Engineering Economics of Life Cycle Cost Analysis 2Nd Edition John Vail Farr Full Chapter

Engineering Economics of Life Cycle
Cost Analysis: 2nd Edition John Vail

Farr
Visit to download the full and correct content document:
https://ebookmass.com/product/engineering-economics-of-life-cycle-cost-analysis-2n
d-edition-john-vail-farr/
�"!
. . 'ti
� <il',
�-
Engineering Economics of Life
Cycle Cost Analysis
The rise of the information age and the digital economy has dramatically changed
engineering and other technology-driven fields. With tremendous advances in com-
puting and communication systems, major organizational upheavals, all fueled by
complexity, globalization, short cycle times, and lean supply chains, the functions of
engineers have significantly changed. Engineers and similar professionals must be
technically savvy and have product management and costing skills all while work-
ing in a distributed and often unstable environment. This new-edition textbook is
updated to cover the integration of cost, risk, value, scheduling, and information
technologies going beyond basic engineering economics.
Engineering Economics of Life Cycle Cost Analysis, Second Edition, offers a systems
and life cycle or total ownership cost perspective. It presents advanced costing tech-
niques such as simulation-based costing, decision and risk analysis, complex systems
costing, software, big data, and cloud computing estimation. Examples and problems
demonstrating these techniques with real-world applications are also included.
All engineers and similar professionals will find this book useful, but it is mainly
written for systems engineers, engineering managers, program/product managers,
and industrial engineers. The text can serve as a professional reference or for use
with graduate courses on advanced engineering economic analysis and cost manage-
ment, and financial analysis for engineers.
BK-TandF-FARR_9781032184869-230017-FM.indd 1 17/05/23 11:54 AM

Engineering Economics of
Life Cycle Cost Analysis
Second Edition
John Vail Farr

Isaac J. Faber
Designed cover image: Shutterstock
Second edition published 2023

by CRC Press
2385 Executive Center Drive, Suite 320, Boca Raton FL 33431
and by CRC Press

4 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN
CRC Press is an imprint of Taylor & Francis Group, LLC
© 2023 John Vail Farr and Isaac J. Faber
First edition published by CRC Press 2018
Reasonable efforts have been made to publish reliable data and information, but the author and pub-
lisher cannot assume responsibility for the validity of all materials or the consequences of their use.
The authors and publishers have attempted to trace the copyright holders of all material reproduced in
this publication and apologize to copyright holders if permission to publish in this form has not been
obtained. If any copyright material has not been acknowledged please write and let us know so we may
rectify in any future reprint.
Except as permitted under U.S. Copyright Law, no part of this book may be reprinted, reproduced,
transmitted, or utilized in any form by any electronic, mechanical, or other means, now known or here-
after invented, including photocopying, microfilming, and recording, or in any information storage or
retrieval system, without written permission from the publishers.
For permission to photocopy or use material electronically from this work, access www.copyright.com
or contact the Copyright Clearance Center, Inc. (CCC), 222 Rosewood Drive, Danvers, MA 01923, 978-
750-8400. For works that are not available on CCC please contact mpkbookspermissions@tandf.co.uk
Trademark notice: Product or corporate names may be trademarks or registered trademarks and are
used only for identification and explanation without intent to infringe.
Library of Congress Cataloging‑in‑Publication Data
Names: Farr, John V., author. | Faber, Isaac, author.

Title: Engineering economics of life cycle cost analysis / John Vail Farr, Isaac J. Faber.
Description: 2nd edition. | Boca Raton : CRC Press, [2023] | Includes bibliographical references
and index.
Identifiers: LCCN 2022059215 (print) | LCCN 2022059216 (ebook) | ISBN 9781032184869
(hbk) | ISBN 9781032184876 (pbk) | ISBN 9781003254782 (ebk)
Subjects: LCSH: Life cycle costing. | Engineering economy. | Systems engineering--Cost
effectiveness.
Classification: LCC TA177.7 .F368 2023 (print) | LCC TA177.7 (ebook) | DDC
620.0068/1--dc23/eng/20221212
LC record available at https://lccn.loc.gov/2022059215
LC ebook record available at https://lccn.loc.gov/2022059216
ISBN: 978-1-032-18486-9 (hbk)

ISBN: 978-1-032-18487-6 (pbk)
ISBN: 978-1-003-25478-2 (ebk)
DOI: 10.1201/9781003254782
Typeset in Times
by KnowledgeWorks Global Ltd.
BK-TandF-FARR_9781032184869-230017-FM.indd 4 17/05/23 11:54 AM

Contents
List of Abbreviations.................................................................................................xi
Preface...................................................................................................................... xv
Acknowledgments....................................................................................................xix
About the Authors....................................................................................................xxi
SECTION 1 The Mathematics of Engineering Economy
Chapter 1 Overview of Systems Life Cycle Costing.............................................3

1.1 Overview of Engineering Economic Analysis........................... 3
1.1.1 Business Operations......................................................4
1.1.2 Customer Relationships................................................. 6
1.1.3 Engineering Services....................................................7
1.1.4 Product and Process Realization...................................7
1.2 Engineering Challenges for the 21st Century............................. 8
1.3 Introduction to Systems Life Cycle Costing............................. 13
1.3.1 Systems Life Cycle Costing........................................ 14
1.4 Cost Analysis, Estimation, and Management........................... 16
1.4.1 Cost Analysis............................................................... 16
1.4.2 Cost Estimation........................................................... 17
1.4.2.1 Parametric Cost Estimation......................... 18
1.4.2.2 Analogy Cost Estimating Methodology...... 18
1.4.2.3 Engineering Build-Up Methodology........... 18
1.4.3 Cost Management........................................................ 18
1.5 Summary..................................................................................20
References........................................................................................... 21
Chapter 2 The Science of Engineering Economics: Understanding the

Time Value of Money.......................................................................... 23
2.1 Introduction and the Time Value of Money............................. 23
2.2 The Capital Budgeting Decision..............................................24
2.2.1 Basic Concepts in Capital Budgeting..........................24
2.2.2 Benefit and Cost Development....................................25
2.3 Time Value of Money...............................................................26
2.3.1 Cash Flow Diagram Rules..........................................28
2.4 Interest......................................................................................28
2.4.1 Simple Interest............................................................. 29
2.4.2 Compounded Interest.................................................. 30
v
vi Contents
2.4.3 The “Rule of 72”......................................................... 32

2.4.4 Compound Interest Notation and Interest Tables........ 33
2.4.5 Interest Compounded Other Than Yearly................... 35
2.5 Common Cash Flow Series...................................................... 37
2.5.1 Single Period Cash Flow............................................. 37
2.5.2 Uniform Cash Flow Series.......................................... 39
2.5.3 Linear Gradient Cash Flow Series..............................40
2.5.4 Irregular Cash Flow Series......................................... 42
2.6 Concept of Economic Equivalence.......................................... 42
2.7 Amortization Schedules........................................................... 45
2.8 Summary.................................................................................. 48
Bibliography........................................................................................ 48
References........................................................................................... 48
Chapter 3 Advanced Economic Analysis of Alternatives.................................... 65

3.1 Introduction.............................................................................. 65
3.2 Net Present Value..................................................................... 65
3.2.1 NPV in Excel...............................................................66
3.3 Annual Equivalent Worth......................................................... 67
3.3.1 Introduction................................................................. 67
3.3.2 Unequal Service Lives Using AEW............................ 68
3.4 Capital Budgeting: Selection of Multiple Projects................... 69
3.5 After-Tax Cash Flow Analysis................................................. 70
3.5.1 Depreciation................................................................ 71
3.5.2 Corporate Income Taxes............................................. 75
3.6 Income and Cash Flow Statements ......................................... 76
3.7 Summary.................................................................................. 79
Bibliography........................................................................................80
References...........................................................................................80
Chapter 4 The Basic Theory of Interest............................................................... 87

4.1 Introduction.............................................................................. 87
4.2 Interest as Time Value of Money............................................. 87
4.3 Inflation.................................................................................... 89
4.3.1 Determining Inflation and Deflation...........................92
4.4 Disinflation, Deflation, and Stagflation....................................94
4.5 Market Interest Rates............................................................... 95
4.5.1 United States Treasury Debt....................................... 95
4.5.2 Debt.............................................................................96
4.5.3 Equity..........................................................................99
4.5.4 Minimum Attractive Rate of Return......................... 101
4.6 Summary................................................................................ 104
Bibliography...................................................................................... 105
References......................................................................................... 105
Contents vii
Chapter 5 Simulation-Based Costing................................................................. 109

5.1 Introduction............................................................................ 109
5.1.1 Ways to Study a System............................................ 111
5.1.2 Advantages and Disadvantages of Simulations......... 111
5.2 Review of Probability and Statistics....................................... 113
5.2.1 Introduction............................................................... 113
5.2.2 Random Variables..................................................... 114
5.2.3 Probability Density Functions................................... 115
5.2.4 Cumulative Distribution Functions........................... 117
5.3 Discrete Process Generators................................................... 119
5.4 Continuous Process Generators.............................................. 123
5.5 Probability and Statistics Summary....................................... 127
5.6 Simulation in Practice............................................................ 127
5.6.1 Introduction to Simulation in Practice...................... 127
5.6.2 Building Complex Simulations................................. 128
5.7 Using Readiness Levels for Model Input............................... 130
5.8 Simulation Using Spreadsheets.............................................. 134
5.8.1 Introduction............................................................... 134
5.9 Building Systems Simulations................................................ 135
5.9.1 Introduction............................................................... 135
5.9.2 Using Expert Elicitation for Data Development........ 137
5.9.3 Adjusting for Bias...................................................... 138
5.10 Sensitivity Analysis................................................................ 138
5.11 Summary................................................................................ 138
References......................................................................................... 139
SECTION 2 Cost Estimation of Complex Systems
Chapter 6 Life Cycle Framework and Techniques............................................. 163

6.1 Introduction to Developing Life Cycle Models...................... 163
6.2 Developing LCC Models........................................................ 163
6.3 Life Cycle Costs Categories................................................... 165
6.3.1 Industrial Base and Supplier/Vendor Relationships.........165
6.3.2 Research, Development, Testing, and Evaluation...........166
6.3.3 Acquisition................................................................ 166
6.3.4 Operations and Support............................................. 167
6.3.5 Disposal or Retirement.............................................. 167
6.3.6 Summary of Life Cycle Categories........................... 168
6.4 Billable Rates.......................................................................... 172
6.5 Costing Labor......................................................................... 173
6.6 Summary................................................................................ 174
Bibliography...................................................................................... 175
References......................................................................................... 176
viii Contents
Chapter 7 Costing of Complex Systems............................................................ 187

7.1 Introduction............................................................................ 187
7.2 Issues Surrounding Complex Systems................................... 187
7.3 Systems Engineering and Management Costs....................... 190
7.3.1 Hardware................................................................... 190
7.3.2 Software.................................................................... 192
7.3.3 Interfaces and Integration at the Component and
System Level............................................................. 192
7.3.4 Systems Engineering and Project Management
Costs.......................................................................... 192
7.4 From Requirements to Architectures to Costs....................... 194
7.5 Summary................................................................................ 195
References......................................................................................... 198
Chapter 8 Software-Intensive Systems.............................................................. 201

