Development of Cost Breakdown Structure for Defence Acquisition Projects

Transcription

1 Development of Cost Breakdown Structure for Defence Acquisition Projects Abderrahmane Sokri DRDC Centre for Operational Research and Analysis Vrenti Ghergari Lily Wang D Cost S Defence Research and Development Canada Scientific Report DRDC-RDDC-2016-R086 May 2016

2 Template in use: (2010) SR Advanced Template_EN (051115).dotm Her Majesty the Queen in Right of Canada, as represented by the Minister of National Defence, 2016 Sa Majesté la Reine (en droit du Canada), telle que représentée par le ministre de la Défense nationale, 2016

3 Abstract Life cycle costing is a complex economic assessment that estimates the overall costs of an item over its entire life. A cost structure is a very useful tool whereby life cycle activities are grouped into cost elements. So far a formal cost structure with a good glossary and coherent relationships is missing for national defence acquisition projects. This report suggests an activity-oriented approach to developing a cost structure for defence acquisition projects. It defines its requirements and presents its theoretical foundation. It also provides a glossary of terms and many concrete examples to illustrate the key elements of the suggested structure. Significance to defence and security This work will enhance the understanding of the principles that govern cost structures in major acquisition projects. It will also provide an important tool that can guide cost estimators and project managers in implementing effective life cycle costing. At least two beneficiary communities were identified: ADM(Fin) and Allied Nations. DRDC-RDDC-2016-R086 i

4 Résumé Le calcul des coûts durant le cycle de vie est une évaluation économique complexe permettant d estimer l ensemble des coûts d un article tout au long de son cycle de vie. Une structure de coûts est un outil très utile pour les activités liées au cycle de vie ayant été regroupées sous des éléments de coût. Pour le moment, il manque une structure des coûts officielle ayant un bon glossaire et des liens cohérents pour les projets d acquisition en matière de défense nationale. Le présent rapport propose une approche axée sur les activités dans le but d élaborer une telle structure de coûts. Il présente son fondement théorique et les conditions de son application. Il fournit également un glossaire et de nombreux exemples concrets pour illustrer les principaux éléments de la structure proposée. Importance pour la défense et la sécurité Ces travaux permettront de mieux comprendre les principes qui régissent les structures de coûts dans les projets d acquisition majeurs. Ils fournissent également un important outil pouvant orienter les évaluateurs des coûts et les gestionnaires de projet dans l établissement des coûts du cycle de vie. Au moins deux collectivités bénéficiaires ont été déterminées : le SMA(Fin) et les pays alliés. ii DRDC-RDDC-2016-R086

5 Table of contents Abstract i Significance to defence and security i Résumé ii Importance pour la défense et la sécurité ii Table of contents iii List of figures v List of tables vi 1 Introduction Background Aim Document structure Definitions Phases of defence acquisition projects Development Acquisition Operations and sustainment Disposal Cost categorization Overall costs of military systems Cost structure development Cost decomposition Requirements Cost assignment Organisation of cost elements Conclusion References Annex A Annex B Activity list for defence acquisition projects A generic CBS for defence system acquisition Annex C Canadian generic CBS for defence acquisition projects C.1 Aircraft system CBS C.2 Sea system CBS C.3 Ground vehicle system CBS C.4 Missile system work breakdown structure List of symbols/abbreviations/acronyms/initialisms DRDC-RDDC-2016-R086 iii

6 List of figures Figure 1: Life cycle phases in defence acquisition projects Figure 2: Overall costs of military systems Figure C.1: CF-188 Hornet Figure C.2: HMCS Fredericton Figure C.3: Leopard 2A4 tank Figure C.4: Ballistic missile iv DRDC-RDDC-2016-R086

7 List of tables Table 1: Cost elements associated with the operation of the main system Table 2: The main steps in the suggested CBS Table A.1: Development phase Table A.2: Acquisition phase Table A.3: Operations and sustainment phase Table A.4: Disposal phase Table B.1: Combination of activities and products DRDC-RDDC-2016-R086 v

