Cost Risk and Uncertainty Analysis Flashcards

Which statistical technique is most commonly used in DoD cost risk analysis to model the probability distribution of a program's total cost?

Answer: Monte Carlo simulation

Monte Carlo simulation is the standard DoD method for propagating input uncertainties through a cost model to produce a probability distribution of total program cost.

In cost risk analysis, what does 'S-curve' represent?

Answer: Cumulative probability distribution of cost outcomes

An S-curve displays the cumulative probability that actual cost will fall at or below a given value, showing the full range of likely outcomes.

What is a 'point estimate' in the context of cost analysis?

Answer: A single deterministic value representing expected cost

A point estimate is a single value used to represent the expected cost without explicitly capturing uncertainty or range.

Which risk percentile does DoD policy typically require programs to budget to when using probabilistic cost estimates?

Answer: 80th percentile

DoD Instruction 5000.02 and related guidance direct programs to budget to the 80th percentile of the cost risk distribution to provide adequate funding confidence.

What is the primary purpose of a sensitivity analysis in cost estimating?

Answer: To identify which input variables have the greatest impact on total cost

Sensitivity analysis reveals which cost drivers, when varied, produce the largest swings in the total estimate, guiding where risk mitigation effort should focus.

What does 'correlation' between cost elements mean in a Monte Carlo cost risk model?

Answer: When risks in different elements tend to occur together, driving costs up simultaneously

Positive correlation means that if one cost element runs over, related elements are likely to run over as well, which increases overall cost risk and widens the distribution.