8.1 Introduction............................................................................ 201
8.2 Software Estimating Techniques............................................ 203
8.2.1 Overview................................................................... 203
8.2.2 Expertise-Based and Hybrid Models........................204
8.2.3 Algorithmic Models..................................................205
8.2.3.1 Original or Basic COCOMO Model..........206
8.2.3.2 Phase Distribution of Effort and
Schedule for Organic Mode.......................208
8.2.3.3 Intermediate COCOMO............................ 211
8.2.3.4 Advanced COCOMO................................. 212
8.2.4 Function Points.......................................................... 212
8.2.5 Costing Software with Agile Development............... 216
8.3 Summary................................................................................ 219
Bibliography...................................................................................... 219
References......................................................................................... 220
Appendix 8.A Effort Multiplier for the Intermediate
COCOMO Model (from Boehm et al., 2000)�� 221
Chapter 9 Cost Estimating Techniques.............................................................. 231

9.1 Estimating Life Cycle Costs Throughout the Product
Development Cycle................................................................. 231
9.2 Analogy.................................................................................. 231
9.3 Parametric Cost Estimating.................................................... 233
9.3.1 The Role of Statistics................................................ 238
9.3.2 Some CERs of Interest..............................................240
9.3.2.1 Wright’s Method........................................ 241
9.3.3 Summary and Conclusions........................................ 243
Contents ix
9.4 Detailed Engineering Builds.................................................. 243

9.5 Summary................................................................................ 245
References......................................................................................... 245
Chapter 10 The Role of Risk, Value, and Cost in Making Decisions.................. 251
10.1 Introduction............................................................................ 251
10.2 Common Decision Analysis Tools......................................... 253
10.2.1 Decision Trees........................................................... 253
10.2.2 Decision-Making Based upon Value Analysis.......... 257
10.2.3 Pugh Matrix.............................................................. 261
10.2.4 Summary................................................................... 262
10.3 Risk......................................................................................... 262
10.3.1 Overview................................................................... 262
10.3.2 Risk Buffers............................................................... 265
10.4 Integrating Risk, Value, and Costs for Decision Analysis..... 265
10.5 Making Defensible and Transparent Decisions...................... 265
10.5.1 Bias............................................................................ 265
10.6 Summary................................................................................ 268
Bibliography...................................................................................... 269
References......................................................................................... 269
Chapter 11 Costing the Cloud, Data, and Machine Learning............................. 275

11.1 Introduction............................................................................ 275
11.2 The Role of the Cloud............................................................ 277
11.3 Costing Data........................................................................... 281
11.4 Cost Considerations for Artificial Intelligence and
Machine Learning.................................................................. 285
11.5 Conclusion.............................................................................. 287
Bibliography...................................................................................... 287
References......................................................................................... 287
SECTION 3 Cost Management
Chapter 12 Costing and Managing Off-the-Shelf Systems ................................ 297

12.1 Introduction............................................................................ 297
12.2 Commercial Off-the-Shelf Systems ...................................... 301
12.2.1 Hardware-centric COTS...........................................304
12.2.2 Software-centric COTS.............................................307
12.2.3 Integration Costs....................................................... 311
12.3 Gots........................................................................................ 311
x Contents
12.4 Software Reuse....................................................................... 311

12.4.1 Cost Reductions Achieved with Software Reuse...... 313
12.5 Open Source........................................................................... 314
12.6 Summary................................................................................ 315
Bibliography...................................................................................... 316
References......................................................................................... 316
Chapter 13 Project Management’s Role in Life Cycle Costing........................... 321

13.1 Introduction............................................................................ 321
13.2 Basics of Networks................................................................. 322
13.3 Work Breakdown Structure.................................................... 323
13.4 Progress Measurement........................................................... 325
13.5 Calculating Earned Value....................................................... 326
13.6 Monte Carlo Simulation of Networks..................................... 329
13.7 Summary................................................................................ 330
Bibliography...................................................................................... 330
References......................................................................................... 330
Chapter 14 Use of Cost Metrics and Ratios......................................................... 341

14.1 Introduction............................................................................ 341
14.2 Benefit-Cost Ratio.................................................................. 341
14.3 Return on Investment............................................................. 342
14.4 Cost-Benefit Analysis............................................................. 345
14.5 Expected Value....................................................................... 345
14.6 Sensitivity Analysis................................................................ 347
14.7 Breakeven Analysis................................................................348
14.7.1 Breakeven Quantity................................................... 350
14.7.2 Conventional Payback Period.................................... 350
14.7.3 Discounted Payback Period....................................... 351
14.7.4 Breakeven Charts...................................................... 352
14.8 Internal Rate of Return........................................................... 353
14.8.1 The Compounding Equation..................................... 353
14.8.2 The Quadratic Equation............................................ 354
14.8.3 Trial-and-Error Method............................................. 355
14.8.4 IRR in Excel.............................................................. 356
14.8.5 Incremental IRR........................................................ 356
14.9 Summary................................................................................ 357
References......................................................................................... 358
Appendix A............................................................................................................ 367

Appendix B............................................................................................................ 379
Index....................................................................................................................... 385
List of Abbreviations
A annuity
AC actual cost
ACID atomicity, consistency, isolation, and durability
ACWP actual cost of work performed
ADM arrow diagramming method
AEW annual equivalent worth
AI artificial intelligence
API application programming interface
APR annual percentage rate
ASCE American Society of Civil Engineers
ASEM Annual Society of Engineering Management
AWS Amazon Web Services
BAC budget at completion
BCR benefit cost ration
BCWP budgeted cost of work performed
BCWS budgeted cost of work scheduled
CAGR calculated compound annual growth ratio
CASE computer-aided software engineering
CBS certificate breakdown structure
CD certificate of deposit
CDF cumulative distribution function
CER cost estimating relationships
CFD cash flow diagram
CLOC commented lines of code
COCOMO constructive cost model
COCOMO II constructive cost model version II
COCOTS constructive commercial Off-the-Shelf model
CONOPS concept of operations
COSYSMO constructive systems engineering cost model
COTS commercial Off-the-Shelf
CPG continuous process generator
CPI consumer price index or cost performance index
CPM critical path method
CPP conventional payback period
CRUD creating, read, updating, and deleting
CSI cost schedule index
CSP cloud service providers
CUT code and unit test
CV conventional carrier or cost variance
DBMS database management system
DD detailed design
DoD Department of Defense
xi
xii List of Abbreviations
DPG discrete process generator

DPP discounted payback period
EAC estimate at completion
EAF effort adjustment factor
ELOC effective lines of code
ESOH environmental, safety, and occupational health
ETC estimate to complete
EV earned value
FFP firm-fixed price
FP function points
FV future value
GAC granulated activated carbon
GCP google cloud platform
GOTS government off-the-shelf
GPUs graphical processing units
IaaS infrastructure as a service
IPT integrated product teams
IRAD internal research and development
IRR internal rate of return
IT information technology
ITM inverse transformation method
KDSI thousands of delivered source lines of instructions
KLOC thousands of lines of code
LCC life cycle costs
LCCA life cycle cost analysis
LDC large defense contractor
LIDAR light imaging detection and ranging
LOGPACS logistic packages
M&S modeling and simulation
MACRS modified accelerated cost recovery system
MARR minimum attractive or acceptable rate of return
ML Machine learning
MODA multi-objective decision analysis
MOTS modifiable or military off-the-shelf
MPTs methods, processes, and tools
MRP material requirements planning
NCLOC non-commented lines of code
NAE National Academy of Engineering
NASA National Aeronautical and Space Administration
NFV net future value
NFW new future worth
NIST National Institute of Standards
NPV net present value
NPW net present worth
NSF National Science Foundation
O&M operation and maintenance
List of Abbreviations xiii
O&S operations and support/sustainment

PaaS platform as a service
PCE parametric cost estimating/estimate
PDF probability distribution function
PDM precedence diagramming method
PERT program evaluation review technique
PM program/project management
PMI Project Management Institute
PMP program management professional
PS percent spent
PSM professional staff months
PV planned value
R&D research and development
RDT&E research, development, testing, and evaluation
RDBMS relational database management system
ROI return on investment
SaaS software as a service
SBC simulation-based costing
SE/PM systems engineering/project management
SLOC source lines of code
SoS system of systems
SQL structured query language
SSD solid-state drives
SV systems view or schedule variance
TCF technical complexity factor
TDEV time to develop
TOC total ownership costs
TRL technical readiness level
TVM time value of money
UCP use case points
UFP unadjusted function point
UV ultraviolet
VAC variance at completion
WACC weighted average cost of capital
WBS work breakdown structure
WLC whole life costing
YTM yield to maturity
Preface
The advent of modern computing systems and instantaneous communication, the
elimination of low and middle management who tracked and managed informa-
tion, and the implementation of extremely efficient supply chains has dramatically
affected the roles and responsibilities of engineers at all levels. With today’s glo-
balization, technology, and complexity, few engineers or similiar professionals sit
at a desk and design at the component level. We are mainly integrators of systems,
project/program managers, and utilizers of technology to develop effective and effi-
cient designs. This 21st-century paradigm has given engineers the opportunity to use
their technical training and problem-solving skills as points of departure into spiral
and rapid prototyping, creation of disruptive products and services, and complex and
interdisciplinary product development in non-traditional engineering fields such as
sales, law, medicine, and corporate leadership. The future will require systems that
are more complex, providing for increased opportunities for engineers to be business
leaders first and engineers second. The marketplaces of the information age will
require employees at all levels to be both business and tech-savvy. They must be able
to develop accurate cost estimates based on defensible cost analysis and manage peo-
ple and budgets. Even at the component level, engineers must conduct meaningful
trade space studies to make informed decisions. Engineers continue to be poised for
tremendous career opportunities, but the landscape will require different job skills.
It is against this backdrop that we wrote this book.
At the undergraduate level, most engineers are, at best, introduced to engineering
economics as their only exposure to the costing and estimating of projects. Many
universities introduce economic planning material in some type of capstone class.
Few require an entire course on the subject. At the graduate level, most programs
are domain-centric and may not deliver any exposure to cost estimation and manage-
ment, especially at the systems level. Engineers must pursue an MBA or learn the
appropriate skills via on-the-job training to become competent in business affairs.
Unfortunately, the courses traditionally taught in an MBA program—mainly strat-
egy, finance, and accounting—do not provide the skills needed to be a program/
product manager or a leader of an integrated product team (IPT), to bring products
to market on time and within budget, to understand the true costs of the product, and
to conduct trade-off or trade space analysis. Thus, most engineers are ill prepared to
enter and excel in the job market and work on interdisciplinary projects where cost
analysis, estimation, and management skills are not only valued but required. Our
formal training has failed us; we must learn the requisite costing, accounting, and
management skills via on-the-job training or return to school to pursue a business
or related degree.
There are some outstanding and very mature engineering economics textbooks
in the marketplace. The methods, processes, and tools (MPTs) presented in these
textbooks are as relevant now as they were 20 years ago. Most of the leading text-
books do an outstanding job of presenting the mechanics of engineering economics.
However, the work environment has dramatically changed; it now requires more
xv
xvi Preface
than simply understanding the mathematics of engineering economy. First and