8 This page intentionally left blank. vi DRDC-RDDC-2016-R086

9 1 Introduction 1.1 Background Life cycle costing is an economic technique that assesses the overall costs of an item over its entire life. It can enhance decision making in choosing the best way to use economic resources. It has been used, for example, to identify the optimal replacement strategy for fleet equipment (Sokri 2011). If used from the very beginning of the analysis, it can assist in allocating budget and comparing different alternative courses of action. This technique has gained increasing importance in early planning and concept formulation of many military acquisition processes. It is being thought of as the cornerstone in many capital investment decisions (Sokri 2014; NATO 2007). New guidelines, procedures, and tools are being established by Treasury Board of Canada Secretariat (TBS) and the Department of National Defence (DND) to implement effective life cycle costing (TBS 2008; DND 2006). An important tool that can guide cost estimators and project managers in this operation is a consistent and commonly recognized cost structure. A cost structure systematically lists the tasks to be performed and groups them into cost elements. A well-developed cost structure will eliminate double counting and ensure that all appropriate costs have been considered. The Canadian Costing Handbook (DND 2006) suggests a generic cost element structure (CES) for military equipment procurement. While this document presents the basic concepts of a cost structure, it still suffers from two main pitfalls: (1) the lack of common definitions that describe the different cost elements, and (2) the absence of accurate relationships that connect the cost elements together. These two problems may cause inaccurate or misleading cost estimates. A good glossary of terms is indispensable in reducing or eliminating duplications, overlaps, and omissions (Stewart et al. 1995). It defines terms that may deviate from their original meanings in everyday use (e.g., maintenance cost, in-service cost). Moreover, each allied nation has developed and uses its own cost structure and terminology. Such a glossary is then crucial to effective communication between allied nations about equivalent cost elements. In a formal cost structure, the cost elements are tied together with relationships. These relationships provide a traceable analytical basis to each derived cost. The Canadian Costing Handbook (DND 2006) does not provide these relationships. Moreover, it specifies that they are not required for formal project approval. The absence of clear relationships of cost elements makes any life cycle cost (LCC) framework inoperative. 1.2 Aim Building on leading standards (NATO 2003), and recent research developments in this field (TBS 2013; DoD 2013), this study seeks to address the two mentioned pitfalls. It has two main interrelated objectives: develop a cost structure for defence acquisition projects, and suggest a cost breakdown glossary to be applied to defence system acquisition projects from a Canadian perspective. DRDC-RDDC-2016-R086 1

10 The resulting document will establish a common ground for preparing and presenting a cost structure for national defence acquisition projects. It can also provide guidance to LCC studies in multinational projects involving allied members. Beyond the proper accounting of all costs, the suggested cost structure offers clarity and order to cost elements and transparency and replicability to the cost attribution rule. It can help in conducting a more refined cost-benefit analysis at the margin. It can also provide insights about many financial issues, such as labour to capital ratio and the ratio of indirect (or overhead) to direct costs associated with military projects. 1.3 Document structure This document is organized into four sections. Following the introduction, Section 2 defines costs and shows how they can be classified. Section 3 describes an activity-oriented approach to develop a cost structure. In Section 4, some concluding remarks are made. 2 DRDC-RDDC-2016-R086

11

12 2.1.1 Development The main decisions about the system shape are taken in the development phase. This phase requires collaboration between the main stakeholders engaged in the project. It incorporates three different steps: (1) The identification, where military capability needs are determined and the feasibility of the project is analyzed; (2) The options analysis phase, where solutions to meet the required capability are explored; and (3) definition, where the design, concept characteristics, and/or implementation plans are refined (DND 2015). The development phase includes four main activities: (1) Project management, (2) Studies and Analysis, (3) Solicitation and contracts, and (4) Research and Design. Annex A provides the definition and lower sub-elements of the mentioned activities in a typical Canadian context Acquisition In the acquisition phase, the asset is being purchased and integrated as an operational capability. Nine main activities are typically performed in this phase to achieve overall project objectives: (1) Project management, (2) Studies and analyses, (3) Engineering, (4) Purchase, (5) Systems integration, (6) System test, trials and evaluation, (7) Deployment, (8) Infrastructure/Facilities, and (9) Other (e.g., contingency) (NATO 2003; NATO 2007). Annex A provides the definition and lower sub-elements of the mentioned activities. At the end of this phase, the output should fully meet the system requirements and satisfy mission needs Operations and sustainment The sustainment and operations phase (sometimes also referred to as in-service phase) corresponds to the operational utilisation of equipment (NATO 1989; Colabella et al. 2012). In this phase, the equipment under consideration is operated at the intended sites to deliver the required services (NATO 2007). Five main activities are typically performed in this phase: (1) Operation, (2) Maintenance, (3) Sustaining support, (4) Continuing system improvements, and (5) Indirect support. Annex A gives the definition and sub-elements of each mentioned activity. The collection of actual costs during this phase can be used to identify costs that are relevant for similar systems Disposal In the disposal phase, equipment is no longer needed and should be withdrawn from service at the end of its useful life. This phase includes planning and managing the demilitarization and removal of the equipment from service (DoD 2013; Colabella et al. 2012). When disposal through sale is not possible, many other options can be analyzed. They particularly include (but are not limited to): (1) Re-deployment when the equipment can be used for training, as a heritage asset, or for spare recovery, (2) Recycling when the material can be safely reused, (3) Long-term waste storage when a disposal site is available. In this phase, safety and environmental pressures are the most important considerations (DoD 2000). Many systems can cause safety hazards as well as environmental damage at this stage. These systems are generally demilitarized and de-armed to make them safe. Depending on the selected option, different activities may be undertaken: (1) Disposal planning, (2) Demilitarization, (3) Disposal of hazardous materials, (4) Dismantle or destruction, (5) Storage, (6) Transportation, (7) Resale. 4 DRDC-RDDC-2016-R086

