The present Department of the Navy Budget process does not appear to include a completely satisfactory method by which to estimate the costs associated with programs requiring advancement of technology beyond the current state-of-the-art. Navy budget analysts could benefit from an understanding of how cost estimating is accomplished in the defense industry. With these insights, Navy estimating methods might be enhanced by allowing for the validation of the various estimating methods and inclusion within the Navy estimation process as appropriate. This research examines the methods used by a major defense contractor in estimating the development costs associated with a specific state-of-the-art extension project, The study, conducted through the use of personal interviews and examination of project cost data and information, determined that a combination of techniques was utilized within a formalized contractor-specific estimation process. These techniques included engineering estimates, reference to similar projects previously accomplished, and parametric modeling.