foremost, engineers often enter the market as leaders of IPTs. Often early in their
career they are responsible for on-time and on-budget products that are produced by
interdisciplinary teams across multiple time zones. They are responsible, in part or
directly, for profit and loss at all levels or products/services development. Technology
has increased productivity and the span of control. When combined with complexity,
risk is also increased. Few engineers have the luxury of becoming component-level
experts and assuming more responsibility as their level of experience grows. Thus,
entry-level and junior engineers need more than the math of engineering economics;
they need to understand the business of being an engineer. Traditional engineer-
ing economics should be one of the tools at their disposal. They must understand
not only how to make capital investment decisions throughout a product life cycle
but also the economics of operating a business, contracting, complex analysis tech-
niques, and, more importantly, making risk trade-offs.
The first edition of this book was a textbook adaption, evolution, and updating of
the “Systems Life Cycle Costing: Economic Analysis, Estimation, and Management,”
published in 2011. Though marketed as a reference book, it was adopted by many
universities as a text for graduate classes in engineering economics. Thus, the moti-
vation for the first edition. Unlike the mature knowledge encompassed by the tradi-
tional engineering disciplines, the techniques and tools for costing complex systems
are rapidly evolving and being driven mainly by the commercial sector. Modern
engineers need MPTs beyond classic engineering economics, must understand life
cycle cost analysis (LCCA), and must apply these to complex systems to include
infrastructure, cars, planes, information technology systems, etc. First and fore-
most, we are interested in the cost analysis, estimation, and management of systems.
Though components are important, the more challenging and relevant problems are
systems. Secondly, engineers must worry about life cycle or total ownership costs
(TOC) and not simply development costs. All too often, we only cost our piece of the
life cycle and do not make sound TOC acquisition decisions using quantifiable and
defendable analysis. Lastly, an engineer must be able to conduct economic analysis,
estimate the cost of the system, lead/manage people and resources, and understand
the “big picture” as part of the business enterprise. Also, the MPTs and techniques
are often not presented in the open literature at the systems level because of the
competitive advantage afforded any company that can accurately estimate their
life cycle costs (LCCs). Thus, much of the MPTs were gleamed from government
sources especially the Department of Defense (DoD) and the National Aeronautical
and Space Administration (NASA). This was not our desire; however, the DoD and
NASA are in many ways are the intellectual thought leader on costing and estimat-
ing of complex systems because of the sheer size and complexity of their projects/
programs.
When Dr. Farr wrote the original LCCA reference in 2011, he had hoped to
improve on the engineering economy material taught in most engineering programs.
He also hoped that book could also be used in graduate programs in engineering
management, mechanical engineering, systems engineering, etc. As we collected
feedback from students and other customers, we became convinced that this was the
Preface xvii
right set of MPTs and should replace engineering economy at both the undergradu-
ate and graduate level. Thus, we wrote the 2019 LCC textbook which was the first
edition of this text. In our software-centric workplace, Dr. Faber is able to bring
some modern relevance to the traditional engineering economic topics based upon
his software and data science background. First and foremost, tools like Excel and
@Risk have made teaching real-world cost problems possible. Secondly, most engi-
neers work in an interdisciplinary world and must understand TOC of their products.
Entry-level engineers simply need more than the mathematics of the time value of
money to succeed that is taught in traditional engineering economics classes/lectures.
Life cycle costing is at best an immature industry-driven discipline. Unfortunately,
textbooks are often long on theory and short on meaningful examples, real data, etc.
The 2nd edition of the 2019 textbook was developed with several goals. First and
foremost, we wanted to introduce new material because of the rapid advances in
data analytics, big data, and software-centric systems. Thus, we added a new chapter
on costing data and advanced computational methods with details on such subjects
as cloud versus distributed systems and the role of costing in artificial intelligence/
machine learning. We also added a chapter on integration cost, value, and schedule
to better perform trade space studies. Secondly, we wanted to correct all of the many
errors and add additional problems. One of the criticisms of the original text was that
many of the problems were too challenging. We originally tried to present as many
real-world problems as possible. Many of the new problems that were added were
designed to demonstrate the techniques in lieu of applying them to a real-world prob-
lem. Lastly, we added an appendix of how to use the economic functions in Excel.
Most of the examples in the text have been updated to demonstrate the functionality
of Excel in lieu of the traditional solution methods of equations and table lookup.
Our former colleagues at West Point along with the students and faculty at Stevens
Institute of Technology, University of Central Florida, Clarkson University, and
Stanford University contributed to much of the material presented herein. Having
made every effort to correctly reference the material, we suspect there are phrases
and other elements of the book that are not properly referenced. If you encounter a
phrase, figure, etc., that is not correctly referenced please send us the correct infor-
mation. Also, please send us any ideas, problems, mistakes, new material, etc. Note
that we are maintaining the website www.systemscosting.com. This is a great way to
contact us, provide feedback, etc.
John V. Farr
Professor Emeritus
United States Military Academy at
West Point
Isaac J. Faber
Chief Data Scientist
United States Army
Acknowledgments
We would like to thank some of the many people who contributed to the publishing
of this textbook. First and foremost, we would like to thank our former colleagues
at the United States Military Academy at West Point, particularly Jackie, James,
Kenny, Tim, Jeff, and Travis, and many of Dr. Farr’s colleagues at Stevens Institute
of Technology, specifically Dinesh, Brian, Rob, Mike, Kate, and Don, who inspired
him to write the original life cycle costing reference and this textbook adaptation.
Dr. Farr’s exposure to systems engineering at both West Point and Stevens helped
shape his motivation to move beyond traditional engineering economics and write
the original reference book. In addition, Dr. Farr’s former colleagues and students at
the University of Central Florida, especially Tim, and Clarkson University continue
to inspire us to deliver high-quality, relevant, and connected material to our students.
We also owe a debt of gratitude to the selfless servants in the US Army whom we
worked with for the majority of our professional careers. Their high standards for
professionalism sustained us when writing this book and performing all the jobs of
an academician became tedious. We would be remiss if we did not thank the many
students who encouraged us to write the book and contributed to much of the mate-
rial used in the text. Their projects formed the basis for many of the class problems,
examples, and case studies. There is no way to recognize each of them individually,
but we wish to thank them all collectively.
Most importantly, we would like to thank our wives, Michele and Kerry. Dr. Farr
owes a debt of gratitude to his two sons, Michael, David and their families, for their
patience during the many nights he worked late on both editions of this book and for
understanding as he traveled around the world to teach the courses for which it was
developed. Isaac also owes a debt to his four children, who sacrificed many hours of
time with their father to make this manuscript possible.
xix
About the Authors
Dr. John V. Farr is a professor emeritus of
Engineering Management at the United States
Military Academy (USMA) at West Point
and was the Founding Director of the Center
for Nation Reconstruction and Capacity
Development upon his retirement in 2017. He
currently teaches part time in the School of
Business at Clarkson University. Upon his
reinterment until 2022 he was a faculty admin-
istrator at the University of Central Florida and
consultant with Applied Research Associates
conducting cost, decision, and risk analysis.
From 2007 to 2010, he was a professor of Systems Engineering and Engineering
Management and Associate Dean for Academics in the School of Systems and
Enterprises at Stevens Institute of Technology. He was the founding director of the
Department of Systems Engineering and Engineering Management at Stevens from
2000 to 2007. Before coming to Stevens in 2000, he was a professor of Engineering
Management at USMA where he was the first permanent civilian professor in engi-
neering and Director of their Engineering Management Program. Dr. Farr is a former
past president and fellow of American Society for Engineering Management (ASEM)
and a Fellow of the American Society of Civil Engineers (ASCE). He is a former edi-
tor of the Journal of Management in Engineering and the founder of the Engineering
Management Practice periodical. He has authored or edited over 200 technical pub-
lications to include five books, seven book chapters, and over 90-refereed publi-
cations mainly on cost analysis, infrastructure, engineering education, engineering
management, and systems engineering. Dr. Farr earned his undergraduate degree
from Mississippi State University and Masters and PhD in Civil Engineering from
Purdue and the University of Michigan, respectively. Dr. Farr is also a member of
Chi Epsilon, a founding member of Epsilon Mu Eta, and Phi Kappa Phi honor soci-
eties. He is a member of the International Council of Systems Engineering, ASCE,
and ASEM. He is also a registered civil engineer in Florida and Mississippi and a
certified project management professional (PMP). Dr. Farr has served on numerous
defense national and academic advisory boards to include membership on the Army
Science Board, Army Education Advisory Committee, Board on Army RDT&E,
Systems Acquisition and Logistics, and as a member of the Air Force Studies Board
and the Board on Army Research and Development of the National Academies. He
has served as a consultant and principal subject matter expert for numerous com-
panies and government agencies and worked in Afghanistan, Africa, Vietnam, and
the Marshall Islands on a wide variety of economic and capacity development and
assessment projects. He taught at the University of Technical Education, Ho Chi
Minh City, Vietnam, in 2013 as a Fulbright specialist.
xxi
xxii About the Authors
Isaac J. Faber an active-duty officer in the

United States Army and is the chief data
scientist at the Artificial Intelligence and
Integration Center. Previously he completed a
PhD at Stanford University where his research
focused on advanced techniques for cyber
security, early warning of complex attacks,
and the costing of complex computer systems.
While at Stanford he was involved in the
startup of a company focused on managing data mining solutions. He previously
served as the lead data scientist at the Army’s cyber warfare unit. In that role, he
guided the development and architecture of an operational cyber analytics platform.
He also served a three-year tour at the United States Military Academy at West
Point where he was promoted to the rank of assistant professor. At West Point he
served in Department of Systems Engineering and taught courses in decision anal-
ysis and engineering economy. He also maintained an active sponsored research
program in logistics and cyber warfare. Though still an active-duty Army officer,
he has found time to produce peer-reviewed journal and conference articles. He is
a Ranger-qualified combat veteran of Iraq with a Bronze Star and Combat Infantry
badge. He has served as the Institute of Industrial and Systems Engineering chair
of the Engineering Economy Division. He holds degrees in Computer Information
Systems (BS) from Arizona State University, Industrial Engineering (MS) from the
University of Washington, and Management Science & Engineering (PhD) from
Stanford University.
Section 1
The Mathematics of
Engineering Economy
1 Overview of Systems
Life Cycle Costing
1.1 OVERVIEW OF ENGINEERING ECONOMIC ANALYSIS