13 2.2 Cost categorization Costs can be categorized into direct and indirect costs. A direct cost is directly attributable to a product without ambiguity. An indirect cost is shared between different products. Costs may also be classified into fixed and variable. A variable cost varies with the total level of activity or volume. A fixed cost remains unchanged within a range of activity, volume, or time. The cost associated with a testing facility for a specific system, for instance, is direct and variable. The cost associated with a storage facility common to many systems is indirect and fixed. Costs may also be divided into linked and non-linked costs. Linked costs include the costs associated with the project list of activities and set of resources. The costs associated with common facilities, munitions handling, and supervision are examples of indirect fixed linked costs. Non-linked costs are indirect and cannot be easily associated to the analyzed system. Examples of non-linked costs include medical services and family housing costs (NATO 2003; DND 2006). A cost element is associated with the consumption of a resource for a given activity to acquire, produce, operate, maintain, or dispose a product. In order to develop a meaningful cost structure, the following components must be defined: resource list, product tree, and activity list. The resource list defines all possible resources used by the system during its life cycle. It may include (but is not limited to): (1) Personnel, (2) Equipment (3) Consumables, (4) Infrastructure, and (5) Information. The product tree defines and describes all the product elements of the system. It may include the main system, such as a ship, aircraft or tank, and the corresponding support elements such as spares, facilities, and documentation. The activity list encompasses all the activities associated with the project under consideration. 2.3 Overall costs of military systems Many NATO nations have developed their own definitions, methods and tools to estimate the overall costs of military systems over their entire operational life (NATO 2003). Three different concepts are frequently used to define this cost: (1) Life cycle cost (LCC), (2) Total ownership cost (TOC), and Whole life cost (WLC). These three concepts are actually different and used for different purposes. There is, however, a relationship between them. As shown in Equation 1 and Figure 2, the set LCC is a subset of the set TOC and the set WLC is a superset of TOC. This means that all elements of LCC are also elements of TOC and all elements of TOC are contained inside WLC. LCC TOC WLC (1) LCC includes all direct and indirect costs associated with the project under consideration (e.g., sustainment and operation cost). It is used as an economic tool in comparing different alternatives. TOC covers the LCC elements and the indirect fixed linked costs (e.g., administration, common facilities, fuel and munitions handling). WLC covers the TOC elements and the indirect fixed non-linked costs (e.g., medical services, family housing). WLC is generally used in high level costing. DRDC-RDDC-2016-R086 5

14

15 3 Cost structure development In order to achieve the project objective and better facilitate planning and control of schedule, deliverables, and costs, the analyzed project should be divided into smaller and manageable pieces of work. This deliverable-oriented decomposition of the project constitutes the cornerstone of the project. This section suggests an activity-oriented approach to develop a cost structure. It describes the decomposition of cost elements and presents the key principles that should direct this operation. 3.1 Cost decomposition There are many ways of organizing a cost structure (NASA 2015). Examples of such decomposition include (but are not limited to): The product-oriented structure that focuses on the end product and organizes cost elements by subsystems. The activity-oriented structure that focuses on functions and organizes cost elements by activity. The organization-oriented structure that focuses on individual organizational units that perform the work. This study suggests an activity-based decomposition to develop a cost structure. It is an activity-oriented structure that overlaps with the product-oriented structure. This structure identifies the cost elements to be considered (ADO 2004). It becomes a formal Cost Breakdown Structure (CBS) whenever it is loaded with cost information. Annex C shows a generic cost structure for military equipment. 3.2 Requirements To analyze and evaluate a major acquisition project in a consistent manner, CBS should be rigorously prepared. It should particularly satisfy the following requirements (NATO 2003; ADO 2004): Comprehensive All the relevant activities and costs items should be identified over the system lifetime (Annex B). CBS should be logically guided by the principle of three constituents. According to this principle, a cost element is generated when a resource is used by an activity applied to a product. The cost element should be assigned to the activity that used the resource. This requirement ensures that the overall scope of work and cost is well-defined. Hierarchical While activities and costs can be broken down to any level of detail, they should be decomposed to the level necessary to enable effective management and reach the project objectives. To define the hierarchical relationships between elements, an identification system should be employed. In this system, each element is coded with a unique numeric or alphanumeric identifier. DRDC-RDDC-2016-R086 7

16 Flexible Life cycle costing is a complex process that involves multiple resources and activities. Flexible CBS is vital to its success. A flexible structure is easy to use and to update as the project evolves. It is dynamic enough to incorporate any change that reflects the current status of the project. A dynamic CBS has the flexibility to grow or contract in size by adding or removing activities. It can provide insights into the interactions between resources, activities and products over time. It can provide analysts with the flexibility to express, model, and simulate the cost behaviour over time. 3.3 Cost assignment To capture all relevant costs across the life cycle of a military system, the first step is to consider the list of all activities, sub-activities, and products involved in its different phases. The second step is to apply the list of activities and sub-activities to the product tree as shown in Annex B. Each activity (or sub-activity) can be further broken down by considering a combination of this activity (or sub-activity) and the corresponding products. For example, the combinations of Operation and Main system results in a new sub-activity called Operation of the main system. All possible resources used by each well-defined activity are defined in the third step. The list of cost elements is then obtained by assessing the costs associated with each set of resources used by a single activity applied to a product. As shown in Table 1, the activity of operating the main system, for example, may use four different resources: (1) Personnel, (2) Consumables, (3) Infrastructure, and (4) Information. The cost associated with this activity is the sum of the costs associated with the four resources used to operate the main system. In the final cost list, each cost element should correspond to four main originators that provide the rationale behind the CBS: (1) the phase of the project, (2) the resources applied, (2) the activity (or sub-activity) performed, and (4) the resulting product. A cost element as a combination of these four originators will be displayed in one of the last three columns of Table 1. Specific means in the last column include all elements indispensable for the system procurement process, but which are not delivered to the end user such as test and trial facilities (NATO 2003). Table 1: Cost elements associated with the operation of the main system. Phases Activity list (1) Main system Product tree (2) Support System (3) Specific Means (2) In-service (1) Operation (4) Information (3) Infrastructure (2) Consumables (1) Personnel Resources 8 DRDC-RDDC-2016-R086

