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Improving the Parametric Method of Cost Estimating Relationships of Naval Ships by Ungtae Lee B.S.E., Electrical Engineering Duke University, 2005 SUBMITTED TO THE DEPARTMENT OF MECHANICAL ENGINEERING AND ENGINEERING SYSTEMS DIVISION IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREES OF MASTER OF SCIENCE IN NAVAL ARCHITECTURE AND MARINE ENGINEERING AND MASTER OF SCIENCE IN ENGINEERING AND MANAGEMENT at the MASSACHUSETTS INSTITUTE MASSACHUSETTS INSTITUTE OF TECHNOLOGY OF TECr*NOLOGY JUNE 2014 AUG 15 2014 C2014 Ungtae Lee. All rights reserved. LIBRARIES The author hereby grants to MIT permission to reproduce and to distribute ARC publicly paper and electronic copies of this thesis document in whole or in part in any medium now know or hereafter created. Signature redacted Signature of Author: ........ Dep*rment of al Engineering and System Design and Management May 10, 2014 ................................ Signature redacted .................................... Eric S. Rebentisch Resor~cher at Soriotechnical Shiems Research Center and Engineering Systems Division Signature redacted , Thesis Supervisor Certified by: ... ...............................................---. ..... Mw kW. Thomas Professor of the Oetice of Navat 6nstrd&tion nd Engineering Signature redacted siSuPervisor Accepted by: ....................................... .. , ............... Patrick Hale DireAfo ysteJp DgP*9IAld 1karment Fellows Program Signature redacted ngineering Systems Division Accepted by: .................................... ..... ................................. David E. Hardt Chairman, Department Committee on Graduate Studies Department of Mechanical Engineering Improving the Parametric Method of Cost Estimating Relationships of Naval Ships by Ungtae Lee Submitted to the Department of Mechanical Engineering and Engineering Systems Division on May 10, 2014 in Partial Fulfillment of the Requirements for the Degrees of Master of Science in Naval Architecture and Marine Engineering and Master of Science in Engineering and Management ABSTRACT In light of recent military budget cuts, there has been a recent focus on determining methods to reduce the cost of Navy ships. A RAND National Defense Research Institute study showed many sources of cost escalation for Navy ships. Among them included characteristic complexity of modem Naval ships, which contributed to half of customer driven factors. This paper focuses on improving the current parametric cost estimating method used as referenced in NAVSEA's Cost Estimating Handbook. Currently, weight is used as the most common variable for determining cost in the parametric method because it's a consistent physical property and most readily available. Optimizing ship design based on weight may increase density and complexity because ship size is minimized. This paper will introduce electric power density and outfit density as additional variables to the parametric cost estimating equation and will show how this can improve the early stage cost estimating relationships of Navy ships. Thesis Supervisor: Eric S. Rebentisch Title: Research Associate, Sociotechnical Systems Research Center Thesis Supervisor: Mark W. Thomas Title: Professor of the Practice of Naval Construction and Engineering 3 THIS PAGE INTENTIONALLY LEFT BLANK 4 TABLE OF CONTENTS ABSTRACT .................................................................................................................................... 3 TABLE OF CON TEN TS................................................................................................................ 5 LIST OF FIGU RES ........................................................................................................................ 7 BIOGRAPH ICAL N OTE ......................................................................................................... 8 A CKN O W LEDG M EN TS ....................................................................................................... 9 1. Introduction............................................................................................................................... 10 1.1. Background ........................................................................................................................ 10 1.2 Origin of Idea ...................................................................................................................... 11 1.3 Objective of Thesis.............................................................................................................. 11 1.4 Im plications......................................................................................................................... 12 2. Shipbuilding Industry................................................................................................................ 12 2. .S. N aval Shipbuilding .................................................................................................... 12 2.2 Issues in N aval Shipbuilding............................................................................................. 14 3. N AV SEA 05C............................................................................................................................ 17 3.1 Overview and Responsibilities of NAV SEA 05C................................................................ 17 3.2 Steps of N AV SEA Cost Estim ation................................................................................. 19 3.2.1. Task 1. The Initial Estim ate is presented................................................................. 19 3.2.2. Task 2. The Cost Analysis Requirements Description (CARD) document. ............ 19 3.2.3. Task 3. The W ork Breakdown Structure (W BS)...................................................... 20 3.2.4. Task 4. Ground Rules and Assumptions (GR&A). ................................................ 22 3.2.5. Task 5. Select Cost Estim ating M ethod and Tools.................................................. 23 3.2.6. Task 6. Collect Data ................................................................................................. 28 3.2.7. Task 7. Run M odel and Generate Point Estim ate.................................................... 29 3.2.8. Task 8. Conduct Cost Risk Analysis and Incorporate into Estimate........................ 29 4. Weight-Based Cost Estim ation............................................................................................ 31 4.1. N A V SEA 's use of weight-based CER ............................................................................ 31 4.2. Congressional Budget Office's use of weight-based CER............................................. 32 4.3. RAN D 's use of w eight-based CER ................................................................................. 33 4.4. M IT Cost M odel's use of weight-based CER ................................................................. 33 4.5. Disadvantages of W eight Based Cost Estim ation.......................................................... 35 4.6. Japanese and Korean AEGIS ship com parison............................................................... 38 5 4.6.1. Cost of South Korean Sejong the Great KDX-III DDG-991.................................... 40 4.6.2. Cost of Japanese Kongo Class DDG-173................................................................. 41 5. M ethodology ............................................................................................................................. 41 5.1. General Approach ........................................................................................................ 41 5.2. Ships selected for A nalysis ............................................................................................ 42 5.3. Data .................................................................................................................................... 45 5.4. Cost data............................................................................................................................. 45 5.4.1. Learning Curve ............................................................................................................ 46 5.4.2. Inflation N orm alization ............................................................................................. 48 5.5. Other data........................................................................................................................... 49 5.5.1. Calculating Density ................................................................................................. 49 6. Analysis..................................................................................................................................... 52 7. Results....................................................................................................................................... 54 7. 1. Cost vs. Light Ship w eight............................................................................................. 54 7.1.1 N on-linear Transform ............................................................................................... 56 7.2 Com bination M odel matrix............................................................................................. 58 7.2.1 Correlations..................................................................................................................58 7.2.2. Com bination M odels............................................................................................... 59 7.2.3. A dditional Com bination