With the globalization of the manufacturing industry and much of the services pro-
fession, the efficiencies derived from advances in technology (and the subsequent
decrease in middle management positions), and the shifting of our economy to be
service based, the roles of the technical organization and of engineers have dramati-
cally changed. In the 21st century, technical organizations must be concerned with
• maintaining an agile, high-quality, and profitable business base of products

or services in an unstable and global economy;
• hiring, managing, and retaining a highly qualified and trained staff of engi-
neers, scientists, technicians, and support personnel in a rapidly changing
technological environment; and
• demonstrating a high level of innovation, entrepreneurship, and capability
maturity, usually with an ever-increasing amount of government oversight
and regulation.
A company’s basic objective is to grow its earnings quickly and sustainably by

providing goods and services that meet stakeholder requirements. In kind, gov-
ernment and non-profit agencies must have strong cost aversions due to resource
restraints and the nature of public service. Engineers support this overarching objec-
tive by developing products and services that attain their targeted contribution to
corporate earnings and/or agency cost savings. Thus, engineers must be able to do
more than simply produce economical and creative designs; they must be able to
• understand and track both the technical and profitability aspects of a project,
• communicate with the financial people, such as accountants and auditors,
and to senior management,
• read and understand financial statements to assess the health of a potential
partner as well as one’s own corporation or agency,
• understand the financial and legal liabilities of their designs and contracts,
• have a life cycle perspective including long-term obligations such as lease versus
buy, warranties, equipment replacement, true costs of employees, and so on, and
• understand the execution of an engineering business and that operational
and strategic decisions can affect profitability and business operations.
Much has been written about innovation and entrepreneurship for engineers and
scientists. The National Science Foundation (NSF) and many others have written
DOI: 10.1201/9781003254782-2 3
4 Engineering Economics of Life Cycle Cost Analysis
about producing engineers with a better understanding of cultures, communication

skills, interdisciplinary learning, and business and management. Traditional engi-
neering economy is only a small component of the formal financial education needed
by entry-level engineers.
As conveyed with the systemigram in Figure 1.1, the world that a modern engineer
must operate in is complex and interrelated. Much has changed in the last 20 years,
and unfortunately engineering education has been slow to evolve. In practice, we
have become more interdisciplinary, and new engineering disciplines (systems, soft-
ware, biomedical, robotics, mechatronics, etc.) have emerged. Journeymen engineers
no longer focus solely on technical issues within traditional engineering fields and
grow into the non-design financial aspects of business as they progress into the ranks
of management. Given the number of small design firms, the interdisciplinary nature
of engineering, the flattening of organizations because of technology, and computer-
based design requiring engineers to be involved throughout the project life cycle,
engineers must perform most of the functions shown in Figure 1.1 earlier if not
immediately in their career.
In Figure 1.1, we divided the financial skills into four main functions: (1) techni-
cal engineering, or those skills needed for successful product realization, (2) man-
aging customer relationships, including expectations and growing the customer base,
(3) engineering operations or those skills needed to successfully operate within a mod-
ern business, and (4) technical and engineering operations skills. Each of these areas
requires differing skill sets and abilities related to costs and economics of an engineer-
ing project. For example, an engineer must understand the financial motivations for
selecting a project for production. This information will influence planning, design,
and ultimately project outcomes. In general, we contend that an engineer needs techni-
cal skills, a financial understanding, and the ability to communicate about both areas.
Figure 1.2 presents just some of the competencies needed for good cost analysis,
estimating, and management. These skills are needed to execute business opera-
tions, build and sustain customer relationships, run a technical business, and deliver
a high-quality, cost-effective product. Though probably not totally complete, the fig-
ure does demonstrate the diverse skills needed to conduct accurate estimates and
manage a project.
These competencies are required for most engineers to be successful, even early
in their careers. In particular, the relationships between the skills, such as how finan-
cial motivations affect technical work, are critical and lend to engineers’ ability to
provide value to their organizations.
1.1.1 Business Operations

Every engineering job is different, and every company or organization has different
expectations. However, in most entry-level jobs, from your first day you will be held
accountable for a budget and for your time, and you will be involved in customer
relations and expectations. Within a very short time, you will be involved in
• market and customer analysis,

• budgeting and forecasting,
Overview of Systems Life Cycle Costing
FIGURE 1.1 Systemigram showing the financial skills needed by an engineer.
5
FIGURE 1.2 Competency model for costing.
• beating the competition,

• high-tech marketing and sales,
• planning and managing for profitability, and
• partnering with other business units.
These skills are as important to your success as developing cost-effective and

efficient products and services that meet customers’ needs.
Obviously, the smaller the company the more an entry-level engineer must
be focused on business operations and customer relationships. Large defense,
information technology, and manufacturing companies often hire engineers for
mainly technical work. However, as engineers grow into management positions,
understanding the policies and finances of the organization is key to their suc-
cess. Indeed, the selection of candidates for higher-level management is based
on engineers’ understanding of the business process and how it relates to tech-
nical work.
Companies are typically broken up into sales and marketing; research and devel-
opment; operations, including all aspects of support, such as quality, logistics,
human resources, and legal; and major product lines. Depending on the company,
they can have divisions centered on products, divisions or regions, and corporate.
Engineers can be employed in any area and at any level, with each requiring differ-
ent knowledge bases and skills. In today’s complex engineering world, the ability to
understand cost and economic considerations across various divisions of a firm can
add tremendous value.
1.1.2 Customer Relationships

Engineers are often the front line between an organization and its customers.
They collect requirements, iterate on designs, make technical presentations, write
Overview of Systems Life Cycle Costing 7
proposals, and, for smaller companies, they can be the face of the organization.
Beyond listening and communicating, they must work with stakeholders to ensure
their expectations are executable within the financial constraints of the project.
Customer relations is focused on making the customer feel both valued and wel-
comed, which requires excellent listening and communication skills. Being able to
communicate the language of finances is an important element of not only managing
but also cultivating customer relations. Engineers who possess only technical knowl-
edge can often unnecessarily intimidate customers, leading to a loss in confidence
and potentially a loss in revenues.
Customer relations involves working with stakeholders not only on engineer-
ing services but also on ensuring that business operations such as billing, con-
tracts, and other service obligations are met. Again, this shows that engineers
must be involved in business operations even if their primary focus is technical
work. Often customers make decisions primarily based on cost factors, so engi-
neers who understand this motivation can be more effective in tailoring their
technical efforts.
1.1.3 Engineering Services
Engineers deliver a wide variety of products and services. They design, build, and/or
operate a wide variety of products and services through low-cost, best value, or sole
source bidding. They use existing scientific principles to create outcomes that meet
stakeholder needs. One of the core needs of most stakeholders is low-cost design that
meets stated requirements.
Numerous design processes can be found in the literature, and all consist of iden-
tifying the problem and stakeholder requirements, brainstorming ideas, generating
solutions, building a model or prototype, developing selection criteria and choosing
the best alternative, and collecting feedback from the customer.
Design-build is a method of project delivery in which a single firm (the
designer-builder) is contracted to provide a finished product. Operations lumped
with design-build for product realization lead to estimates for total life cycle costs
(LCCs) or total ownership costs (TOC) and have become popular because one con-
tractor assumes all the risk. The term whole life costing (WLC) is also used in the
construction industry. The LCC implications of providing for all types of project
delivery (i.e., any combination of design, build, and/or operation) are important
and complex, requiring engineers to be part of a team of lawyers, accountants,
bankers, and others.
1.1.4 Product and Process Realization

Product and/or process realization is most often defined as the work or efforts that
an organization performs to develop, manufacture, and deliver the finished goods or
services that effectively and efficiently meet stakeholder requirements. Figure 1.3
shows the various factors that can contribute to an on-time and on-budget project or
one with schedule and cost overruns.
FIGURE 1.3 Challenges cost estimators typically face. (Modified from Government
Accounting Office, 2009.)
1.2 ENGINEERING CHALLENGES FOR THE 21ST CENTURY

Engineers are trained to innovate, design, and produce products. Our formal educa-
tion system focuses primarily on the skills needed for product realization.
According to the Institute of Electrical and Electronics Engineers (2011), about
one-third of all masters of business administration candidates are engineers. Many
will argue that there is too much content in undergraduate programs and that engi-
neering degrees must follow the path of other professional programs, such as law,
architecture, and medicine. However, we see the exact opposite trend driven by ris-
ing costs and the student loan debt crisis. Many states are mandating that the number
of credit hours be capped at 120 in order to minimize costs.
Engineering has traditionally been defined as “the creative application of scien-
tific principles to design or develop structures, machines, apparatus, or manufactur-
ing processes, or works utilizing them singly or in combination; or to construct or
operate the same with full cognizance of their design; or to forecast their behavior
under specific operating conditions; all as respects an intended function, econom-
ics of operation or safety to life and property” (Engineers’ Council for Professional
Development, 1947). The National Academy of Engineering (2008) states, “No pro-
fession unleashes the spirit of innovation like engineering. From research to real-world
applications, engineers constantly discover how to improve our lives by creating bold
new solutions that connect science to life in unexpected, forward-thinking ways.
Few professions turn so many ideas into so many realities. Few have such a direct
and positive effect on people’s everyday lives. We are counting on engineers and
their imaginations to help us meet the needs of the 21st century.” Another definition
often quoted about engineering comes from the Quality Assurance Agency (2015)
in the United Kingdom and states that the context of “engineering is concerned with
developing, providing and maintaining infrastructure, products, processes and ser-
vices for society. Engineering addresses the complete life cycle of a product, process
or service, from conception, through design and manufacture, to decommissioning
FIGURE 1.4 Generic life cycle model with business process and engineering.
and disposal, within the constraints imposed by economic, legal, social, cultural and
environmental consideration.” Figure 1.4 shows one generic life cycle model and the
role of engineers throughout the life cycle.
The core function of the engineering profession is to develop solutions. Solutions
are what systems engineers produce to solve a specific problem or to help close a per-
formance gap. From a user perspective, these gaps are either known (e.g., the need to
bring fresh water to a community) or unknown (e.g., the need to listen to on-demand,
tailored music, anytime and almost anywhere via a smart device). The National
Academy of Engineering (NAE) determined the top 20 engineering achievements of
the 21st century, listed in Table 1.1, which offer solutions to make life easier, to connect
people, and to explore. As we move forward, the National Academy of Engineering
(2000) has also defined the next set of engineering challenges to be solved. In develop-
ing solutions to these challenges, the engineering organization and the engineer must
make decisions about how to use resources and which path is the best to solve the chal-
lenge. Note that all of these are as relevant now as they were in 2000.
To help connect the need or requirement to the solution, the engineer must be able
to provide credible answers to a set of questions:
• How strategic is this solution? How important is it for us to solve this

challenge?
• How well are we providing a solution? How does this solution solve the
challenge?
• How well can we deliver?
• Will we make money?
• Can we win?
TABLE 1.1
Engineering Achievements and Challenges
Top 20 Engineering Achievements (NAE, 2000) Grand Challenges
• Electrification • Make Solar Energy Affordable
• Automobile • Provide Energy from Fusion
• Airplane • Develop Carbon Sequestration Methods
• Water Supply and Distribution • Manage the Nitrogen Cycle
• Electronics • Provide Access to Clean Water
• Radio and Television • Restore and Improve Urban Infrastructure
• Agricultural Mechanization • Advance Health Informatics
• Computers • Engineer Better Medicines
• Telephone • Reverse-engineer the Brain
• Air Conditioning and Refrigeration • Prevent Nuclear Terror
• Highways • Secure Cyberspace
• Spacecraft • Enhance Virtual Reality
• Internet • Advance Personalized Learning
• Imaging • Engineer the Tools for Scientific Discovery
• Household Appliances
• Health Technologies
• Petroleum and Petrochemical Technologies
• Laser and Fiber Optics
• Nuclear Technologies
• High-Performance Materials
Answering these questions ensures that the solution will be profitable and able to
make a difference. The focus of this text is on the fourth question, “Will we make
money?”, which in many ways drives the other questions.
In today’s global business environment, engineers integrate hardware, software,
people, processes, and interfaces to produce economically viable and innovative
products and services while ensuring that all pieces of the enterprise work together.
The engineer’s real challenge is to make all the pieces work together to solve the real
problems of the enterprise using cost-effective solutions.
The notion of cost-effective solutions has been gaining increasing scrutiny in
engineering projects due to traditional industries that have seen competition erode
historical profit margins and government agencies whose budgets have been con-
strained or have come under scrutiny. A recent example of this is the successful
landing of a series of rovers on Mars. The four vehicles employed in interplanetary
space exploration have been heralded almost as much for their cost-effectiveness as
for the technical engineering involved in designing them. Indeed, on NASA’s web-
site (see NASA, 2017), the first of the four rovers is described as “a demonstration
of the technology necessary to deliver a lander and free-ranging robotic rover to the
surface in a cost-effective and efficient manner.” The implication of this statement
is that the rover would be thought of as a failure if its design was not cost-effective
and efficient. It is becoming ever more important that engineers understand the cost
implications of their designs and decisions in order to continue to fulfill their roles.
Note that in all the definitions of engineering discussed above, there exists an
economic element. This element has grown in importance over time; notice that cost
is not predominant in the first definition by the Engineers’ Council for Professional
Development but is clearly elaborated in more recent definitions, such as the one
from the Quality Assurance Agency. Financial and business issues will continue to
do more than directly affect technical work done each day; more than ever, they will
also affect the careers of engineers. Also, technical employees who contribute to the
resolution of business issues are considered more valuable and have faster career pro-
gressions. Most engineers transition from technical to business jobs as their career
develops, including starting a business or leading firms in managerial roles.
As the process of globalization continues, leading to improved standards of liv-
ing and increased demand for goods and services provided by engineers, it is critical
that technical employees understand the economic considerations of design at every
stage of their careers. However, there is a disconnect with the current engineering
education curriculum and this important consideration of cost. Few of the traditional
engineering programs, such as mechanical, chemical, civil, and electrical, require
any form of finance or an introductory course in engineering economics. Most meet
the need/requirements for economic analysis with a module as part of a senior design
class. Many graduates are surprised at how important and pervasive cost and eco-
nomics are throughout an engineer’s career in any domain and how much empha-
sis is placed on these considerations in the “real world.” As shown in Figure 1.5,
engineering at all levels involves financial aspects. This book seeks to provide the
engineer with a guidebook for understanding how to incorporate the challenges of
economic considerations at each of these levels.
Each of these distinct levels (see Figure 1.5) brings its own challenges and unique
approaches to addressing them, ranging from traditional engineering economics to
advanced cost analysis. While this text is not intended to be comprehensive, it will
provide engineers with a set of tools to handle cost and economic issues related to
each respective stage in their career.
Given the increasing complexity of the current environment, engineers must pro-
vide innovative products and services. In general, engineers perform a wide variety
of services, including (modified from Pavarini, 2007)
• design and delivery of technology-based products, including research and