17 3.4 Organisation of cost elements To organize cost elements into a logical and hierarchical coding schema, a CBS should be used. In this structure, level 1 costs can be defined by each life cycle phase. The numbers 1, 2, 3 and 4 would respectively correspond to the development, acquisition, in-service, and disposal phases. Consequently, the cost elements associated with activities under each phase will define level 2. When seeking elaboration, the following levels would correspond to sub-activities. The penultimate level elements would correspond to the resources applied. The resulting products define the last level. In this example structure, the cost of consumables to operate the main system, for instance, would be labeled Annex B shows how to develop a generic CBS for defence system acquisition. Examples of CBSs for defence system acquisition without the last two levels (i.e., resources and products) are provided in Annexes C.1, C.2, C.3, and C.4. Table 2 describes the main steps in the suggested methodology. Step 1 consists of identifying the different life cycle phases. Step 2 is to identify activities under each phase. Step 3 is to define the resulting products. Step 4 is to identify resources consumed by each activity. Step 5 is to assign resource costs to activities. Step 6 is to calculate the total cost of the project by summing the cost of each activity. Table 2: The main steps in the suggested CBS. Step Description 1 Identify phases 2 Identify activities 3 Identify products 4 Identify resources 5 Compute the cost each activity 6 Calculate the total cost The suggested CBS provides multiple benefits. In addition to the advantage of being comprehensive, hierarchical, and flexible, this structure is general to several types of fleets. It also has the significant advantage of using the principle of three constituents (activity, product and resource). It would be, therefore, a very useful tool whereby it becomes possible to analyze any of these three major cost factors. In general, the granularity of the CBS will vary with the maturity of the project. Its level of description should correspond to information management needs. Finer levels of details may be reached at or after the implementation phase for conducting any potential economic analysis. Last but not least, this structure is developed in collaboration with the final user and consequently adapted to Canadian nomenclature. DRDC-RDDC-2016-R086 9

18 4 Conclusion Life cycle costing is a complex process that involves estimating the overall costs of an item over its entire life. A CBS is a hierarchical structure whereby the project cost elements are organized to avoid missing or double counting errors. So far a formal cost structure with a good cost breakdown glossary and coherent relationships is missing for national defence acquisition projects. Using recent research and leading standards, this study suggested an activity-oriented approach to develop a generic CBS for national defence acquisition projects. It articulated the principles to be followed for preparing and presenting such a structure. It provided a cost breakdown glossary from a Canadian perspective. It also presented four concrete examples drawn from different systems to illustrate the key elements of the suggested structure. In order to better facilitate life cycle costing, each project is divided into four main phases: development, acquisition, in-service, and disposal phases. Each phase is also divided into smaller and manageable activities. The suggested approach is rationally guided by the principle of three constituents (activity, product and resource). This principle states that a cost appears when a resource is used by an activity applied to develop, produce, operate, sustain, or dispose a specific product. The first step in this approach is to identify the activities to be performed and their respective resources. The second is to assign resource costs to each activity. The third is to assign activity costs to cost objects. The suggested hierarchical structure is comprehensive ensuring all activities and costs are well-defined. It is also flexible and easy to use and to update as the project evolves. Using the principle of three constituents, this structure allows the analysis of anyone of these three constituents. The suggested CBS and the corresponding glossary of terms will establish a common ground for preparing and presenting a cost structure for national defence acquisition projects. They can also provide guidance to LCC studies in multinational projects involving allied members. Further efforts are ongoing to implement effective life cycle costing for military equipment (Sokri and Yazbeck 2015). Examples of such studies include (but are not limited to): the development of cost estimating relationships for heavy military equipment; and the development of a theoretical foundation for forecasting the life cycle cost of military equipment. 10 DRDC-RDDC-2016-R086

