Posted by The Psychology of Cost Estimating
From the Journal of Cost Analysis and Parametrics: Volume 11 | Issue 1 | April 2023
Downloadable File: JCAPv11i1-PsychologyofCostEstimating-Prince
Abstract: Cost estimation for large (and even not so large) government programs is a challenge. The number and magnitude of cost overruns associated with large Department of Defense (DoD) and National Aeronautics and Space Administration (NASA) programs highlight the difficulties in developing and promulgating accurate cost estimates. These overruns can be the result of inadequate technology readiness or requirements definition, the whims of politicians or government bureaucrats, or even as failures of the cost estimating profession itself. However, there may be another reason for cost overruns that is right in front of us, but only recently have we begun to grasp it: the fact that cost estimators and their customers are human.
The last 70+ years of research into human psychology and behavioral economics have yielded amazing findings into how we humans process and use information to make judgments and decisions. What these scientists have uncovered is surprising: humans are often irrational and illogical beings, making decisions based on factors such as emotion and perception, rather than facts and data. These built-in biases to our thinking directly affect how we develop our cost estimates and how those cost estimates are used.
We cost estimators can use this knowledge of biases to improve our cost estimates and also to improve how we communicate and work with our customers. By understanding how our customers think, and more importantly, why they think the way they do, we can have more productive relationships and greater influence. By using psychology to our advantage, we can more effectively help the decision maker and our organizations make fact-based decisions.
This paper is structured into three parts. Part 1 provides a discussion of the problem of cost overruns in the aerospace industry and some of the findings from traditional cost overrun studies. Part 2 talks about human irrationality and how that opens the door to biasing the estimate. Findings from psychology and behavioral economics are used to describe how biases and faulty logic on the part of the estimator and the customer can lead to poor cost estimates and a failure on the part of the cost estimator to add value. In Part 3 I discuss practical techniques and approaches that can drive rationality into the estimate, thus changing the conversion to one that is productive and influential, leading ultimately to better decisions and fewer cost overruns.
One final note, my experiences and observations are drawn from almost 31 years working as a NASA cost estimator. While I know that cost overruns are a common problem across the Federal Government and industry, everyone has a unique perspective. All I ask is that as you read this paper you keep an open mind. If you don’t think what I have to say is useful or applicable to your situation, that’s fine. As a wise instructor of mine once said, “I am offering you a buffet, feel free to take what speaks to you and leave the rest.”
Author: Andy Prince is recently retired from NASA/Marshall Space Flight Center, where he managed the Program Planning & Control Office. He is perusing new career opportunities and recently accepted a job with New Horizons 5. A lifetime member of ICEAA, he has 38 years of cost estimating and analysis experience and is past ISPA Board Chair and ICEAA co-President. Andy has received numerous awards during his career, including the Frank Freiman Lifetime Achievement Award.