Cost beniefit analysis training for decision makers and manager step2

AMERICA’S ARMY: THE STRENGTH OF THE NATION

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Cost-Benefit Analysis (CBA)
Four-Day Training Briefing

Step 2: Define CBA Boundaries
and Parameters

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Last Updated: 10 November 2011


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Defining CBA Boundaries and Parameters
1. Define Problem/Opportunity and Objective

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2. Define Scope; Formulate Facts
and Assumptions

3. Define Alternatives

4. Develop Cost Estimate for each Alternative
5. Identify Quantifiable and Non-Quantifiable
Benefits

The Boundaries and Parameters of a CBA are the
specifications that make an analysis feasible and
practicable. They are expressed by Scope, Facts,
and Assumptions.
• Scope: Defines the range of coverage encompassed
by an initiative or proposal along specific dimensions
like time, location, and organization.
• Fact: A verifiable statement that is real and something
that has happened or is happening.
• Assumption: A conclusion drawn from facts and
observations describing a status or condition that is
not certain to exist.

6. Define Alternative
Selection Criteria
7. Compare Alternatives
8. Report Results and Recommendations

The CBA should state the involved stakeholders, period of
time that the analysis covers, and Stakeholders’ Needs not
addressed in the analysis.

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Boundaries and Parameters

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• Boundaries and parameters provide the limiting conditions that
make a controlled analysis of alternatives possible. Consider:
– Difficulty of analysis in an unbounded problem: how to achieve world
peace.
– Possibility of analysis in a bounded problem: how best to neutralize the
threat of potential Iranian nuclear capability by the strategic deployment
of a new missile defense system, given an annual budget allocation of
$1.5B, and given that several potential deployment sites exist in Eastern
Europe and the Middle East.

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Boundaries and Parameters

• In a CBA, the boundaries and parameters are
expressed in the Scope, Facts, and Assumptions.

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Definition: Scope
• “The scope of the analysis defines the range of coverage
encompassed by the project along specific dimensions such as
time, location, organization, technology or function. The CBA
should state the involved stakeholders, period of time that the
analysis covers, as well as organizations or requirements not
covered or addressed in the analysis.” (CBA Guide, “Step 2”,
)

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Scope
•

The choice of scope is very significant, and can distort the analysis in favor
of one or more COAs. Consider:
– The cost of buying versus leasing a car

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• over a period of one year

• over a period of fifteen years

– O&M costs of Pentagon office space from the perspective of:
•
•
•
•

Individual DoD employee
Department of the Army
Department of Defense
Taxpayer

– Impact of 2008 Lehman Brothers bankruptcy on:
•
•
•
•
•

Lehman Brothers 2008 summer intern
Lehman clients
Barclays
U.S. and international financial markets
2011 Occupy Wall Street protesters

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Scope

Different scopes entail different cost estimates: For example, Flyaway, Weapon
System, Procurement, Program Acquisition, and Life Cycle Costs all encompass
different types of costs.

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•

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Scope

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• The scope chosen for the CBA
– Must be the same across all COAs.
– Must allow for a fair comparison
between the costs and benefits of all
alternatives. “Normalization.”
• For instance, if the cost of COA1 starts off
very high in the first year but drops off
sharply in later years, and the cost of COA2
starts off low but rises sharply in later years,
the time scope chosen should be
sufficiently large to accurately capture the

effects of both trends.

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Scope Exercise
• Properly scope the following CBA:

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– A comparison of two new weapons systems, Sys 1 and Sys 2, to be
procured by all FORSCOM units. Sys 1 has a lifecycle of 6 years, Sys 2 has a
lifecycle of 4 years. O&S costs are shown in the table below. Give the
appropriate length of analysis for this CBA.
FY1

FY2

FY3

FY4

FY5

FY6

Sys 1

$3M

$0.5M

$0.5M

$0.2M

$0.4M

$0.7M

Sys 2

$1M

$1M

$1M

$0.8M

---------

---------

Note: Fictional
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Scope Exercise
• Properly scope the following CBA:

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– A comparison of two new weapons systems, Sys 1 and Sys 2, to be
procured by all FORSCOM units. Sys 1 has a lifecycle of 6 years, Sys 2 has a
lifecycle of 4 years. O&S costs are shown in the table below. Give the
appropriate length of analysis for this CBA.
FY1

FY2

FY3

FY4

FY5

FY6

Sys 1

$3M

$0.5M

$0.5M

$0.2M

$0.4M

$0.7M

Sys 2

$1M

$1M

$1M

$0.8M

---------

---------

Solution: The appropriate time span is 12 years … the lowest common
multiple of the four- and six-year lifecycles for the two systems.

