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During the initial stages of planning, US government research and development programs tend to underestimate program costs, resulting in program costs 20-120% higher than estimated and inefficient use of funds. This results from subjective cognitive biases and the absence of scope changes in the estimation process. This research introduces a novel metric, Total Financial Reserve (TFR), to the field, providing sponsors, portfolio managers, and the Department of Defense (DoD) with a comprehensive perspective on the anticipated costs associated with a program. This advancement facilitates improved planning and resource allocation, thereby minimizing the incidence of funding reallocations and program cancellations.
Utilizing publicly available data from the Government Accountability Office (GAO), a comprehensive analysis of 20 years of Major Defense Acquisition Programs (MDAP) was conducted, allowing for a comparison between 133 initial baselines and their corresponding final costs. Reference Class Forecasting (RCF) was employed for the first time in the context of cost estimation for MDAP. A model was constructed utilizing a fitted Johnson SU distribution, thereby facilitating the establishment of quartiles for ten reference classes.
Through cross-validation, it was demonstrated that this model accurately categorized the 50th and 75th quantiles for all the test data within 10% of the expected distribution. Furthermore, a comparison with established reserve estimation heuristics revealed a substantial improvement in accuracy.
