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Total Ownership Costs

Category: Analysis 10th October 2019

Free essayWhile analyzing the Cost Estimating Relationship (CERs) and the Engineered Cost Estimate methods, it is important first to determine the meaning of each term. The Cost Estimating Relationship method is considered to be a modern approach to predict a price. In many cases, it turns out to be the only tool to estimate a tool. This approach has either different characteristics or limitations. It is essential that some limitations of CERs can be used improperly. Moreover, CERs may be useful while determining simple cost factors, carves, equations, rules of thumb attests to their value and different situations in which they may serve (Dragos, 2010).

There is the Engineered Cost Estimating method to assess the price of the product. According to the society of cost estimating and analysis, Engineered Cost Estimating method includes statistical and standards, empirical and comparative approaches. Empirical Cost Estimating method is known as detailed estimating process or engineered based cost estimating. It requires step by step preparation. It is often based on personality of estimator, his experience, knowledge and skills. Moreover, the empirical method does not guarantee that the amount of time spend is proportionate to the accuracy of estimate (Charkiewicz, 2011).

Comparative cost estimating method is based on a comparing or accomplishing the job done by the shop before and the similar current job. The aim of this approach is to create reasonable assumption of cost and time for the new project. Therefore, the validation of past time and cost should be available. Actually, this process can be called an experience because experience is the only source the estimator utilizes to quote the job (Charkiewicz, 2011).

Statistical cost estimating sometimes is called parametric estimating. This approach directly depends on an analysis of part experiences of parts or processes with the experience. Statistic cost estimating method is able to calculate a time for programming, tool design, engineering and estimating duties.

Standard cost estimating process is based on combination of predetermined standards with common machine time standards, such as speed, press speed, feeds. The standards cost estimating method is not limited to machine time only. Furthermore, this approach is often used when the part drawings have been made available.

Life-cycle cost analysis (LCCA) is an economic approach in product evaluating. Section 707 of the executive Order 13123 defines the LSCA “the sum of present values of investment costs, capital costs, installation costs, energy costs, operating costs, maintenance costs, and disposal costs over the life-time of the project, product or measure” (Shearer, 2000). Life-cycle cost analysis tends to be a production and procurement costing technique, which considers all life cycle costs. Mainly, it aims to determine the lowest cost of ownership and fixed asset, such as installation, purchase price, disposal, maintenance and upgrading, and other costs during the asserts of economic life. In manufacturing, LCCA is aimed to estimate how much income the product will generate. It estimates not only the production costs but also expenses in each stage of life cycle duration (Business Dictionary, n.d).

Value of Design

Design research proved that particular design can significantly and directly improve sales, turnover, growth and profit. As the matter of fact, using and valuating design brings benefit for those who deal with it. People understanding the value of design possess a competitive edge over the rest. Over the past decade, shares in design-led businesses have outperformed more than 200 per cents (Trueman & Pike, n.d.). In addition, a business that spends on design gets turnover increased on 2,5%. Design has many positive characteristics that directly affect the business development.

Business recognized that high-quality design has a powerful impact on profitability and competitive advantages of the product (Trueman & Pike, n.d.). A good design is able to differentiate products and services. Moreover, poor product design can threaten the survival of the product. It has been argued that high quality design can help reduce complexity and cost, increase the brand value and improve an integration and communication throughout the organization. Admittedly, design can help organizations balance the needs of shareholders and managers with the value, quality and the cost requirements of the clients.

The design of the product is the work of a team. It involves either designers or design consultancies. In addition, it involves also engineers, senior management, scientists, finance directors and accountants and those who contribute and influence the process of new product development.

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Design has its attributes and role. As soon as design benefits were shown to managers, the two more considered as important benefits were design to differentiate the product and design to reduce complexity (Table 1).

The former Design to Cost (DTC) has many of the same tenets as a Cost as Independent Variable (CAIV). However, the programs have some differences. There was experienced one problem with DTC. It was a failure to incentivize managers’ development program to trade off schedule and performance for downstream manufacture and support cost consideration. Consequently, there appear the tendencies to defer a hard decision after development managers remain on board while the production has begun. DTC program goes back to the mid-1970th, when managers placed the greatest emphasis on using fixed price and production contracts.

