The Use of Infration Indexes in the Department of Defense

The 2009 Weapon Systems Acquisition Reform Act (WSARA) requires DoD's Office of Cost Assessment and Program Evaluation (CAPE) to “… periodically assess and update the cost (or inflation) indexes used by the Department to ensure that such indexes have a sound basis and meet the Department's needs for realistic cost estimation.” The objective of this paper is to provide CAPE with a factual and analytical basis for responding to this provision of WSARA. The paper starts by discussing the rationale for using inflation indexes: in general, in the government as a whole, and in the Department of Defense. It then identifies the regulatory and statutory provisions that support the issuance of inflation guidance by the Office of the Under Secretary of Defense (Comptroller) (OUSD(C)). Next, it describes how this guidance is applied, by describing the key features of the processes used in the Office of the Secretary of Defense (OSD) and the Services to adjust for inflation in estimating the costs of and budgeting for major systems. It evaluates the appropriateness of using the inflation indexes provided by OUSD(C). Finally it compares the Comptroller's rates with some alternatives and considers whether modifications to current practices might better meet the Department's needs for realistic cost estimation