Estimating Maintenance Costs for Royal Canadian Navy Ships A Parametric Cost Model Zakia Bouayed Christopher E. Penney Abderrahmane Sokri Tania Yazbeck DRDC – Centre for Operational Research and Analysis Defence Research and Development Canada Scientific Report DRDC-RDDC-2017-R147 October 2017 IMPORTANT INFORMATIVE STATEMENTS Disclaimer: Her Majesty the Queen in Right of Canada (Department of National Defence) makes no representations or warranties, express or implied, of any kind whatsoever, and assumes no liability for the accuracy, reliability, completeness, currency or usefulness of any information, product, process or material included in this document. Nothing in this document should be interpreted as an endorsement for the specific use of any tool, technique or process examined in it. Any reliance on, or use of, any information, product, process or material included in this document is at the sole risk of the person so using it or relying on it. Canada does not assume any liability in respect of any damages or losses arising out of or in connection with the use of, or reliance on, any information, product, process or material included in this document. This document was reviewed for Controlled Goods by Defence Research and Development Canada (DRDC) using the Schedule to the Defence Production Act. Endorsement statement: This publication has been peer-reviewed and published by the Editorial Office of Defence Research and Development Canada, an agency of the Department of National Defence of Canada. Inquiries can be sent to: [email protected]. Template in use: (2010) SR Advanced Template_EN (051115).dotm © Her Majesty the Queen in Right of Canada (Department of National Defence), 2017 © Sa Majesté la Reine en droit du Canada (Ministère de la Défence nationale), 2017 Abstract This paper proposes a parametric costing model for Defence planners to conduct a first order estimate of the maintenance component of O&S costs for ships being considered for procurement. The model is built based on a parametric approach which incorporates relevant cost drivers as input parameters. The coefficients of these cost factors are estimated by fitting the model with a historical dataset of Royal Canadian Navy ships through regression analysis. Once the coefficient values are obtained, the cost model is used to produce out-of-sample fitted values to estimate maintenance costs for both currently active vessels and those being considered for acquisition. The regression analysis returns highly significant explanatory variables, with an R-squared statistic of 0.875. The single most important factor in explaining yearly maintenance costs is the ship’s class. Additionally, the effect of an additional sea day per year is to increase yearly maintenance costs by 0.38%. An Excel-based costing tool is also provided in this paper for potential use by personnel working within the Centre for Costing in Defence to produce rough order of magnitude maintenance cost estimates. Significance to Defence and Security This Scientific Report presents a regression-based parametric costing model to forecast the maintenance component of O&S costs for defence projects being considered for procurement. The outcome of this report supports the fourth Defence Priority – Ensuring Defence Resource Stewardship & Affordability. Estimating O&S costs while still in the early stages of a program is important for long-term budgeting and decision making and ensures that systems can be sustained over full program lifetimes, in addition to contributing to sound financial management of the Defence budget and stewardship of public resources. DRDC-RDDC-2017-R147 i Résumé Le présent document propose un modèle paramétrique d’estimation du coût à l’intention des planificateurs de la Défense afin d’obtenir une évaluation de premier ordre des coûts d’O & M dans le cadre du volet sur l’entretien des navires que l’on songe à acquérir. Le modèle a été élaboré selon une méthode paramétrique qui utilise des facteurs de coût pertinents comme paramètres d’entrée. On détermine les coefficients de ces facteurs de coût en ajustant le modèle en fonction d’un ensemble de données historiques sur les navires de la Marine royale canadienne au moyen d’une analyse de régression. Lorsqu’on connaît la valeur du coefficient, on utilise le modèle de coûts pour obtenir des valeurs ajustées hors échantillon afin de calculer les dépenses d’entretien, tant pour les navires en service que pour ceux que l’on songe à acquérir. L’analyse de régression donne des variables explicatives très importantes, notamment la valeur statistique R au carré de 0,875. Le plus important facteur permettant d’expliquer les frais annuels d’entretien est la classe du navire. En outre, chaque jour de mer supplémentaire