In government and defense contracting, whether for major acquisition programs, IT systems, defense systems, or other capital assets, cost estimating is a foundational process. Because of the high stakes in government/defense (large budgets, public accountability, oversight by Congress, schedule & performance risk), the Government Accountability Office (GAO) emphasizes the need for reliable cost estimates. Without credible estimates, agencies risk cost overruns, missed deadlines, and performance shortfalls.
Cost Analysis Versus Cost Estimates
It’s important to understand the distinction between cost estimating and cost analysis, as their purposes and scopes differ, yet they are closely related or sometimes used interchangeably.
Cost Analysis
Cost analysis is a broader discipline. According to the Government Accountability Office (GAO), cost analysis provides critical support to program managers and decision authorities by using analytic methods to develop cost understanding, evaluate alternatives, and assess existing estimates. It covers not only predicting future costs, but also understanding historical expenditures, comparing alternatives, and assessing trade-offs.
Cost Estimates
Cost estimating, by contrast, is more focused: it is the process of collecting and analyzing data and applying methods to predict the future cost of a particular program or project. In other words, cost estimating is a subset of cost analysis, the part that turns analytic insight into a formal estimate of future cost.
Key Types of Cost Estimates
While different agencies and services will use slightly different terminologies, in the defense/government context, common estimate types include:
| Estimate Type | Level of Effort and Scope | Description |
| Budget Estimate | Moderate effort; used when the project scope is well-defined enough to allocate funding; typically supports the budgeting/appropriation phase. | A budget estimate approximates the time and resources needed to plan, implement and complete a project, and serves as a basis for developing a viable budget. |
| Rough Order Magnitude (ROM) Estimate | Low effort; high-level scope definition (often early concept or feasibility phase); large uncertainty. | A ROM estimate is a quick, broadly scoped estimate created when few details exist (e.g., early in the acquisition lifecycle). It gives stakeholders a ball-park cost range (for example, to decide whether to proceed) but is not budget-quality |
| Estimate at Completion (EAC) | Effort varies; used during the execution phase when actual performance data is available; scope is defined, but circumstances may have changed. | Effort varies; used during the execution phase when actual performance data is available; scope is defined but circumstances may have changed. |
| Life-Cycle Cost Estimate (LCCE) | An estimate developed by the program office to support budgeting, resource allocation and decision-making through the program lifecycle. | An estimate spanning all phases of a system’s life, capturing development, procurement, operations & sustainment, and retirement/support costs. |
| Program Office Estimate (POE) | High effort; full program lifecycle (development, procurement, operations & support, disposal) scope. | A government-prepared estimate used for evaluating proposed offers/bids, assessing the reasonableness of contractor proposals and shaping budget/reserve planning. |
| Independent Cost Estimate (ICE) | High effort; independent baseline review; detailed and often supports oversight. | An estimate developed by the program office to support budgeting, resource allocation and decision-making through the program lifecycle. |
| Independent Government Cost Estimate (IGCE) | Moderate effort; estimate to support procurement/acquisition decision or contract evaluation. | A government-prepared estimate used for evaluating proposed offers/bids, assessing reasonableness of contractor proposals and shaping budget/reserve planning. |
| Should-Cost Estimate (SCE) | Varies; often used for cost-reduction analysis; scope is defined but seeks “what the cost should be” under efficient execution. | A government-prepared estimate used for evaluating proposed offers/bids, assessing the reasonableness of contractor proposals and shaping budget/reserve planning. |
Each of these estimate types serves a different decision-support function, such as budget formulation, contract negotiation, oversight review, and system acquisition approval. By recognizing the type and its purpose, you shape the estimation approach accordingly.
The Characteristics of a Reliable Cost Estimate
The GAO guide uses four characteristics as the foundation for judging estimate quality. When an estimate meets these characteristics (substantially or fully), the estimate is considered reliable.
- Comprehensive: The estimate includes all costs, and covers the full scope (e.g., life-cycle costs if required), all cost elements, properly structured, with an appropriate work breakdown.
- Well Documented: The estimate is supported by documentation of the assumptions, data sources, calculation methodology, risk/contingency approaches, and version history.
- Accurate: The estimate is unbiased, uses correct data and methods, produces results within an acceptable range of error, and is based on realistic cost drivers and known constraints.
- Credible: The estimate realistically addresses risk and uncertainty, uses valid assumptions, includes contingency, is conservative (where needed), and can be defended to oversight bodies.
How OAE can Help
As the market evolves and government/defense contracting becomes ever more complex, OAE is positioned to support organizations in building defensible estimates in their proposals.
Purpose & Estimating Planning & Governance: OAE supports the estimation planning phase by helping define and manage estimating workflows, assign team roles, schedule deliverables, standardize estimating templates and maintain version control.
Baseline Definition & Work Breakdown Structure (WBS): With OAE you can build structured WBS hierarchies, link cost elements to schedule, and link to EVM metrics or milestones.
Ground Rules, Assumptions and Data Capture: The platform enables documentation of all assumptions and ground rules, and maintains a database of historical cost data (internally or external benchmark data) which can be normalized, indexed, and reused.
Estimating Models & Analytics: Using OAE you can build cost models (parametric, bottom-up, analogous)
Traceability, Transparency & Stakeholder Reporting: With OAE you can provide dashboards, cost-range/confidence reporting, and scenario analysis to decision makers and oversight bodies
OAE converts estimation from a fragmented, error-prone effort into a structured, transparent and repeatable workflow, giving teams consistency, visibility and confidence in their cost-estimate process.