Note: Fictional
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Scope Exercise
• An office within HQDA is expanding by 10 people and requires
additional desk space within the Pentagon. Since the office space
is provided to the Army by DOD without charge, one analyst has
suggested that all COAs within the Pentagon are cost-free, and
therefore only benefits need to be considered. Determine if this
reasoning is correct, and determine the appropriate scope for the
analysis.

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Scope Exercise

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•

An office within HQDA is expanding by 10 people and requires additional desk
space within the Pentagon. Since the office space is provided to the Army by
DOD without charge, one analyst has suggested that all COAs within the
Pentagon are cost-free, and therefore only benefits need to be considered.
Determine if this reasoning is correct, and determine the appropriate scope
for the analysis.

Solution: Scoping the cost to the Army, the cost of office space is not captured.

The appropriate scope which captures the full cost is from the perspective of DOD.
Note: These answers assume that the additional staff must be in the Pentagon. If
putting the 10 people in another building is a viable alternative, then the
solution shown here would probably change.

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Scope Exercise
• An Army organization currently employs 1000 people, all DACs.
This organization has prepared a CBA comparing the costs of
converting 5 of the current DACs to 5 contractors (working the
same number of hours). The annual cost to employ each DAC is
$100K, and due to training expenses, the cost to employ each
contractor is $110K. In the CBA, the cost of COA1 (all DACs) is
listed as $100M, and the cost of COA2 (995 DACs, 5 Contractors)
is listed as $100.05M. What is wrong with the scope of this CBA?

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Scope Exercise

• An Army organization currently employs 1000 people, all DACs.
This organization has prepared a CBA comparing the costs of
converting 5 of the current DACs to 5 contractors (working the
same number of hours). The annual cost to employ each DAC is
$100K, and due to training expenses, the cost to employ each
contractor is $110K. In the CBA, the cost of COA1 (all DACs) is
listed as $100M, and the cost of COA2 (995 DACs, 5 Contractors)
is listed as $100.05M. What is wrong with the scope of this CBA?
Solution: The scope should be confined to the five positions that are
being considered for conversion. The comparison should be
between five DACs and five Contractors.

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Definition: Facts
Facts:
• A verifiable statement that describes an objective
condition or event, something that has happened
or is happening. The most relevant facts are those
that constrain the CBA.
• Constraints are the “limits placed on resources to
be devoted to the project. All managers are faced
with certain constraints within which they
operate. Constraining organizational policies or
procedures, funding considerations, physical

limitations, and time-related considerations need
to be addressed in the CBA. These
policies/considerations could stem from technical,
environmental, ethical, or political constraints.”
(CBA guide, “Step 2”, )

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Definition: Assumptions
Assumptions:
• A condition or situation over which we have no control but is essential to
the success of our proposed solution.
• Assumptions impose risk on the solution. The risks and risk mitigation
measures must be specified in the CBA.
• Sensitivity analyses are performed by purposefully strengthening or
weakening individual assumptions, and noting the effect on the COA
recommended. The best COAs are those that remain the optimal course of
action over a wide range of assumptions.

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Assumptions

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• Assumptions made for one COA should be made to the same
degree in all other COAs as relevant. For instance:
– It is not reasonable to assume in one COA that 20 people will required to
perform a task if in another COA it is assumed that only 15 people are
required to perform the same task.
– It is not reasonable to assume in one COA that a particular resource will
be available in 10 years, if in another COA it is assumed that it will be
available only for the next year.

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Facts and Assumptions Examples

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• “Army War College S&P Department Expansion CBA”
– Fact: Course demands through the Strategy and Policy Department at the
War College have increased by 65% over the past three years.
– Fact: 60% of the S&P Department faculty will be 70 or older in the next
five years.
– Assumption: Workload for department faculty will increase.
– Assumption: More than one third of the S&P faculty will retire within the
next five years.
– Assumption: After an initial training period, each new hire will be able to

perform as much work as the recently retired faculty member.
– Fact/Constraint: the War College Dean has allocated no more than
$1.2M/year to pay the salaries of new faculty members.

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Facts and Assumptions Examples

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• “U.S. Army Central Command Afghanistan Police Force Training”
– Fact: President Obama has announced that all U.S. troops will withdraw
from Afghanistan by the end of 2014.
– Assumption: Troop withdrawal will proceed as scheduled.
– Fact: American troops provide for 80% of current domestic
counterterrorism force training in Afghanistan.
– Assumption: demand for counterterrorism training will not decrease after
U.S. withdrawal.
– Assumption: without coordinated assistance, security training resources
will be understaffed after U.S. withdrawal.