19 References Australian Defence Organisation (ADO) (2004). Work Breakdown Structures for Defence Materiel Projects. DEF(AUST)5664 Issue A. Bras, B. and Emblemsvåg, J. (1996). Designing for the Life Cycle: Activity-Based Costing and Uncertainty. Design for X, Colabella, L.P., Bower, A., Eden, R., Peltz, E., Lewis, M.W., and O Neill, K. (2012). Equipment Sustainment Data in Standard Army Management Information Systems. RAND Corporation Documented Briefing, Contract No. W74V8H-06-C-0001, CA, USA. Department of National Defence (DND) (2002). Engineering and Maintenance Management. Internal report, Ottawa, Canada. Department of National Defence (DND) (2006). Costing Handbook. Manual A-FN /AF-001. Ottawa, Canada. Department of National Defence (DND) (2012). DND Project Approval Directive (PAD) Ottawa, Canada. Department of National Defence (DND) (2015). Procurement Administration Manual (PAM). A-PP /AG-002, Revision 67, April NASA (2015). NASA Cost Estimating Handbook Version 4.0. Washington, D.C. NATO (1989). Handbook on the Phased Armaments Planning System (PAPS). Allied Administrative Publication (AAP-20) PAPS. NATO (2003). Cost Structure and Life Cycle Cost (LCC) for Military Systems. NATO RTO Technical Report TR-SAS-036, Paris, France. NATO (2003). Cost Structure and Life Cycle Costs for Military Systems. RTO Technical Report TR-028, Paris, France. NATO (2007). Methods and Models for Life Cycle Costing. NATO RTO Technical Report TR-SAS-054, Paris, France. Sokri, A. (2011). Optimal replacement of military aircraft: an economic approach. Defence and peace economics, 22(6), Sokri, A. (2014). Life Cycle Costing of Military Equipment. Proceedings of the International Conference of Control, Dynamic Systems, and Robotics, May 2014, Ottawa, Canada. Sokri, A. and Yazbeck, T. (2015). A Predictive Methodology for In-Service Costs. Defence Research and Development Canada, Scientific Letter DRDC-RDDC-2015-L273, Ottawa. DRDC-RDDC-2016-R086 11

20 Stewart, R.D., Wyskida, R.M., and Johannes, J.D. (1995). Cost Estimator s Reference Manual, 2nd Edition. New York, NY: Wiley. Treasury Board of Canada Secretariat (TBS) (2008). Guide to Costing. Catalogue No. BT66-12/2008E-PDF. Ottawa, Canada. Treasury Board of Canada Secretariat (TBS) (2013). Large Military Acquisition: Life Cycle Cost Framework Preliminary Draft, Ottawa, Canada. US Department of Defense (DoD) (2000). The Air Force System Safety Handbook, MIL-STD-882D, NM, USA. US Department of Defense (DoD) (2013). Defense Acquisition Guidebook. Defense Acquisition University, VA, USA. 12 DRDC-RDDC-2016-R086

21 Annex A Activity list for defence acquisition projects This Annex lists the generic cost elements in each of the life cycle phases, their sub-elements and definition in a typical Canadian context. The list is intended to be representative rather than exhaustive. Table A.1: Development phase. Activity (1) Project management Sub-elements: Salaries Contracted Support Operating Expenses Professional Service PWGSC Revenue Dependency Definition Project management is the systematic planning, organizing and controlling of allocated resources to accomplish project objectives (cost, time, performance, and risk). It is reserved for non-repetitive and time-limited activities that are different from the habitual activities of the organization. It encompasses personnel salaries and benefits (civilian and military); operating expenses (e.g., office equipment, travel, training); and professional services (e.g., contract management), contracted support, and Public Works and Government Services Canada (PWGSC) Revenue Dependency, etc. (2) Studies and analyses Activities undertaken in support of requirements determination, options analysis, cost estimating, and the development of project documents. These activities may be undertaken by internal or external stakeholders (DND, 2015). However, if details permit, the main deliverables could be highlighted as sub-elements (i.e., studies in support of concept of operation, functional requirement and performance specifications of the mission system, statement of operational requirements, or specific project approval documentation), etc. (3) Solicitation and Contracts This element covers the final delivery of the contracting documents such as Request for Proposal (RFP) and Statement of Work (SOW). Il also includes the preparation and execution of the bidding process. (4) Research and Design Sub-elements: Design & Development System Engineering Engineering Development Model Operational Test and Evaluations Other Studies Technical activities undertaken to design and develop a new complex capability and define its requirements and specifications. It may include design and development, engineering and testing in order to define the requirements, specifications, system and its operation, operational test and evaluation, support and disposal, etc. DRDC-RDDC-2016-R086 13

22 Activity (1) Project management Sub-elements: Salaries Contracted support Operating expenses Professional service Table A.2: Acquisition phase. Definition Project Management is similar to the development phase with increased scope of activities. It may also include the management of the project cost, schedule and performance measurements, risk management, configuration control, contract management, Reliability Availability Maintainability (RAM), Integrated Logistic Support (ILS), Quality Assurance (QA) including reviews and quality audits and documentation tasks, etc. (2) Studies and analyses Studies and analyses are similar to the development phase with increased scope of activities. Additional studies and analysis may include technology review, survivability and reliability, Integrated Logistics Support (ILS), Logistics Support Analysis (LSA) for spare and maintenance requirements, risk analysis, etc. (3) Engineering Sub-elements: System engineering Design and development Engineering Design and engineering changes (4) Purchase Sub-elements: Main mission system Support system/equipment Initial spare and parts Technical activities required to develop a new operational capability. This element usually includes system engineering, design and development engineering, design changes, etc. This includes the purchase of the main system and major subsystems not requiring significant additional development. It also includes procuring the initial spares and repair parts acquired as part of the deliverables of the acquisition project. The main mission system captures the cost of procuring a usable end item of equipment or software (DoD, 1992). The support system/equipment includes both peculiar support equipment and common support equipment that are required to support and maintain the system or portion of the system. The support system and equipment do not directly engage in the performance of the mission. Peculiar support equipment is the one that needs to be procured as new for the main mission system. Common support equipment also supports other systems and may (usually) already exist (DoD, 2011). Initial spare and parts are delivered to the end user together with the systems and support equipment for its maintenance in the initial year(s) of system in-service. Additional spares and repair parts for ongoing in-service sustainment are included under the Operation & Sustainment phase. (5) Systems integration This includes the integration of subsystems into a capability (6) System Test, Trials and Evaluation Sub-elements: ensuring that the final system meets the mission objectives. The test, evaluation, trials and demonstration activities to collect and validate engineering data on the system performance. It doesn t include the final acceptance test after the deployment 14 DRDC-RDDC-2016-R086

