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Combining Labour Market Economic Modelling with Traditional Cost Estimation

Mr Iain BainAndrew Nicholls

KPMG

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Traditional Approach

• Labour/Effort

• Cost

• Schedule

• Generic Indexation

• Risks

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Labour/Effort - Replacement Submarine Design Effort

Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029Draftsmen Electrical Design 6 12 16 20 48 77 96 96 96 77 39 20 20 10 10Draftsmen Mechanical Design 6 8 12 20 31 39 58 58 58 39 20 12 12 12 12Draftsmen Piping Vent Design 6 10 10 20 31 39 67 86 86 67 39 18 18 12 12Draftsmen Structural Design 16 20 29 58 96 134 134 134 134 96 50 29 29 20 20Draftsmen Other Design 10 10 14 29 39 58 58 58 58 39 20 20 20 20 20Engineer Electrical 10 14 20 29 39 58 58 58 58 39 20 10 10 10 10Engineer Mechanical 8 10 10 20 29 39 39 39 29 20 10 6 6 6 6Engineer Fluids 4 10 10 20 29 39 39 39 29 20 10 6 6 6 6Engineer Naval Architecture/Structure and Arrangements 16 29 39 58 77 96 96 96 77 58 39 29 29 20 20Engineer Combat Systems 16 29 39 58 77 77 77 77 77 58 58 58 58 39 39Engineer Signature Analsysis 6 6 10 14 20 23 29 23 20 16 10 10 10 20 20Engineer Planning/Production 2 4 6 6 10 20 20 20 20 10 6 6 4 4 4Engineer Testing 2 4 6 6 10 10 10 10 10 6 4 4 6 10 10Engineer Management 6 10 16 20 20 20 20 20 20 16 16 10 10 6 6Engineer Engineering Support 6 10 16 20 39 39 39 39 39 20 20 10 10 10 10Engineer Other Engineering 6 10 16 20 29 39 58 58 58 39 29 29 39 48 58

Total   126 196 269 418 624 807 898 911 869 620 390 277 287 253 263

Source: Australia’s Submarine Design Capabilities and Capacities, RAND, 2011

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Price: Some Simplifying Assumptions

Experienced and highly trained workforce required

Using $100,000 p.a. as not unreasonable, but also for simplicity

Source: Australia’s Submarine Design Capabilities and Capacities, RAND, 2011

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Design Activity: Nominal or Out-turned Price

Over $1bn using standard approach

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Question:

We all understand potential cost risk for highly skilled workforce, but can these be quantified

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Bringing in Economic Modelling approach

• Intergrates labour market economic modelling into traditional cost estimation

• Provides more robust estimation of budget related to personnel by

• projecting the economy-wide skills gaps for required skills

• accounting for such skills gaps in individual occupations that are required by a specific project

. Has application for projects that may have significant demand for highly sort after skills within the economy.

.

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Methodology: A Step-by-Step

 

 

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KPMG and the KPMG logo are registered trademarks of KPMG International.

A practical application of our approach : Step 1 - apply labour market model to produce skills gaps for each ANZSCO occupation

1. Employment by industry(Macro CGE

model)

4. Labour force by

education (Education

Model)

Balancing Occupational Demand

& Supply

Balancing Occupational Demand

& Supply

3. Population

by age groups

(Demographic Model)

2. Employment

by occupation(Occupational Demand

Model)

5. Labour force by

occupation (Occupation

al Supply Model)

Labour Demand

Labour Supply

Model system control of inputs and outputs

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Model Output for each year

Industry 1. Industry 2 ...... ...... Industry 19 Industry 20Total

DemandTotal Supply Skills Gap

Occupation 1

Occupation 2

Occupation 3

.....

Occupation 40

.....

.....

.....

Occupation 473

Occupation 474

Total Employment

20 Industries: ANZSIC 1 Digit Classification

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Step 2 - Map each employment of interest based on major ANZSCO codes

Occupational projection of number of employment for a specific project

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Mapping Skill Sets to ANZSC codes

Note that ANZSCO codes also go to lower levels, but these have not been used in this example

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Step 3 - Identify potential pressure wages growth for each employment category

The index designed to capture wage pressure at the occupational, INDEX_OCCUPATIONAL, produces a rather different picture as opposed to the national index, INDEX_NATIONAL

.03

.04

.05

.06

.07

.08

.09

.10

15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

INDEX_NATIONALINDEX_OCCUPATIONAL

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Step 4 - Calculate final impact on cost estimate based on the occupational index

Accordingly, using our approach gives a different budgetary outcome over the lifespan of the project

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

COST_NATIONAL COST_OCCUPATIONAL

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Difference made by considering occupation specific wage pressure

-10,000,000

-5,000,000

0

5,000,000

10,000,000

15,000,000

20,000,000

15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

DIFFERENCE

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

DIFFERENCE_ACCUMULATIVE

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Issues dealing with sub-skills set

• analysing the concentration of technical skills in the occupations needed for the project

• a higher wage pressure results from higher concentrated sub-skills set in a occupation

(results a 10% increase in the occupational index)

0

40,000,000

80,000,000

120,000,000

160,000,000

200,000,000

15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

COST_NATIONALCOST_OCCUPATIONALCOST_OCCUPATIONAL1

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Issues dealing with sub-skills set

budget gap over time and accumulative budget gap

0

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

COST_NATIONAL_ACCUCOST_OCCUPATIONAL_ACCUCOST_OCCUPATIONAL1_ACCU

-8,000,000

-4,000,000

0

4,000,000

8,000,000

12,000,000

16,000,000

20,000,000

24,000,000

28,000,000

15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

DIFFERENCE DIFFERENCE1

0

40,000,000

80,000,000

120,000,000

160,000,000

200,000,000

15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

DIFFERENCE_ACCUMULATIVEDIFFERENCE_ACCUMULATIVE1

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Concluding Remarks

- Large complex projects significantly benefit from integration of economic and costing analysis.

-Labour Market risks can be quantified.

- Approach has broad application for Defence and Natural Resources industries

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KPMG and the KPMG logo are registered trademarks of KPMG International.

Questions