development,
• product integration (hardware, software, human factors, etc.),
• corporate information technology (infrastructure and/or applications),
• sales engineering (technical sales and pre-sales support),
• customer technical support (post-sales support),
• technical consulting,
• marketing and/or product management of technology-based products,
• sales,
• education and training,
• logistics or support operations,
• business or management consulting,
• financial analysis and consulting,
FIGURE 1.5 Trends and challenges for engineers and the associated financial aspects.
• leading technology-based companies/divisions and hopefully, and

• founding high-tech businesses.
Cost estimating and management operates across all these business areas and
environmental considerations. More than ever, engineers must consider the finan-
cial aspects of the services they provide. As the success and failure of engineering
projects is closely tied to economic factors, it is critical for engineers to understand
how their decisions affect outcomes. The following material presents methods, tech-
niques, and lessons learned and can serve as a reference book or textbook for any
technical career field.
1.3 INTRODUCTION TO SYSTEMS LIFE CYCLE COSTING

In today’s global business environment, engineers, information technology profes-
sionals and practitioners, and other related product development professionals inte-
grate hardware, software, people, and interfaces to produce economically viable and
innovative applications while ensuring that all pieces of the enterprise work together.
No product or service is immune from cost, performance, schedule, quality, and
risks and trade-offs. Yet engineers spend most of their formal education focused on
performance and most of their professional careers worrying about resources and
schedules. Too often we become fixated on the technical performance required to
meet the customer’s expectations without worrying about the downstream costs that
contribute to the total LCC of a system. Unfortunately, in many cases the LCC or
TOC are ignored because either the total costs would make the project untenable
(especially for large government projects) or the increased acquisition costs needed
to reduce the LCC would make the project unacceptable.
We have an extensive array of economic techniques and tools at our disposal
to predict and monitor costs and schedules, yet overruns are commonplace, espe-
cially for software-enabled systems. We do not understand either the technical or
non-technical aspects of LCC and the associated risks. The technical domain of the
engineer continues to grow in complexity through the requirements of more com-
plex products. This growth also increases the considerations of cost and finances on
their products. Figure 1.6 shows some of the external and internal factors that we
must tackle in conducting cost analysis and then must address when managing the
program in the most effective manner.
Engineering has changed dramatically in our technology-driven global economy.
Beyond technical excellence, understanding the economics or business aspects of
modern engineering is key to success. In a profession where network-centric sys-
tems of systems are commonplace, engineers must be involved in all aspects of new
FIGURE 1.6 Some of the factors that can affect the cost of a system. (Modified from
Stevens Institute of Technology, 2008.)
product development. Accounting, project management, leadership, and marketing

are just some of the necessary skills we need to succeed in the workforce. It is
against this backdrop that this book was written to serve as a collection of methods,
processes, and tools (MPTs) and terminology needed to understand the business
aspects of modern engineering.
We divided this book into three broad groupings: analysis, estimation, and man-
agement. Under analysis, we present techniques such as engineering economics and
simulation-based costing focusing on total life cycle understanding and perspec-
tive. This analysis section is titled “The Mathematics of Engineering Economy” and
includes Chapters 2 to 5; it presents techniques for detailed analysis that are relevant
for modern complex systems. Under estimation, which we titled “Cost Estimation of
Complex Systems,” Chapters 6 to 11 present a discussion of complex systems, soft-
ware, cloud and big data, and estimating techniques. We also discuss the role of risk
and value in decision making. Lastly, we grouped management techniques, which
we titled “Cost Management”; Chapters 12 to 14 discuss commercial off-the-shelf
systems, the role of project management in LCC management, and the use of metrics
and ratios in cost management.
1.3.1 Systems Life Cycle Costing

LCCs are all the anticipated costs associated with a project or program throughout
its life. LCC is the sum total of the direct, indirect, recurring, non-recurring, and
other related costs incurred, or estimated to be incurred, in the design, research and
development, investment, operations, maintenance, retirement, and any other support
of a product over its life cycle (i.e., its anticipated useful lifespan). All relevant costs
should be included regardless of funding source, business unit, management control,
and so on. LCC is important for systems because the acquisition is a small part in
relation to the true cost or TOC associated with owning and operating the systems.
There are four generally accepted methods for determining LCC:
• Engineering cost methods: direct estimation at the component level leading

to a detailed engineering build of the system.
• Cost accounting: modern cost management systems to track and allocate
expenses.
• Analogy: an estimate using historical results from similar products or
components.
• Parametric: based on mathematical relationships between costs and some
product- and process-related parameters.
Any combination of these four can be used to develop TOCs.

Analogy and parametric cost estimates (PCEs) are considered top-down estimat-
ing techniques by which the costs are estimated by looking at the project based on
the customer’s requirements. Engineering costs (or detailed engineering builds) and
accounting techniques are bottom-up methods and refer to estimating and tracking
costs by breaking the project down into elements using work breakdown structure
and physical and functional architectures.
FIGURE 1.7 Costs incurred and committed during our systems life cycle acquisition pro-
cess. (Modified from Andrews, 2003.)
Figure 1.7 presents a standard new product development process. This figure shows
how costs are committed and incurred as a function of phases in our LCC model.
Modern products can have life cycles that range from several years to decades long. One
of the main challenges that engineers encounter is that early in the product development
phases cost considerations are often ignored or downplayed in favor of performance
factors. However, it is during these early phases that decisions have the largest impact
on the LCC of a project. This tendency can lead to downstream cost overruns and poten-
tially project failure. It is an engineer’s responsibility to ensure that design factors pre-
sented early in the life cycle before costs are realized include financial considerations.
Table 1.2 contains a mapping of our life cycle model, milestones, and some vari-
ous cost estimation activities that occur throughout the life cycle. The list is by no
means all-encompassing and different organizations, systems, etc., all used differ-
ent terminology. The table is meant to show how that the cost estimation activity is
continually evolving and changing in order to meet various milestones. Also, as you
proceed through the life cycle the costing fidelity must increase. For example, the
“Updated Systems Development Cost” activity will evolve with more details as we
become more knowledgeable on the design of the system.
In its simplest form, LCC is composed of initial and future expenses. However,
clearly defining initial costs can be a challenge. For example, take a typical new prod-
uct development process as shown in Figure 1.7; how do we allocate investments to the
industrial base for major projects? What about spare parts? Should they be categorized
as production or operations and support? Very quickly you become mired in determin-
ing how and when to allocate expenses. Figure 1.7 also shows the standard LCC termi-
nology and model we adopted for this text and how costs are committed and incurred
as a function of phases in our LCC model. We will discuss this figure throughout the
text because of its importance in illustrating how programs and funds are committed
early in a program and what and when various techniques should be used.
TABLE 1.2
Life Cycle Model and Associated Cost Estimation Activities
(Modified from Papke and Wang, 2018)
Customer-Driven Associated Cost Estimation
Life Cycle Phases Milestone Activity
Conceptual exploration Request for information Feasibility analysis
Analysis of alternatives Cost effectiveness analysis
Competitive assessment Should cost
Draft request for proposal Initial cost baseline
Final request for proposal Updated cost baseline
Proposal Proposal cost baseline
Component advanced Contract award Proposal cost baseline
development
Systems requirements review Systems development costs
Preliminary design review Updated systems development costs
Systems integration/ Critical design review Updated systems development costs
preliminary design
Systems demonstration, Test readiness review Updated systems development costs
test, and evaluation
Systems acceptance review Updated systems development costs
Production Production readiness review Updated systems development costs
Operations, support, Operational readiness review Updated systems development costs
and disposal
The MPTs and terminology presented are important in that they can be used to
• estimate the TOC to the various stakeholders;

• reduce and capture TOC through using LCC trade-offs in the systems engi-
neering and product development processes;
• control cost through using LCC contractual provisions in procurements; and
• assist in day-to-day acquisition management actions by providing timely,
consistent, and relevant cost information.
1.4 COST ANALYSIS, ESTIMATION, AND MANAGEMENT

1.4.1 Cost Analysis
All engineers make trade-offs in the four domains shown in Figure 1.8. Good engi-
neers follow a disciplined and structured approach when developing a product or ser-
vice. Costing hardware, software, and integration requires an understanding of many
MPTs and terminology that few engineers have received formal training in. Once
technical characteristics have been ascertained from the requirements, selecting the
right MPTs is critical to accurately determining costs early in the development cycle
and estimating realistic LCC.
FIGURE 1.8 Domains in which engineers make trade-offs for any project.
Because of the complexity and the rapid pace of technology evolution, the costing
of complex systems has become a tremendous challenge. We understand how to cost
hardware and to a lesser extent software; however, we are still developing tools and
processes for costing the integration of complex systems. As we scale to larger and
more complex systems, systems of systems, and enterprises, our ability to determine
costs becomes less relevant and reliable.
1.4.2 Cost Estimation

Cost estimation techniques can be divided into three categories: PCEs, analogies,
and detailed engineering builds. Figure 1.9 shows their applicability throughout the
life cycle as well as how this course is organized. We will discuss PCEs, analogies,
and engineering builds in the conduct of life cycle analysis. Engineering economy
and simulation-based costing are critical tools needed to conduct any type of mean-
ingful LCC. As stated, we do not discuss accounting, but like the other tools, this is
FIGURE 1.9 Cost estimation techniques throughout the life cycle. (Modified from NASA, 2015.)
an important technique for ascertaining costs. However, capturing expenses in a for-

mal manner is certainly the best way to ascertain costs. Obviously, developing true
costing amounts and using good cost management require good accounting practices
and the tracking of expenses using activity-based costing techniques.
1.4.2.1 Parametric Cost Estimation