23 Activity Developmental test and evaluation Operational test and evaluation Mock-ups/system integration Test and evaluation support Test facilities (7) Deployment Sub-elements: Delivery Initial training Installations and set-towork Final acceptance test (8) Infrastructure/Facilities Sub-elements: Industrial investment Government investment Definition and activation of the system. This element contains items that are used or consumed in the conduct of such tests and specially fabricated hardware to obtain or validate engineering data on the performance of the system. This activity may further breakdown into sub-elements such as: developmental test and evaluation and test facilities. This encompasses delivery and installation and activation of the system (Set-To-Work), acceptance testing, and initial training to operate the system. Delivery includes moving materiel from the manufacturer to the first point of acceptance. It also includes conditioning, packaging, handling, storage and transportation activities to government operational sites. Set-To-Work includes installing all equipment at an end user or contractor locations. Through initial training personnel will learn how to operate and maintain the system. Acceptance testing includes demonstrating that the system configuration works in an operational environment. Facilities include the permanent, semi-permanent, or temporary real property assets required to operate and support the materiel system. This element can typically include: vehicle hangers, workshops, munitions storage, etc. (9) Other This element typically includes contingency. Activity (1) Operation Sub-elements: System manpower System operation materials Operation support and services (2) Maintenance Sub-elements: Level 1 maintenance Level 2 maintenance Level 3 maintenance Level 4 Maintenance Table A.3: Operations and sustainment phase. Definition The system manpower element includes the labour of all operators and other support labour directly related to the unit operation. It may include military, government civilian and sometimes contractor manpower. The system operation materials element includes operating energy (fuel, petroleum, oil and lubricates, electricity, etc.) and training munitions. This element also includes the activities that support the analyzed system (administration, engineering, logistics, safety and security, etc.). Planned and unplanned activities intended to keep the system in (or to return it to) a given state. Maintenance can be broken down into four levels: Level 1 maintenance includes preventive maintenance and corrective maintenance tasks of a minor nature. Level 2 maintenance includes corrective maintenance by repair or replacement of parts and assemblies limited only by time (usually 24 hours). DRDC-RDDC-2016-R086 15

24 Activity (3) Sustaining support Sub-elements: System specific training Support equipment Maintenance and repair Sustaining/system engineering Program management Software maintenance support Maintaining and updating of data and technical publications Replenishment and PHST (4) Continuing System Improvements Sub-elements: Software upgrade Modification and Engineering change Major system capability upgrade (5) Indirect Support Sub-elements: Installation/Operation support Personnel support general training and education Other indirect support Definition Level 3 maintenance includes corrective maintenance of longer duration than level 2, reconditioning of assemblies, rebuild of minor components, and limited calibration. Level 4 Maintenance includes the complete overhaul of equipment normally performed at a military Depot or civilian manufacturer (DND, 2002). Support activities provided by centrally managed organizations external to the units that own the operating systems. This includes (1) all the costs directly associated with systemspecific specialty training activities in the Operations & Sustainment phase. (2) The costs incurred to replace or repair support equipment associated with the primary system or its major subsystems at all levels of maintenance. (3) The government and contractor sustaining engineering to ensure the operational reliability and conformance with established specifications. (4) Management activities associated with the program. This element may be combined with Sustaining Engineering if costs cannot be identified separately. (5) Software Maintenance Support. (6) Maintaining and Updating of Data and Technical Publications. (7) Re-provisioning for the routine replenishment and PHST (Packaging, Handling, Storage and Transportation) (DoD, 2014). Upgrade and additional operational capabilities that occur after deployment of a system. This activity is intended to improve the system's safety and reliability. It can also be intended to enable the system to meet its basic original operational requirements. This activity may further breakdown into sub-elements such as Software upgrade, Modification and engineering change, and Major system upgrade. It could be considered as separate new procurement during the system mid-life and therefore could be accounted separately if applicable. Indirect support costs are those support costs from centrallyorganized resources that cannot be identified directly to the units but can be logically attributed to the system s operation, maintenance and sustainment. The indirect support can include a variety of services such as operation support, personnel administration, general training and education, security, and legal. 16 DRDC-RDDC-2016-R086