However, in 1994-1995, the DSOD (Deputy Secretary of Defense) ruled under Secretary of Defense for acquisition and technology. That program was aimed “to put in place the process of cost performance trades that permits day-to-day interaction between the Requirements and Acquisition communities by adopting an Integrated Product and Process Development Team approach within Department of Defense (DoD)” (Land, 1997). Previously the cost of the product was considered as a dependent variable. After amendment, dated July 19, 1995, the forth basic philosophy and policy have been set. They were aimed to compare performance parameters and were considered to be independent patterns. In March 1996, this amendment turned out to be a precondition to ‘cost as independent variable’ policy.

Innovation and old policies had many differences. Primary, DTC program was focused on an average cost. Secondary, DTC was concentrated on support cost operations and projected operations.

Admittedly, DTC policy included the following statements:

  • An initial design to cost activity shall focus on determining cost drivers, cost schedule performance trade-offs, and potential risk areas in the development process;
  • According to DTC the cost of the product must be established as a design compulsion early in the acquisition life-cycle;
  • A design to average cost objects must be established for CAIV programs.

The ‘Ask a professor’ or ‘Cost as independent variable’ (CAIV) program is the main change that has occurred in the government’s approach and how will it impact the ability to compete. This program will operate according to the following principle. As the development continuous, attempts to get better should focus on identifying areas, which require corrective actions because of excessive costs. In order to keep the cost within acceptable tolerance, different cost reduction techniques shall be applied to some areas of business.

Cost as Independent Variable

Cost as independent variable (CAIV) is determined in section 3.3.4 of DoD 5000. 2-R. According to this section, CAIV is a process that is able to help arrive at cost objectives including a life-cycle cost, and helps the community set the performance objectives (Criscimagna, n.d.). Cost as the independent variable is often used to develop a strategy for acquiring and operating DoD systems. This result is often achieved by setting achievable and aggressive cost objectives and managing their achievements. Majorly, cost objectives serve to balance the protected out-year resources with mission needs. Thus, cost objectives take into account improvements in anticipated possesses in either DoD or defense industries.

CAIV in DoD is considered to be the best commercial business practice in the private sector. Making the cost independent variable is an important part of Acquisition Reform. The main adventure of CAIV program is a strong role of the user in adjusting and setting program goals throughout the acquisition process. The role of user is truly essential in making trades between performance and cost (Land, 1997). Furthermore, it is compulsory to note that CAIV is a part of strategy acquiring systems needed to count a new threat. It is essential to include support, users, and acquisition communities into the acquisition team under CAIV (Table 2). To establish a trade space and maximize the benefits of CAIV some supporters offer defying system performance parameters in terms of objective and thresholds (Table 3). The most challenging element in this process is to achieve life-cycle cost goals and doing so to minimize costs and production.

Cost-Reimbursement Contracts

Cost-reimbursement contracts are the type of amendment that provides payment of allowable incurred costs. Such contracts are known as cost-plus contracts. According to the contract contractor is paid for all allowed expenses to a set limit and additional payment to allow for a profit. Cost-plus contracts differ from fixed-price contracts. In fixed-price contracts, contractor is paid arranged amount regardless of expenses. Fixed-price contracts are able to apply for payment of the permitted settled in contract performance and prescribed in the contract. Cost-plus contract can be only used when peradventure involved in contract performance does not permit costs to be rated with accuracy to deal with any type of fixed-price contracts. Under cost –reimbursement contracts, contractor is aimed to provide his best efforts to complete a required contract effort (Land, 1997).

Contracting that deals with cost-plus contracts has either advantages or disadvantages. The first advantage is the contractor is able to avoid incentive to cut corners. A good example of cost-plus contracts is United States space program (Criscimagna, n.d.). It proves that the best way to use cost-plus contracts is when long-term quality is more important than the cost is. The next benefit of cost-plus contracts is that the final cost may be less than a fixed price contracts because contractors cannot inflate prices with the aim to cover their risk.

Among disadvantages of cost-plus contracts is limited certainty as for the final cost. Cost-reimbursement requires additional administration and oversight to ensure permissible costs which are paid by the contractor. They often are exercising proper cost control.

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Conclusion

The cost estimating relationship method is considered to be a modern approach to predict a price. According to the society of cost estimating and analysis, Engineered Cost Estimating method includes statistical and standards, empirical and comparative approaches. Life-cycle cost analysis (LCCA) is an economic approach in product evaluating. As the matter of fact, using and valuating design brings benefit for those who deal with it. Business recognized that high-quality design has a powerful impact on profitability and competitive advantages of the product. The former Design to Cost (DTC) has many of the same tenets as a Cost as Independent Variable (CAIV). The most challenging element in this process is to achieve life-cycle cost goals and doing so to minimize costs and production.

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