing (ABC) -  Costing using a method to ensure that the budgeted amounts in an account truly represent all the resources consumed by the activity or item represented in the account.  Cost estimating in which the project is divided into activities and an estimate is prepared for each activity. Also used with detailed, unit cost, or activity-based cost estimating. Actual Cost - the costs actually incurred and recorded in accomplishing work performed. Allowance - an amount included in a base cost estimate to cover known but undefined requirements for a control account, work package, or planning package. Analysis - the separation of a whole (project) into parts; examination of a complex entity, its elements, and their relationships; a statement of such analysis. Assumptions - factors used for planning purposes that are considered true, real or certain. Assumptions affect all aspects of the planning process and of the progression of the project activities. (Generally, the assumptions will contain an element of risk.) Baseline - a quantitative definition of cost, schedule, and technical performance that serves as a standard for measurement and control during the performance of an activity; the established plan against which the status of resources and the effort of the overall program, field programs, projects, tasks, or subtasks are measured, assessed, and controlled. Once established, baselines are subject to change control discipline. Basis (basis of estimate, or BOE) - documentation that describes how an estimate, schedule, or other plan component was developed, and defines the information used in support of development. A basis document commonly includes a description of the scope, methodologies, references and defining deliverables, assumptions and exclusions, clarifications, adjustments, and level of uncertainty. Benchmark - a standard by which performance may be measured. Appendix B DOE G 413.3-21 B-2 5-9-2011 Bias - a repeated or systematic distortion of a statistic or value, imbalanced about its mean. Bounding assumption - identified risks that are totally outside the control of the project team and therefore cannot be managed (i.e., transferred, avoided, mitigated, or accepted). Bounding assumptions are also referred to as “enabling assumptions”. Brainstorming - interactive technique designed for developing new ideas with a group of people. Budgeting - a process for allocating estimated of resource costs into accounts (i.e., the cost budget) against which cost performance will be measured and assessed. Budgeting often considers time-phasing in relation to a schedule or time-based financial requirements and constraints.

Buried contingency - costs that may have been hidden in the details of an estimate to protect a project from the removal of explicit contingency and to ensure that the final project does not go over budget. To reviewers, buried contingency often implies inappropriately inflated quantities, lowered productivity, or other means to increase project costs. Buried contingency should not be used. Capital assets -  Land, structures, equipment, systems, and information technology (e.g., hardware, software, and applications) used by the Federal government and having an estimated useful life of 2 years or more. Capital assets include environmental restoration (decontamination and decommissioning) of land to make useful leasehold improvements and land rights, and assets whose ownership is shared by the Federal government with other entities (does not apply to capital assets acquired by state and local governments or other entities through DOE grants).  Strategic assets; unique physical or intellectual property that is of long-term or ongoing value to an enterprise; in total cost management, a strategic asset may also include fixed or intangible assets; assets created by the investment of resources through projects (excludes cash and financial assets). Change control - a process that ensures changes to the approved baseline are properly identified, reviewed, approved, implemented and tested, and documented. Change order - a unilateral requirement signed by the Government contracting officer directing the contractor to make a change that the changes clause authorizes without the contractor’s consent. Code of accounts (COA) - a systematic coding structure for organizing and managing asset, cost, resource, and schedule information; an index to facilitate finding, sorting, compiling, summarizing, and otherwise managing information to which the code is tied. A complete COA includes definitions of the content of each account. Conceptual design - the concept that meets a mission need; requires a mission need as an input. Concepts for meeting a mission need are explored and alternatives considered before arriving at the set of alternatives that are technically viable, affordable, and sustainable. Conceptual design report (CDR) - documentation of conceptual design phase outcome; forms the basis for a preliminary baseline. DOE G 413.3-21 Appendix B 5-9-2011 B-3 Co-dependent risk - co-dependent project risks are generated when intermediate deliverables or outcomes (two or mor