25 Table A.4: Disposal phase. Activity Definition (1) Disposal planning Activity intended to manage the end-of-life tasks and actions. It includes Sub-elements: the system disposal planning, costing and control. Disposal project management plan Disposal environmental management plan Tenders and tender evaluation (2) Demilitarization Activity intended to remove or neutralize the military potential of a system. It includes removal of explosives, weapons, etc. (3) Disposal of Activity intended to ease the pressure of the system disposal on the hazardous materials environment and public health. It includes destroying the hazardous wastes and remediating the site once contaminated. Activity intended to disassemble or destroy the demilitarized system. It includes disassembling or destroying the system. (4) Dismantle or destruction (5) Storage Activities intended to purchase and operate storage locations. It includes purchasing and operating storage locations. (6) Transportation Activity intended to transport the system to the demilitarization site. It includes transporting the system to the demilitarization site. (7) Resale Activity intended to sale the demilitarized system and the support elements. This activity not only incurs costs but may also realize revenue. DRDC-RDDC-2016-R086 17

26 This page intentionally left blank. 18 DRDC-RDDC-2016-R086

27

28 (4 Disposal (1) Disposal planning (2) Demilitarization (3) Disposal of hazardous materials (4) Dismantle or destruction (5) Storage (6) Transportation (7) Resale. 20 DRDC-RDDC-2016-R086

29 Annex C Canadian generic CBS for defence acquisition projects This Annex presents a generic CBS for military equipment in a typical Canadian context. 1.0 Development 1.1 Project management - Salaries (Civilian and military) - Contracted Support - Operating Expenses (Travel, Office Space/Supplies, Training, Legal, Security etc) - Professional Service - PWGSC Revenue Dependency 1.2 Studies and analyses 1.3 Solicitation and Contracts 1.4 Research and Design (Optional) - Design & Development - System Engineering/Program Management - Engineering Development Model - Operational Test and Evaluations - Other Studies 1.5 Other 2.0 Acquisition 2.1 Management - Salaries - Contracted Support - Operating Expenses - Professional Service 2.2 Studies, Analysis and Simulation 2.3 Engineering - System Engineering - Design and Development Engineering - Design and Engineering Changes 2.4 Purchase - Main Mission System - Major Sub-systems - Support System: Peculiar Equipment Common Equipment - Initial Spares and Repair Parts 2.5 System Integration 2.6 System Test, Trials and Evaluation - Developmental Test and Evaluation - Operational Test and Evaluation - Mock-ups/System Integration Labs - Test and Evaluation Support DRDC-RDDC-2016-R086 21

30 - Test Facilities 2.7 Deployment - Delivery (PHST Packaging, Handling, Storage and Transportation) - Initial Training - Installations and Set-To-Work - Final Acceptance Test 2.8 Infrastructure, Facilities and Investment on Specific Means - Industrial Investment - Government Investment 2.9 Other 3.0 Operations & Sustainment 3.1 Operations - System Manpower - Energy (Fuel, Petroleum, Oil and Lubricates, Electricity, etc.) - Training Munitions and Expendable Stores - Other Operating Materials - Operation Support and Services 3.2 Maintenance - Level 1 Maintenance - Level 2 Maintenance - Level 3 Maintenance - Level 4 Maintenance 3.3 Sustaining Support - System Specific Training - Support Equipment Maintenance and Repair - Sustaining/System Engineering - Program Management - Software Maintenance Support - Maintaining and Updating of Data and Technical Publications - Replenishment and PHST 3.4 Continuing System Improvements - Software Upgrade - Modification and Engineering Change - Major System/Capability Upgrade 3.5 Indirect Support - Installation/Operation Support - Personnel Support - General Training and Education - Other Indirect Support (Legal, Security, Housing, etc.) 4.0 Disposal 4.1 Disposal Planning - Disposal Project Management plan - Disposal Environmental Management Plan - Tenders and Tender evaluation 4.2 Demilitarization 4.3 Disposal of hazardous materials 22 DRDC-RDDC-2016-R086

31 4.4 Dismantle or Destruction of System 4.5 Storage 4.6 Transportation 4.7 Resale of Demilitarized System (revenue) C.1 Aircraft system CBS The aircraft system CBS is similar to the generic CBS in Annex C with only one exception in the acquisition phase. In this phase, the purchase activity can be decomposed as follows: 2.4 Purchase - Aircraft Airframe Propulsion Aircraft vehicle Subsystems Avionics Auxiliary Equipment Armament/Weapons Furnishings - Support System Peculiar Equipment Common Equipment - Initial Spares and Repair Parts Figure C.1: CF-188 Hornet. DRDC-RDDC-2016-R086 23

32 C.2 Sea system CBS The sea system CBS is similar to the generic CBS in Annex C with only one exception in the acquisition phase. In this phase, the purchase activity can be decomposed as follows: 2.4 Purchase - Ship Hull Structure Propulsion Electrical Command, Control, Communication and Surveillance Auxiliary System Outfit and Furnishings Armament - Major Sub-systems - Support System Peculiar Equipment Common Equipment - Initial Spares and Repair Parts Figure C.2: HMCS Fredericton. 24 DRDC-RDDC-2016-R086

