Confidence Assessment of Military Airframe Cost Predictions

Past experience of cost overruns in weapon system acquisition programs has underscored the variation between cost estimates and actual expenses. This study analyzes the degree of confidence that can be placed in cost predictions for airframes from standard cost models. Each airframe cost observation is partitioned into six components based on phases of the development or production cycle, e.g., flight test costs and manufacturing labor wages. Confidence measures are then compared for alternative model forms and for the use of a single regression on total costs versus the aggregation of regressions on component costs. We develop statistical theory to test the independence of component models and to estimate predictive statistics for aggregated cost estimates. Component regression errors are found to be significantly correlated, thereby increasing the width of confidence intervals. To assume error independence for the sake of simplifying the confidence assessment is thus misleading.