Updating MIT's Cost Estimation Model for Shipbuilding By LTJG Matthew B. Smith, USCG B.S., Naval Architecture and Marine Engineering (2004) United States Coast Guard Academy Submitted to the Department of Mechanical Engineering in Partial Fulfillment of the Requirements for the Degree of Master of Science in Naval Architecture & Marine Engineering at the Massachusetts Institute of Technology June 2008 C 2008 Massachusetts Institute of Technology All rights reserved Signature of Author ....................................... ........... ..... Matthew Smith May 9, 2008 Certified by...................... ....... ............ ............. Henry Marcus Professor of Mechanical Engineering- Marine Systems Thesis Reader Certified by........................................ .................... Associate Professor of the Practice of Naval Construction and Engineering Thesis Supervisor A ccepted by ............................. ....... ... ........... ... .............. Professor Lallit Anand ~I ~ ~ ~ ~ • ~ .I• ~ Cha~irman-` "IIII Il[L MASSAcHýs IrSTR OF TEOHNOLOGY Department Committee on Graduate Students JUL 0 3 2008 LIBRARIES TABLE OF CONTENTS Table of Contents ......................................................... ......... 2 List of Figures/Tables ............................................................ 3 Acknowledgements............................................................. 4 Abstract........................................................................ 5 Introduction ................................................................... 6 Chapter 1: Basic Principles of Cost Estimation................................. 7 1.1 SWBS Groups...................................................... 8 1.2 Cost Estimating Relationships ......... ..................... .. 13 1.3 Learning Curves....................................................... 19 1.4 Life Cycle Cost, Total Ownership Cost and Whole Ship Cost...26 Chapter 2: The MIT Cost Models............................................. 38 2.1 The BMTS Cost Model.............................................39 2.2 The MIT Math Model ...................................................... 50 2.3 Combining the Two Models...................................... 64 2.4 Developing Coast Guard CERs .................................. 71 2.5 Future Program Modifications............ .............................. 74 Chapter 3: Applications and Lessons Learned.................................. 75 C onclusion........................................................................... 81 References ............................................................... .... 82 LIST OF FIGURES/TABLES Table 1: SW BS Group Descriptions................................................................ 11 Table 2: Typical Learning Rates ....................................... 21 Table 3: Typical Learning Curve Factors........................................................... 24 Table 4: Factors Used For Outputs for BMTS Cost Model.......... ............................. 41 Table 5: Lead Ship Cost Contributors for the BMTS Cost Model .......................... 45 Table 6: Initial BMTS Cost Model Results with Incorrect SWBS 800 reference ...........46 Table 7: BMTS Cost Model Results with Faulty Learning Curve Equation .................. 47 Table 8: Cost Model Results with Corrected Learning Curve.................................. 48 Table 9: Final Outputs from Corrected BMTS Cost Model.......... ................... 49 Table 10: Variable List for Lead Ship Cost for MIT Math Model Cost Estimation ....... 52 Table 11: KN Values as used by the MIT Math Model ....................................... 53 Table 12: Variable List for Follow Ship Cost Tab in MIT Math Model .................... 55 Table 13: Variables and Definitions for MIT Math Model Life Cycle Cost Tab..............58 Table 14: Cost Factors for Life Cycle Cost- Determining the Cost of Ships ................ 69 Table 15: Depiction of Updated Outputs Tab in Combined Cost Model ............... 71 Table 16: Sample Data provided in Coast Guard Format.........................................72 Figure 1: Relative Learning Curve Productivities Based Upon Applications of Advanced Shipbuilding Technologies ............................................................... 22 Figure 2: Generation of Values for Cost Learning Curves ...... ................... 23 Figure 3: Graph of Typical Learning Curve Factors........................................... 24 Figure 4: NATO Ship Life Cycle Cost Hierarchy ................................................ 27 Figure 5: Trade-Off Study Between Affordability and Capability ............................ 28 Figure 6: NATO Alternate Operating and Support Cost Categories for Ships ........... 30 Figure 7: U SCGC Healy............................................................................. 32 Figure 8: NATO Ship Costing Approach................. .......................................... 37 Figure 9: USCGC ESCANABA, Famous Class ............................................ 38 Figure 10: Output from ASSET depicting breakdown of weights by SWBS groups.........39 Figure 11: Inputs for Combined Cost M odel.......................................................66 Figure 12: Disclaimer for How to Pick Life Cycle Cost Factors...............................70 Figure 13: Coast Guard Deep Water Project Assets ............................................. 75 Figure 14: Coast Guard Cutter Mackinaw (GLIB) ................................................ 77 ACKNOWLEDGEMENTS I would like to express my sincere appreciation and many thanks to my thesis advisor, CDR Joel Harbour, and my thesis reader, Professor Henry Marcus, for their help throughout this project. I would also like to thank Mr. Martin Hecker from the Coast Guard Engineering Logistics Center whose insight into the applications of Cost Estimation for the U.S. Coast Guard really brought everything together for me. ABSTRACT This thesis project will update the MIT ship cost estimation model by combining the two existing models (the Basic Military Training School (BMTS) Cost Model and the MIT Math Model) in order to develop a program that can accurately determine both a ship's acquisition cost as well as its life cycle cost. Using United States Coast Guard resources, this project will also address various aspects of the ship design process which have a direct effect on the cost of building a ship. This will include, but not be limited to, the cost estimation process, determining which design decisions have the biggest impact on the ship's total cost, common pitfalls in the design process that lead to increases in cost, and lessons learned that have helped minimize the cost of a ship. INTRODUCTION This thesis project will update the MIT ship cost estimation model by combining the two existing models (the Basic Military Training School (BMTS) Cost Model and the MIT Math Model) in order to develop a program that can accurately determine both a ship's acquisition cost as well as its life cycle cost. Using United States Coast Guard resources, this project will also address various aspects of the ship design process which have a direct effect on the cost of building a ship. This will include, but not be limited to, the cost estimation process, determining which design decisions have the biggest impact on the ship's total cost, common pitfalls in the design process that lead to increases in cost, and lessons learned that have helped minimize the cost of a ship. This paper will discuss a number of concepts that are used in the cost estimation process. These concepts include Ship Work Breakdown Structure (SWBS) groups and how they can be used to help with cost estimation, cost estimating relationships, the differences between lead and follow ship costs and factors that determine them, life cycle costs and their components, and how they tie into the big picture of Coast Guard and Navy cost estimation. These concepts will then be revisited during the discussion of the current cost models in use at MIT. While the actual cost estimating relationships that are used by the programs will not be published, the means in which they are applied will be discussed at length in order to provide the reader with a good understanding of both the old and new cost models work. CHAPTER 1: BASIC PRINCIPLES OF COST ESTIMATION When calculating the cost of a vessel one must consider the costs of both labor and construction materials in addition to any overhead costs that may be incurred during the project. Shipyards typically have to deal with a highly variable product which makes bidding on contracts especially difficult. With minimal profit margins and little time available to make bids, it is crucial that reasonably accurate cost estimations are developed. Making matters even more difficult is the fact that due to the complexity and cost of a detailed ship design, and the large amount of time between the creation of a preliminary design and when that design is finally seen through to completion, there are often a significant number of design change orders which can cause dramatic increases to the cost of the final product. (1) New construction contracts often begin without detailed production drawings. This makes it very important for shipyards to have a means of developing accurate cost estimations. Shipyards typically maintain a catalog of historical costs that are tracked by a consistent work breakdown structure (WBS). This catalog typically has a list of common ship systems that includes hull structure,