33 C.3 Ground vehicle system CBS The ground (surface) vehicle system CBS is similar to the generic CBS in Annex C with only one exception in the acquisition phase. In this phase, the purchase activity can be decomposed as follows: 2.4 Purchase - Surface Vehicle System - Primary Vehicle Hull/frame/Body/Cab Turret Assembly Suspension/Steering Vehicle Electronics Power Package/Drive Train Auxiliary Automotive Fire Control Armament Automatic Ammunition handling Navigation and Remote Piloting Special Equipment Communications Primary Vehicle Software release Other vehicle Subsystems - Remote Control System Ground control Systems Communication and Control Subsystem Remote Control System Software Release Other remote Control Subsystem - Secondary Vehicle - Support System Peculiar Equipment Common Equipment - Initial Spares and Repair Parts Figure C.3: Leopard 2A4 tank. DRDC-RDDC-2016-R086 25

34 C.4 Missile system work breakdown structure The missile system CBS is similar to the generic CBS in Annex C with only one exception in the acquisition phase. In this phase, the purchase activity can be decomposed as follows: 2.4 Purchase - Missile System - Air Vehicle Airframe Propulsion Subsystems Power and Distribution Guidance Navigation Controls Communications Payload Reentry System Post Boost System Ordnance Initiation Set Onboard Test Equipment Onboard Training Equipment Auxiliary Equipment Air Vehicle Software Release - Encasement Device - Command and Launch Sensors Launch and Guidance Control Communications Launcher Equipment Auxiliary Equipment Booster Adapter Command and Launch Software Release Other Command and Launch System - Missile System Software Release - Support System - Peculiar Equipment - Common Equipment - Initial Spares and Repair Parts (parl.gc.ca) Figure C.4: Ballistic missile. 26 DRDC-RDDC-2016-R086

35 List of symbols/abbreviations/acronyms/initialisms ADM (Fin CS) CBS CES DND DoD DRDC LCC NASA NATO PAD PHST TOC US WLC Assistant Deputy Minister (Finance & Corporate Services) Cost Breakdown Structure Cost Element Structure Department of National Defence The US Department of Defense Defence Research and Development Canada Life Cycle Cost National Aeronautics and Space Administration North Atlantic Treaty Organisation Project Approval Directive Packaging, Handling, Storing, and Transporting Total Ownership Cost United States Whole Life Cost DRDC-RDDC-2016-R086 27

36 This page intentionally left blank. 28 DRDC-RDDC-2016-R086

37 DOCUMENT CONTROL DATA (Security markings for the title, abstract and indexing annotation must be entered when the document is Classified or Designated) 1. ORIGINATOR (The name and address of the organization preparing the document. Organizations for whom the document was prepared, e.g., Centre sponsoring a contractor's report, or tasking agency, are entered in Section 8.) 2a. SECURITY MARKING (Overall security marking of the document including special supplemental markings if applicable.) DRDC Centre for Operational Research and Analysis Defence Research and Development Canada 101 Colonel By Drive Ottawa, Ontario K1A 0K2 Canada UNCLASSIFIED 2b. CONTROLLED GOODS (NON-CONTROLLED GOODS) DMC A REVIEW: GCEC DECEMBER TITLE (The complete document title as indicated on the title page. Its classification should be indicated by the appropriate abbreviation (S, C or U) in parentheses after the title.) Development of Cost Breakdown Structure for Defence Acquisition Projects 4. AUTHORS (last name, followed by initials ranks, titles, etc., not to be used) Sokri, A.; Ghergari, V.; Wang, L. 5. DATE OF PUBLICATION (Month and year of publication of document.) May a. NO. OF PAGES (Total containing information, including Annexes, Appendices, etc.) 38 6b. NO. OF REFS (Total cited in document.) DESCRIPTIVE NOTES (The category of the document, e.g., technical report, technical note or memorandum. If appropriate, enter the type of report, e.g., interim, progress, summary, annual or final. Give the inclusive dates when a specific reporting period is covered.) Scientific Report 8. SPONSORING ACTIVITY (The name of the department project office or laboratory sponsoring the research and development include address.) DRDC Centre for Operational Research and Analysis Defence Research and Development Canada 101 Colonel By Drive Ottawa, Ontario K1A 0K2 Canada 9a. PROJECT OR GRANT NO. (If appropriate, the applicable research and development project or grant number under which the document was written. Please specify whether project or grant.) 9b. CONTRACT NO. (If appropriate, the applicable number under which the document was written.) 10a. ORIGINATOR S DOCUMENT NUMBER (The official document number by which the document is identified by the originating activity. This number must be unique to this document.) 10b. OTHER DOCUMENT NO(s). (Any other numbers which may be assigned this document either by the originator or by the sponsor.) DRDC-RDDC-2016-R DOCUMENT AVAILABILITY (Any limitations on further dissemination of the document, other than those imposed by security classification.) Unlimited 12. DOCUMENT ANNOUNCEMENT (Any limitation to the bibliographic announcement of this document. This will normally correspond to the Document Availability (11). However, where further distribution (beyond the audience specified in (11) is possible, a wider announcement audience may be selected.)) Unlimited