Posted by Empirical Investigation of Engineering Change Order Percentages in Defense Contracts
From the Journal of Cost Analysis and Parametrics: Volume 10 | Issue 2 | April 2022
Downloadable File: JCAPv10i2-ChangeOrderPercentagesDefenseContracts-Miller
Abstract: Engineering Change Orders (ECO) are technical requirements changes to existing contracts. To account for the potential increase in contract costs stemming from ECOs, current acquisition practice is to estimate a dollar value to hold in management reserve (MR) in case of ECO occurrence. Estimators often rely on rules-of-thumb when developing these estimates. Specifically, many estimators use a 10% rule-of-thumb for estimating MR contract costs in the Development life cycle phase and a 5% rule-of-thumb for contracts in the Production life cycle phase. However, no empirical data appear to support or validate these 10% and 5% figures. Using a new data source, 1,216 contracts with ECOs were analyzed to determine the accuracy of the 10% and 5% rules-of-thumb as well as to determine if more accurate rules-of-thumb could be developed. Results suggest that if a contract is likely to have a positive ECO percentage, then 14% and 6% rules-of-thumb are more statistically appropriate for contracts in the Development and Production life cycle phases respectively. Lastly, Service, Contract Type, Commodity, Initial Program Size, and Schedule appear to impact ECO percentages.
Authors:
Capt Kaiana M. Miller is a Cost Analyst in the Technology, Command and Control, and Special Programs Division of the Air Force Cost Analyst Agency at Joint Base Andrews. He received his BS in Management from The United States Air Force Academy and his MS in Cost Analysis from AFIT. Capt Miller’s research interests include statistical modeling, predictive analytics, and social policy.
Dr. Edward D. White is a Professor of Statistics in the Department of Mathematics and Statistics at AFIT. He received his BS in Mathematics from the University of Tampa, MAS from The Ohio State University, and Ph.D. in Statistics from Texas A&M University. His primary research interests include statistical modeling, simulation, and data analytics.
Dr. Jonathan D. Ritschel is an Associate Professor of Cost Analysis in the Department of Systems Engineering and Management at AFIT. He received his BBA in Accountancy from the University of Notre Dame, his MS in Cost Analysis from AFIT, and his Ph.D. in Economics from George Mason University. Dr. Ritschel’s research interests include public choice, cost analysis, and economic institutional analysis.
Dr. Robert D. Fass is an Assistant Professor in the Department of Systems Engineering and Management at AFIT. He holds a BA in Economics, an MBA from the University of New Mexico, and a Ph.D. in Business Administration and Management from New Mexico State University. Dr. Fass’ research interests include cost analysis, decision analysis, risk analysis, behavioral economics, organizational behavior, organizational change, and government acquisition policy.
Scott Drylie, Ph.D., is an Assistant Professor in the Department of Systems Engineering and Management at AFIT. He holds a BS in Economics from Montana State University, a M.Ed in Education from University of Nevada, a MS in Cost Analysis from AFIT, and a Ph.D. in Economics from George Mason University. Lt Col Drylie’s research interests include Smithian political economy, organizational behavior, public choice, and cost analysis.