Cost Estimation in Strategic Procurement Practices:Methodology and Applications in Indian Defense Sector

Abstract

Estimation of cost plays very important and significant role in strategic procurement decisions. Cost is defined as an amount be paid or given up to get something in business, whereas estimate described as to form an approximate judgement or opinion regarding the worth, amount, size, weight etc. The ability to generate reliable cost estimates of a project, product or service is very critical for a Company to meet and execute its business requirements. Without this ability, Company is at risk of experiencing missed deadlines and performance shortfalls. In case of overestimate scenarios, companies could lead to loss of future orders against competition. This paper provides comprehensive review of various costing methods and its underlined assumptions specifically for defense industry. The unique fundamental characteristic of this sector is that sales are always restricted to Governments and their armed forces. The selection criteria by government remain to be through competitive tender bidding and based on L1 (Lowest bidder) selection. It is important to choosing a right and appropriate cost model based on its size, complexity, timeline & development stage both during participating and life cycle management to meet business objectives. During this descriptive research, various interviews and interactions done with key decision makers of International Defense Industry. It is observed that, Standard regular products follow costing methods like Expert judgment, price to win, Top-Down and Bottom-up approach, whereas complex & large ones are estimated using statistical based Parametric, COSYMO (constructive System Engineering Cost Model), Analogy, Engineering and actual costing techniques. In new era of highly sophisticated weapon systems and radars technology developments, software's are another big-ticket item in defense industry, while doing life cycle cost estimation. An attempt has also been made to highlight challenges that are faced by organizations specially those entering to the defense sector for the first time in India. Non- availability of existing structure, local industrial base, product lines, engineering capabilities & technology makes cost estimation more challenging. This paper also come up with suggestions that can be used as high level reference guide while calibrating international cost data points for using in India.