PCEs are usually based on mathematical equations or models. Simple mathematical
relationships, such as linear and non-linear regression, are mainly used. Often, they are
based on historical data from similar projects. Tools such as Microsoft Excel can easily
be used to fit these relationships. The biggest challenge is determining the relationships
between the dependent and independent variables and their range of usefulness.
1.4.2.2 Analogy Cost Estimating Methodology

Analogy estimates are performed on the basis of comparison and extrapolation using
like items or efforts. In many instances, this can be accomplished using simple rela-
tionships or equations representative of detailed engineering builds of past projects.
Obviously, this is the preferred means to conduct a cost estimate based on past pro-
grams that are technically representative of the program to be estimated. Cost data
is then subjectively adjusted upward or downward depending on whether the subject
system is felt to be more or less complex than the analogous program (NASA, 2015).
1.4.2.3 Engineering Build-Up Methodology

Sometimes referred to as “bottom-up” estimating, the engineering build-up method-
ology rolls up individual estimates for each element, item, and component into the
overall cost estimate. This can be accomplished at the work breakdown structure
element level or at the component level. In this costing methodology, the cost of a
work breakdown structure element is computed by estimating at the lowest level of
detail and computing quantities and effort levels to determine the total system cost.
Obviously, this is the most accurate means to develop a cost estimate. The chal-
lenge is that early in the systems development a bottom-up approach cannot be used
because the systems haven’t been fully designed. Ideally, you would like to take
bottom-up estimates and scale them based on experience.
The techniques used in estimating software (we chose to treat software separately
from systems) are much more mature than systems. At best, the tools commonly
used are estimates and analogies and have little mathematical basis. Whether purely
a service-centric or a physical system, most products now have a significant soft-
ware element. The methodology for estimating software has been around for over
30 years and can be classed as a PCE tool. However, because of new languages,
hardware and software integration challenges, computer-aided software tools, and so
on, techniques and algorithms must be continually updated. Software estimating is
still dominated by experience supplemented with quantitative techniques.
1.4.3 Cost Management

Engineering cost management can be defined as the process of identifying, allo-
cating, and tracking the resources needed to meet the stakeholder’s requirements.
An integrated, process-centered, documented process backed with quantifiable data

provides real and tangible benefits to all stakeholders. Engineering cost manage-
ment can best be described as an integrated, process-centered, measurable, and dis-
ciplined approach to LCC and management to make the trade-offs between cost,
performance, schedule, and risk. Good cost management practices, supported by
sound analysis, can lead to (modified from NASA, 2015)
• complete, unambiguous, and documented functional requirements in order

to meet LCC goals;
• bounded and clearly defined product functional expectations and accep-
tance criteria, understood and agreed to by all stakeholders;
• more accurate, credible, and defensible scope, cost, and schedule estimates
with realistic assessments of risk;
• more complete and timely risk identification, leading to more effective risk
mitigation;
• a basis for properly quantifying, evaluating, and controlling the acceptance
and timing of changes to requirements (i.e., precluding “scope creep”);
• final products that deliver better reliability, adaptability, usability, perfor-
mance, maintainability, supportability, and functionality—in short, higher
quality and value;
• insight into near-, mid-, and long-term technology, design, infrastructure,
and operational investment needs as they relate to different effects on the
phases and trade-offs within the life cycle;
• earlier and more consistent visibility of problems (fewer surprises);
• an understanding of the costs for each step in the development process;
• more efficient project management; and
• Organizational credibility and reputation.
Engineers play a critical role in corporate or business planning. Engineers are

involved in cost management from top-level corporate planning to costing compo-
nents and subsystems. All require the same basic understanding of the time value of
money, risk, and life cycle perspective.
Engineering cost management is employed as a means of balancing a project’s
scope and expectations of risk, quality, and technical performance to ensure that the
most cost-effective solution is delivered; it consists of three steps:
1. Define the requirements, level of quality desired, and the budget.

2. Ensure that the domains of performance, cost, schedule, and risk/quality
are aligned with the budget.
3. Monitor and manage the balance of these four domains throughout the life
of the project by using sound engineering techniques.
The ability to use analysis techniques such as those discussed in this chap-
ter allows an engineer to conduct defensible analysis that can not only provide
true ownership costs but can also allow for conducting meaningful trade-off
analysis.
1.5 SUMMARY
Because of technology, globalization, and complexity most engineers have become prod-
uct development professionals integrating hardware, software, people, and interfaces to
meet the stakeholder’s requirements. Few products or services are immune from cost,
performance, schedule, quality, and risk and trade-off considerations, and all must address
environmental, sociological, and political concerns. Unfortunately, engineers spend much
of their formal education focused on technical performance and most of their professional
careers focused on communication, resources, and schedules. Too often we become fix-
ated on the technical performance required to meet the customer’s requirements without
worrying about the downstream costs. In essence we ignore the problem because funding
the operations and maintenance, disposal, etc., becomes someone else’s problem.
One of the unintended consequences of globalization has been the outsourcing of
core competencies. In essence, many engineers and companies have become mar-
keters, packagers, and integrators of technology. More so than for companies with
a strong core technology as their product, engineers in the global economy must
understand costs as a business driver.
In order to be successful, we must understand the role of finances in every aspect
of our daily job. This needs to be taught at the undergraduate level. As they enter the
job market, engineers must understand at least some of the financial aspects of engi-
neering business operations and considerations that can affect product realization.
In our global service-sector economy, engineers now serve as key systems inte-
grators, enablers, and managers of people, technology, and processes to produce
economically viable and innovative products and services. Engineers, and not just
technical experts, must play a key role in all phases of new product development.
Most importantly, we must understand how to perform good cost analysis, estima-
tion, and management as well as their limitations.
Too often, performance (features and functionality) is used as the entire measure
of system effectiveness. As shown in Figure 1.10, there must be consideration given
to LCC. The broader point is that often in designing systems, we focus most of our
attention on the functions to be provided, the operational requirements, but only
when we take LCC into account do we have operational effectiveness.
FIGURE 1.10 Components of operational effectiveness. (Modified from Stevens Institute

of Technology, 2008.)
REFERENCES
Andrews, Richard, 2003, An Overview of Acquisition Logistics, Defense Acquisition
University, Fort Belvoir, VA, Course Notes, 2007.
Engineers’ Council for Professional Development, 1947, “Canons of Ethics for Engineers.”
Government Accounting Office, March 2008, “2008 Defense Acquisitions, Assessments of
Selected Weapon Programs,” GAO-08-467SP.
Government Accounting Office, March 2009, “Cost Estimating and Assessment Guide Best
Practices for Developing and Managing Capital Program Costs,” GAO-09-3SP.
Institute of Electrical and Electronics Engineers, February 2011, “Engineers and Business
School—A Match Made in Heaven,” accessed 1 April 2013 at http://spectrum.ieee.org/
at-work/education/engineers-and-business-schoola-match-made-in-heaven
NASA, 2015, “Cost Estimating Handbook,” accessed 1 August 2018 at https://www.nasa.gov/
pdf/263676main_2008-NASA-Cost-Handbook-FINAL_v6.pdf
NASA, 2017, “Mars Pathfinder Overview,” accessed 10 April 2018 at https://www.nasa.gov/
mission_pages/pathfinder/overview
National Academy of Engineering, 2000, “Grand Achievements and Grand Challenges,” accessed
15 June 2022 at https://www.nae.edu/7461/GreatAchievementsandGrandChallenges,
1 September 2000.
National Academy of Engineering, 2008, “Changing the Conversation: Messages for
Improving Public Understanding of Engineering,” National Academies Press,
Washington, DC.
Papke, B., and Wang, G., “Integration of Parametric Cost Estimation with System Architecture
– It’s a dirty job but someone has to do it!” 28th annual INCOSE International
Symposium, 7–12 July 2018, Washington, DC.
Pavarini, Carl, 2007, “Entrepreneurship and Business for Engineers and Scientists,” Stevens
Institute of Technology, Class TG 401.
Quality Assurance Agency, 2015, “QAA Subject Benchmark Statement for Engineering,”
accessed 1 August 2018 at http://www.qaa.ac.uk/docs/qaa/subject-benchmark-state-
ments/sbs-engineering-15-masters.pdf?sfvrsn=fb91f681_16
Stevens Institute of Technology, 2008, “SYS 625 Fundamentals of Systems Engineering
Class Notes.”
Zhao, Y., 2013. Why 787 slips were inevitable. Rutgers University, New York.
QUESTIONS
1.1 Your subcontractor company has teamed with a large defense contractor (LDC)
and has been awarded the new Super Fighter—the largest procurement contract
in defense history. List three areas for each of the following stakeholders that
should be your primary focus when monitoring, billing, and paying your sup-
pliers/subcontractors for the Super Fighter contract:
• Program manager for the LDC
• Program manager for your subcontractor company
• LDC corporate headquarters
• Defense sponsoring agency
• Legislative body
1.2 When we buy cars, homes, major appliances, and so on, we are mainly focused
on the upfront costs (mainly purchase price) and seldom assess LCCs of a
major investment. Unfortunately, our decisions are often driven solely by per-
formance. From your own buying experience, write down your thought process
for buying a new car and weigh the major components of your decision (upfront
costs, trade-in value, gas mileage, looks, accessories, etc.). List and assign
weights (must add up to 100%) to each component of upfront and recurring
costs.
1.3 One of the key challenges for buyers is that we fixate on development costs with
little or no regard to downstream LCC costs. Briefly explain why you think
this occurs. Is this more of a problem for large government programs than for
private projects?
1.4 Firm-fixed price (FFP) contracts provide a pre-established price, which places
more risk and responsibility for costs and resulting profit or loss on the con-
tractor and provides more incentive for efficient and economical performance
(modified from Government Accounting Office, 2008). Our everyday life is
governed by FFP contracts (home construction, car maintenance, etc.), yet few
large contracts are FFP. What cultural obstacles must be overcome to institu-
tionalize FFP contracts for government?
1.5 What are the grand challenges of the next 10 years for engineers? What are the
common characteristics of these problems?
1.6 What is the difference between interdisciplinary and multidisciplinary
problems?
1.7 Let’s assume that the role of engineering-centric business is to provide cus-
tomers with a better price or better value proposition than competitors while
operating the business to attain targeted profits. What are the exceptions? How
would you restate this for government?
1.8 Engineers make trade-offs in design in risk, schedule, cost, and performance.
For product realization are these industries specific? For example, NASA might
be driven by being risk averse.
1.9 What business is Stryker in? What types of engineers do they employ, and what
are their primary job functions? Who are their customers? What is Stryker’s
current financial status or performance? Would you buy their stock? Why or
why not?
1.10 The Boeing Company Dreamliner (787) is a long-range jet airliner that was
developed by Boeing for the intended purpose of servicing commercial airline
customers. The airplane is the first to employ a lightweight composite mate-
rial for structural components and as such realizes a significant fuel savings
for its operators. However, the delivery of the first airplane was initially slated
for 2008 but due to several project delays the first in-service flight did not take
place until 2011. The airplane also suffered from numerous technical problems
in the years following its initial service. All these technical problems and delays
led to dramatic cost overruns from initial estimates (see Zhao, 2012). Research
public sources and describe the cost problems of the Dreamliner. Discuss the
systems that could have been put in place to prevent these problems.
Another random document with
no related content on Scribd:
of which was the
sinking of the Sea Hawk.
3. BOB DEXTER AND THE STORM MOUNTAIN
MYSTERY or The Secret of the Log Cabin
Bob Dexter came upon a man mysteriously injured and
befriended him,
which led Bob into the midst of a series of strange events.
4. BOB DEXTER AND THE AEROPLANE MYSTERY or
The Secret of the Jint San
Bob and his chums witness the mysterious disappearance
of an aeroplane
and find excitement in their exploration of an unknown
cave.
5. BOB DEXTER AND THE SEAPLANE MYSTERY or
The Secret of the White Stones
Bob Dexter, while on a vacation, captures a band of
criminals, and solves
a mystery in which millions of dollars in gems and jewelry
had been stolen.
6. BOB DEXTER AND THE RED AUTO MYSTERY or The
Secret of the Flying Car
A story of a mysterious red auto is packed with many hair-
raising adventures.
Bob comes to the rescue and captures the criminals.
7. BOB DEXTER AND THE RADIO MYSTERY or The
Secret of the Counterfeiters
When Bob and his chums resolve to clear up a baffling
mystery they do
it with many narrow escapes.
These books may be purchased wherever books are sold