par année fera augmenter les frais annuels d’entretien de 0,38%. Un outil d’estimation du coût en format Excel accompagne également le présent document afin que le personnel qui travaille au Centre d’établissement des coûts de la Défense puisse l’utiliser pour obtenir le montant approximatif des dépenses d’entretien. Importance pour la défense et la sécurité Le présent rapport scientifique propose un modèle paramétrique d’estimation du coût fondé sur une régression pour prévoir les dépenses d’O & M dans le cadre du volet sur l’entretien pour les projets de défense que l’on songe à acquérir. Le rapport vient appuyer la quatrième priorité de la Défense, soit assurer l’intendance des ressources et la viabilité financière de la Défense. L’estimation des dépenses d’O & M au tout début d’un programme est importante afin d’établir un budget et de prendre des décisions à long terme pour garantir que les systèmes pourront être maintenus tout au long de la durée de vie du programme et contribuer à une saine gestion financière du budget de la Défense ainsi qu’à l’intendance des ressources publiques. ii DRDC-RDDC-2017-R147 Table of Contents Abstract ................................. i Significance to Defence and Security ...................... i Résumé ................................ ii Importance pour la défense et la sécurité .................... ii Table of Contents ............................ iii List of Figures ............................. v List of Tables .............................. v Acknowledgements ........................... vi 1 Introduction ............................. 1 1.1 Background and Context ...................... 1 1.2 Literature Review ........................ 2 1.3 Aim ............................. 3 1.4 Scope ............................. 3 1.5 Report Structure ......................... 3 2 Model ............................... 4 2.1 Cost Elements .......................... 4 2.1.1 Operating Costs ...................... 4 2.1.2 Maintenance Costs ..................... 4 2.1.3 Sustaining Support Costs ................... 4 2.2 Parametric Approach ....................... 5 2.3 Random Effects Model ...................... 6 2.4 Dependent Variable ........................ 6 2.5 Identifying Cost Drivers ...................... 6 2.6 Developing Cost Estimating Relationships ............... 7 2.7 Model Limitations ........................ 8 3 Regression Results .......................... 9 3.1 Dataset ............................ 9 3.2 Parameter Estimates ....................... 9 3.3 Model Diagnostics ........................ 10 3.4 Discussion ........................... 11 4 Navy Maintenance Costing Tool ..................... 12 4.1 Obtaining an Estimate ....................... 12 4.2 Example ............................ 13 5 Conclusion ............................. 14 5.1 Recommendations ........................ 14 6 Attachment ............................. 16 References ............................... 17 DRDC-RDDC-2017-R147 iii Annex A Data ............................. 18 Annex B Interpreting the Regression Results .................. 22 Annex C Potential Applications ...................... 23 C.1 Aircraft and Land Vehicles ..................... 23 C.2 Facilities ............................ 23 C.3 Classification .......................... 23 List of Symbols/Abbreviations/Acronyms/Initialisms ............... 25 iv DRDC-RDDC-2017-R147 List of Figures Figure 1: Profile of annual program expenditures by major cost category across life cycles. ............................. 1 Figure 2: RCN Ship Maintenance Costing Tool, Halifax Class Ship with 100 Sea Days. 13 Figure 3: RCN Ship Maintenance Costing Tool, Kingston Class Ship with 220 Sea Days. .............................. 13 Figure C.1: Classification of defence equipment. ................. 24 List of Tables Table 1: Description of O&S cost categories. ................. 5 Table 2: Regression results. ........................ 9 Table 3: Selected regression diagnostics. ................... 10 Table A.1: RCN Dataset, 2011–2015 Fiscal Years. ................ 18 DRDC-RDDC-2017-R147 v Acknowledgements The authors would like to acknowledge the contribution of LCdr Guy Cadrin for making this study possible. His assistance in obtaining data and providing an understanding of Navy maintenance procedures contributed significantly to the successful execution of this study. vi DRDC-RDDC-2017-R147 1 Introduction 1.1 Background and Context The Centre for Costing in Defence (CCD) makes use of the concept of the Life Cycle Cost (LCC) to bring total cost visibility to a purchasing program. LCC can be thought of as a “cradle to grave” approach to managing a program throughout its useful life. This entails identifying all cost elements that pertain to the program