Note: Notional

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Facts and Assumptions Exercise

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• You are preparing a Cost-Benefit Analysis to aid in the decision to
sell or lease an older fleet of U.S. Army helicopters to the Iraqi
Army. From the following facts listed, draw possible assumptions
relevant to the analysis:
– Fact: under the current agreement, a lease may be extended or concluded
at the end of every two years, at the discretion of the Iraqi Army. At the
conclusion of the lease, the helicopters will be returned to the U.S. Army.
The RAF will be accountable for any damages beyond normal wear.
– Fact: The fleet has been used extensively in Operation Desert Storm (Iraq,
1991). They will also be used by the Iraqi Army in a similar climate.
– Fact: Recent sales of used helicopters have been at “as-is” condition.

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Facts and Assumptions Exercise

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• Possible assumptions:
– Under a lease, the Iraqi Army will have less of an incentive to properly
maintain the fleet against “normal wear,” and the actual life cycle of the
fleet may be reduced as a result.

– Since conditions of use are similar, future wear can be approximated by
historical wear.
– By selling the fleet, the U.S. Army will not be responsible for further costs
of maintaining the fleet (i.e. the buyer assumes the risk).

• Other facts to be determined that would aid the analysis:
– Estimate of remaining lifetime of the fleet.
– “Lease” and “Buy” prices at which Iraqi Army is willing to settle.
– Remaining utility of fleet to U.S. Army.

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Review Exercise: Henry Ford
• In a rented garage at 58 Bagley Street in Detroit, Henry Ford
completed his first gas-powered car on the morning of June 4,
1896. He had spent $250 FY1896 dollars on equipment to build
the car, and $100 on labor. The garage cost $15 per month to
rent. After the car was assembled, it was clear that it would not
be able to fit through the door of the rented garage. The car was
to be used as a model for the two-year long test-driving phase of
his R&D process, with the final goal of arriving at a model for
mass production and sale. Define the scope and identify facts
and assumptions.

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Mini-case Exercise #1

or “who, oh who should overtime bill?”

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•

Following the President’s announcement of the scheduled deployment of
three BCTs to Australia, it has been determined that a secure communications
link must be established between the White House, Pentagon, State
Department, and the new Australian base. SECDEF and CJCS have tasked Army
WEBCOM with the extra responsibility of managing the new communications
link. Currently, 35 Army civilian GS-11 employees in WEBCOM are assigned to
U.S. Army Pacific. It is anticipated that 42,800 total work hours per year will be
required to maintain the new communications link. Each of the 35 Army
civilians currently works full time. For Army civilians, if less than 200 hours of
overtime is worked per year, the pay rate for overtime is $60 per hour. If
between 200 and 400 hours of overtime is worked per year, the pay rate is
$80 per hour of overtime. If more than 400 hours of overtime is worked in
one year, the pay rate is $120 per hour of overtime. Contractors may be hired.
No vendor quotes are currently available, but from the GSA catalog it has
been determined that hourly rates can be estimated to be $88/hr. for this
type of contractor labor. Currently, WEBCOM has been placed under a hiring
freeze for Army civilians only. Perform all 8 CBA steps to support a decision.
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Mini-case Exercise #2

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or “how much for one building?”

• In preparation for BRAC, the Army plans to build 20 office
buildings (20 acres per office building) for use at Fort Beatrix.
Army planners have identified 400 acres of uneven land near Fort
Beatrix that it owns, and it has been valued at $45K per acre The
cost to the army of constructing the first building is $2.25M, and
the cost of constructing each additional building increases by
$.25M for each building built due to increasing marginal cost of
developing the uneven land (i.e., the second costs $2.5M, the
third costs $2.75M, and so on). Alternatively, a contracting
company is willing to construct any number of office buildings at
a flat rate of $3M each. Perform all 8 CBA steps to support a
decision.

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Mini-case Exercise #3

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or “what’s the cheapest route to Baghdad?”

• Due to the impending drawdown and changing mission
requirements, the General Officer overseeing three forward
operating bases in Iraq—FOB Ironman, FOB Danger, and FOB
Python—has been tasked to come up with 200 soldiers as
transportation and logistics specialists within the next six
months. However, the GO has been given no new growth
mandates. The 200 must be relocated to Baghdad, which is a
distance of 100 mi., 200 mi., and 150 mi. from Ironman, Danger,
and Python, respectively. Each FOB has provided a list of
nonessential personnel available for transfer to Baghdad, along
with salary data. Perform all 8 CBA steps to support a decision.

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