Send for Our Free Illustrated Catalogue
CUPPLES & LEON COMPANY, Publishers
New York
THE GREAT ACE SERIES
By NOËL SAINSBURY, JR.
Author of The Champion Sport Stories
12mo. Cloth. Illustrated. Jacket in colors.
Price 50 cents per volume. Postage 10 cents additional.
Here is a series of rattling good
flying stories told by an expert. A
boy-aviator’s adventures in the
wilds of New Guinea, Arabia,
South America and other strange
lands. Billy Smith, son of an
eminent explorer, learns to pilot a
seaplane aboard a Naval Air
Station, and immediately fares
forth upon a series of the most
exciting cruises and mysterious
quests by air, by land and by sea
that have ever fallen to the lot of
man. The author, a traveller and
ex-naval aviator, brings many of his own adventures into
these tales. Every boy with a drop of red blood in his veins
will want to join Billy Smith in his thrilling quests.
1. BILLY SMITH—EXPLORING ACE

or By Airplane to New Guinea
The story of a fourteen-year-old lad, taught to pilot a
seaplane by his
uncle, Lieut.-Commander on a Naval Air Station. Together
they are forced
down at sea, and Lieut.-Com. Smith is so impressed with
the lad’s courage
in this trying situation that he takes Billy with him to New
Guinea to help
search for Billy’s father.
2. BILLY SMITH—SECRET SERVICE ACE
or Airplane Adventures in Arabia
Billy Smith again proves his mettle in a series of
adventures that take
him to Port Sudan on the Red Sea and the Holy City of
Hejaz.
3. BILLY SMITH—MYSTERY ACE
or Airplane Discoveries in South America
Doctor Stanton, bird man of the Natural History Museum
disappeared
in the Amazon Jungles. The Smiths, father and son are
ordered to find him,
and the trail leads to an outpost rubber plantation, where
Billy is lost in the
jungle and captured by the cannibal Mangeroma Indians.
4. BILLY SMITH—TRAIL EATER ACE
or Into the Wilds of Northern Alaska
Another exciting story. Billy Smith and his pal, Nuky, with
the aid
of Billy’s father set a trap to catch desperate gangsters
which they succeed
in doing after many thrilling adventures.
5. BILLY SMITH—SHANGHAIED ACE
or Malay Pirates and Solomon Island Cannibals
Billy shanghaied while on a search for a missing steamer
and one passenger
in particular, escapes in time to be of vast help, after all,
and bring
off a famous rescue in the South Sea Islands.
These books may be purchased wherever books are sold

Send for Our Free Illustrated Catalogue
CUPPLES & LEON COMPANY, Publishers

New York
TRANSCRIBER’S NOTES:
Obvious typographical errors have been corrected.
Inconsistencies in hyphenation have been
standardized.
Archaic or variant spelling has been retained.
*** END OF THE PROJECT GUTENBERG EBOOK BOMBA THE
JUNGLE BOY ON JAGUAR ISLAND ***
Updated editions will replace the previous one—the old editions

will be renamed.
Creating the works from print editions not protected by U.S.

copyright law means that no one owns a United States copyright
in these works, so the Foundation (and you!) can copy and
distribute it in the United States without permission and without
paying copyright royalties. Special rules, set forth in the General
Terms of Use part of this license, apply to copying and
distributing Project Gutenberg™ electronic works to protect the
PROJECT GUTENBERG™ concept and trademark. Project
Gutenberg is a registered trademark, and may not be used if
you charge for an eBook, except by following the terms of the
trademark license, including paying royalties for use of the
Project Gutenberg trademark. If you do not charge anything for
copies of this eBook, complying with the trademark license is
very easy. You may use this eBook for nearly any purpose such
as creation of derivative works, reports, performances and
research. Project Gutenberg eBooks may be modified and
printed and given away—you may do practically ANYTHING in
the United States with eBooks not protected by U.S. copyright
law. Redistribution is subject to the trademark license, especially
commercial redistribution.
START: FULL LICENSE

THE FULL PROJECT GUTENBERG LICENSE
PLEASE READ THIS BEFORE YOU DISTRIBUTE OR USE THIS WORK
To protect the Project Gutenberg™ mission of promoting the

free distribution of electronic works, by using or distributing this
work (or any other work associated in any way with the phrase
“Project Gutenberg”), you agree to comply with all the terms of
the Full Project Gutenberg™ License available with this file or
online at www.gutenberg.org/license.
Section 1. General Terms of Use and

Redistributing Project Gutenberg™
electronic works
1.A. By reading or using any part of this Project Gutenberg™
electronic work, you indicate that you have read, understand,
agree to and accept all the terms of this license and intellectual
property (trademark/copyright) agreement. If you do not agree to
abide by all the terms of this agreement, you must cease using
and return or destroy all copies of Project Gutenberg™
electronic works in your possession. If you paid a fee for
obtaining a copy of or access to a Project Gutenberg™
electronic work and you do not agree to be bound by the terms
of this agreement, you may obtain a refund from the person or
entity to whom you paid the fee as set forth in paragraph 1.E.8.
1.B. “Project Gutenberg” is a registered trademark. It may only

be used on or associated in any way with an electronic work by
people who agree to be bound by the terms of this agreement.
There are a few things that you can do with most Project
Gutenberg™ electronic works even without complying with the
full terms of this agreement. See paragraph 1.C below. There
are a lot of things you can do with Project Gutenberg™
electronic works if you follow the terms of this agreement and
help preserve free future access to Project Gutenberg™
electronic works. See paragraph 1.E below.
1.C. The Project Gutenberg Literary Archive Foundation (“the
Foundation” or PGLAF), owns a compilation copyright in the
collection of Project Gutenberg™ electronic works. Nearly all the
individual works in the collection are in the public domain in the
United States. If an individual work is unprotected by copyright
law in the United States and you are located in the United
States, we do not claim a right to prevent you from copying,
distributing, performing, displaying or creating derivative works
based on the work as long as all references to Project
Gutenberg are removed. Of course, we hope that you will
support the Project Gutenberg™ mission of promoting free
access to electronic works by freely sharing Project
Gutenberg™ works in compliance with the terms of this
agreement for keeping the Project Gutenberg™ name
associated with the work. You can easily comply with the terms
of this agreement by keeping this work in the same format with
its attached full Project Gutenberg™ License when you share it
without charge with others.
1.D. The copyright laws of the place where you are located also
govern what you can do with this work. Copyright laws in most
countries are in a constant state of change. If you are outside
the United States, check the laws of your country in addition to
the terms of this agreement before downloading, copying,
displaying, performing, distributing or creating derivative works
based on this work or any other Project Gutenberg™ work. The
Foundation makes no representations concerning the copyright
status of any work in any country other than the United States.
1.E. Unless you have removed all references to Project

Gutenberg:
1.E.1. The following sentence, with active links to, or other

immediate access to, the full Project Gutenberg™ License must
appear prominently whenever any copy of a Project
Gutenberg™ work (any work on which the phrase “Project
Gutenberg” appears, or with which the phrase “Project
Gutenberg” is associated) is accessed, displayed, performed,
viewed, copied or distributed:
This eBook is for the use of anyone anywhere in the United

States and most other parts of the world at no cost and with
almost no restrictions whatsoever. You may copy it, give it
away or re-use it under the terms of the Project Gutenberg
License included with this eBook or online at
www.gutenberg.org. If you are not located in the United
States, you will have to check the laws of the country where
you are located before using this eBook.
1.E.2. If an individual Project Gutenberg™ electronic work is

derived from texts not protected by U.S. copyright law (does not
contain a notice indicating that it is posted with permission of the
copyright holder), the work can be copied and distributed to
anyone in the United States without paying any fees or charges.
If you are redistributing or providing access to a work with the
phrase “Project Gutenberg” associated with or appearing on the
work, you must comply either with the requirements of
paragraphs 1.E.1 through 1.E.7 or obtain permission for the use
of the work and the Project Gutenberg™ trademark as set forth
in paragraphs 1.E.8 or 1.E.9.
1.E.3. If an individual Project Gutenberg™ electronic work is

posted with the permission of the copyright holder, your use and
distribution must comply with both paragraphs 1.E.1 through
1.E.7 and any additional terms imposed by the copyright holder.
Additional terms will be linked to the Project Gutenberg™
License for all works posted with the permission of the copyright
holder found at the beginning of this work.
1.E.4. Do not unlink or detach or remove the full Project

Gutenberg™ License terms from this work, or any files
containing a part of this work or any other work associated with
Project Gutenberg™.
1.E.5. Do not copy, display, perform, distribute or redistribute
this electronic work, or any part of this electronic work, without
prominently displaying the sentence set forth in paragraph 1.E.1
with active links or immediate access to the full terms of the
Project Gutenberg™ License.
1.E.6. You may convert to and distribute this work in any binary,
compressed, marked up, nonproprietary or proprietary form,
including any word processing or hypertext form. However, if
you provide access to or distribute copies of a Project
Gutenberg™ work in a format other than “Plain Vanilla ASCII” or
other format used in the official version posted on the official
Project Gutenberg™ website (www.gutenberg.org), you must, at
no additional cost, fee or expense to the user, provide a copy, a
means of exporting a copy, or a means of obtaining a copy upon
request, of the work in its original “Plain Vanilla ASCII” or other
form. Any alternate format must include the full Project
Gutenberg™ License as specified in paragraph 1.E.1.
1.E.7. Do not charge a fee for access to, viewing, displaying,

performing, copying or distributing any Project Gutenberg™
works unless you comply with paragraph 1.E.8 or 1.E.9.
1.E.8. You may charge a reasonable fee for copies of or

providing access to or distributing Project Gutenberg™
electronic works provided that:
• You pay a royalty fee of 20% of the gross profits you derive from
the use of Project Gutenberg™ works calculated using the
method you already use to calculate your applicable taxes. The
fee is owed to the owner of the Project Gutenberg™ trademark,
but he has agreed to donate royalties under this paragraph to
the Project Gutenberg Literary Archive Foundation. Royalty
payments must be paid within 60 days following each date on
which you prepare (or are legally required to prepare) your
periodic tax returns. Royalty payments should be clearly marked
as such and sent to the Project Gutenberg Literary Archive
Foundation at the address specified in Section 4, “Information
about donations to the Project Gutenberg Literary Archive
Foundation.”
• You provide a full refund of any money paid by a user who

notifies you in writing (or by e-mail) within 30 days of receipt that
s/he does not agree to the terms of the full Project Gutenberg™
License. You must require such a user to return or destroy all
copies of the works possessed in a physical medium and
discontinue all use of and all access to other copies of Project
Gutenberg™ works.
• You provide, in accordance with paragraph 1.F.3, a full refund of

any money paid for a work or a replacement copy, if a defect in
the electronic work is discovered and reported to you within 90
days of receipt of the work.
• You comply with all other terms of this agreement for free
distribution of Project Gutenberg™ works.
1.E.9. If you wish to charge a fee or distribute a Project

Gutenberg™ electronic work or group of works on different
terms than are set forth in this agreement, you must obtain
permission in writing from the Project Gutenberg Literary
Archive Foundation, the manager of the Project Gutenberg™
trademark. Contact the Foundation as set forth in Section 3
below.
1.F.
1.F.1. Project Gutenberg volunteers and employees expend

considerable effort to identify, do copyright research on,
transcribe and proofread works not protected by U.S. copyright
law in creating the Project Gutenberg™ collection. Despite
these efforts, Project Gutenberg™ electronic works, and the
medium on which they may be stored, may contain “Defects,”
such as, but not limited to, incomplete, inaccurate or corrupt
data, transcription errors, a copyright or other intellectual
property infringement, a defective or damaged disk or other
medium, a computer virus, or computer codes that damage or
cannot be read by your equipment.
1.F.2. LIMITED WARRANTY, DISCLAIMER OF DAMAGES -

Except for the “Right of Replacement or Refund” described in
paragraph 1.F.3, the Project Gutenberg Literary Archive
Foundation, the owner of the Project Gutenberg™ trademark,
and any other party distributing a Project Gutenberg™ electronic
work under this agreement, disclaim all liability to you for
damages, costs and expenses, including legal fees. YOU
AGREE THAT YOU HAVE NO REMEDIES FOR NEGLIGENCE,
STRICT LIABILITY, BREACH OF WARRANTY OR BREACH
OF CONTRACT EXCEPT THOSE PROVIDED IN PARAGRAPH
1.F.3. YOU AGREE THAT THE FOUNDATION, THE
TRADEMARK OWNER, AND ANY DISTRIBUTOR UNDER
THIS AGREEMENT WILL NOT BE LIABLE TO YOU FOR
ACTUAL, DIRECT, INDIRECT, CONSEQUENTIAL, PUNITIVE
OR INCIDENTAL DAMAGES EVEN IF YOU GIVE NOTICE OF
THE POSSIBILITY OF SUCH DAMAGE.
1.F.3. LIMITED RIGHT OF REPLACEMENT OR REFUND - If

you discover a defect in this electronic work within 90 days of
receiving it, you can receive a refund of the money (if any) you
paid for it by sending a written explanation to the person you
received the work from. If you received the work on a physical
medium, you must return the medium with your written
explanation. The person or entity that provided you with the
defective work may elect to provide a replacement copy in lieu
of a refund. If you received the work electronically, the person or
entity providing it to you may choose to give you a second
opportunity to receive the work electronically in lieu of a refund.
If the second copy is also defective, you may demand a refund
in writing without further opportunities to fix the problem.
1.F.4. Except for the limited right of replacement or refund set

forth in paragraph 1.F.3, this work is provided to you ‘AS-IS’,
WITH NO OTHER WARRANTIES OF ANY KIND, EXPRESS
OR IMPLIED, INCLUDING BUT NOT LIMITED TO
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
ANY PURPOSE.
1.F.5. Some states do not allow disclaimers of certain implied

warranties or the exclusion or limitation of certain types of
damages. If any disclaimer or limitation set forth in this
agreement violates the law of the state applicable to this
agreement, the agreement shall be interpreted to make the
maximum disclaimer or limitation permitted by the applicable
state law. The invalidity or unenforceability of any provision of
this agreement shall not void the remaining provisions.
1.F.6. INDEMNITY - You agree to indemnify and hold the

Foundation, the trademark owner, any agent or employee of the
Foundation, anyone providing copies of Project Gutenberg™
electronic works in accordance with this agreement, and any
volunteers associated with the production, promotion and
distribution of Project Gutenberg™ electronic works, harmless
from all liability, costs and expenses, including legal fees, that
arise directly or indirectly from any of the following which you do
or cause to occur: (a) distribution of this or any Project
Gutenberg™ work, (b) alteration, modification, or additions or
deletions to any Project Gutenberg™ work, and (c) any Defect
you cause.
Section 2. Information about the Mission of

Project Gutenberg™
Project Gutenberg™ is synonymous with the free distribution of
electronic works in formats readable by the widest variety of
computers including obsolete, old, middle-aged and new
computers. It exists because of the efforts of hundreds of
volunteers and donations from people in all walks of life.
Volunteers and financial support to provide volunteers with the

assistance they need are critical to reaching Project
Gutenberg™’s goals and ensuring that the Project Gutenberg™
collection will remain freely available for generations to come. In
2001, the Project Gutenberg Literary Archive Foundation was
created to provide a secure and permanent future for Project
Gutenberg™ and future generations. To learn more about the
Project Gutenberg Literary Archive Foundation and how your
efforts and donations can help, see Sections 3 and 4 and the
Foundation information page at www.gutenberg.org.
Section 3. Information about the Project

Gutenberg Literary Archive Foundation
The Project Gutenberg Literary Archive Foundation is a non-
profit 501(c)(3) educational corporation organized under the
laws of the state of Mississippi and granted tax exempt status by
the Internal Revenue Service. The Foundation’s EIN or federal
tax identification number is 64-6221541. Contributions to the
Project Gutenberg Literary Archive Foundation are tax
deductible to the full extent permitted by U.S. federal laws and
your state’s laws.
The Foundation’s business office is located at 809 North 1500

West, Salt Lake City, UT 84116, (801) 596-1887. Email contact
links and up to date contact information can be found at the
Foundation’s website and official page at
www.gutenberg.org/contact
Section 4. Information about Donations to

the Project Gutenberg Literary Archive
Foundation
Project Gutenberg™ depends upon and cannot survive without
widespread public support and donations to carry out its mission
of increasing the number of public domain and licensed works
that can be freely distributed in machine-readable form
accessible by the widest array of equipment including outdated
equipment. Many small donations ($1 to $5,000) are particularly
important to maintaining tax exempt status with the IRS.
The Foundation is committed to complying with the laws

regulating charities and charitable donations in all 50 states of
the United States. Compliance requirements are not uniform
and it takes a considerable effort, much paperwork and many
fees to meet and keep up with these requirements. We do not
solicit donations in locations where we have not received written
confirmation of compliance. To SEND DONATIONS or
determine the status of compliance for any particular state visit
www.gutenberg.org/donate.
While we cannot and do not solicit contributions from states

where we have not met the solicitation requirements, we know
of no prohibition against accepting unsolicited donations from
donors in such states who approach us with offers to donate.
International donations are gratefully accepted, but we cannot

make any statements concerning tax treatment of donations
received from outside the United States. U.S. laws alone swamp
our small staff.
Please check the Project Gutenberg web pages for current

donation methods and addresses. Donations are accepted in a
number of other ways including checks, online payments and
credit card donations. To donate, please visit:
www.gutenberg.org/donate.
Section 5. General Information About Project

Gutenberg™ electronic works
Professor Michael S. Hart was the originator of the Project
Gutenberg™ concept of a library of electronic works that could
be freely shared with anyone. For forty years, he produced and
distributed Project Gutenberg™ eBooks with only a loose
network of volunteer support.
Project Gutenberg™ eBooks are often created from several

printed editions, all of which are confirmed as not protected by
copyright in the U.S. unless a copyright notice is included. Thus,
we do not necessarily keep eBooks in compliance with any
particular paper edition.
Most people start at our website which has the main PG search
facility: www.gutenberg.org.
This website includes information about Project Gutenberg™,

including how to make donations to the Project Gutenberg
Literary Archive Foundation, how to help produce our new
eBooks, and how to subscribe to our email newsletter to hear
about new eBooks.

Engineering Economics of Life Cycle Cost Analysis 2Nd Edition John Vail Farr Full Chapter

Uploaded by

Copyright:

Available Formats

Engineering Economics of Life Cycle Cost Analysis 2Nd Edition John Vail Farr Full Chapter

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Engineering Economics of Life Cycle Cost Analysis 2Nd Edition John Vail Farr Full Chapter

Uploaded by

Copyright:

Available Formats

Engineering Economics of Life Cycle

Cost Analysis: 2nd Edition John Vail

BK-TandF-FARR_9781032184869-230017-FM.indd 1 17/05/23 11:54 AM

John Vail Farr

Second edition published 2023

and by CRC Press

CRC Press is an imprint of Taylor & Francis Group, LLC

© 2023 John Vail Farr and Isaac J. Faber

First edition published by CRC Press 2018

Library of Congress Cataloging‑in‑Publication Data

Names: Farr, John V., author. | Faber, Isaac, author.

ISBN: 978-1-032-18486-9 (hbk)

BK-TandF-FARR_9781032184869-230017-FM.indd 4 17/05/23 11:54 AM

SECTION 1 The Mathematics of Engineering Economy

Chapter 1 Overview of Systems Life Cycle Costing.............................................3

Chapter 2 The Science of Engineering Economics: Understanding the

2.4.3 The “Rule of 72”......................................................... 32

Chapter 3 Advanced Economic Analysis of Alternatives.................................... 65

Chapter 4 The Basic Theory of Interest............................................................... 87

Chapter 5 Simulation-Based Costing................................................................. 109

SECTION 2 Cost Estimation of Complex Systems

Chapter 6 Life Cycle Framework and Techniques............................................. 163

Chapter 7 Costing of Complex Systems............................................................ 187

Chapter 8 Software-Intensive Systems.............................................................. 201

Chapter 9 Cost Estimating Techniques.............................................................. 231

9.4 Detailed Engineering Builds.................................................. 243

Chapter 11 Costing the Cloud, Data, and Machine Learning............................. 275

SECTION 3 Cost Management

Chapter 12 Costing and Managing Off-the-Shelf Systems ................................ 297

12.4 Software Reuse....................................................................... 311

Chapter 13 Project Management’s Role in Life Cycle Costing........................... 321

Chapter 14 Use of Cost Metrics and Ratios......................................................... 341

Appendix A............................................................................................................ 367

DPG discrete process generator

O&S operations and support/sustainment

than simply understanding the mathematics of engineering economy. First and

Isaac J. Faber an active-duty officer in the

1.1 OVERVIEW OF ENGINEERING ECONOMIC ANALYSIS

• maintaining an agile, high-quality, and profitable business base of products

A company’s basic objective is to grow its earnings quickly and sustainably by

about producing engineers with a better understanding of cultures, communication

1.1.1 Business Operations

• market and customer analysis,

FIGURE 1.2 Competency model for costing.

• beating the competition,

These skills are as important to your success as developing cost-effective and

1.1.2 Customer Relationships

1.1.4 Product and Process Realization

1.2 ENGINEERING CHALLENGES FOR THE 21ST CENTURY

• How strategic is this solution? How important is it for us to solve this

• design and delivery of technology-based products, including research and

• leading technology-based companies/divisions and hopefully, and

1.3 INTRODUCTION TO SYSTEMS LIFE CYCLE COSTING

product development. Accounting, project management, leadership, and marketing

1.3.1 Systems Life Cycle Costing

• Engineering cost methods: direct estimation at the component level leading

Any combination of these four can be used to develop TOCs.

• estimate the TOC to the various stakeholders;

1.4 COST ANALYSIS, ESTIMATION, AND MANAGEMENT

SECTION 1 The Mathematics of Engineering Economy