Welch Awards 2017 - Inflation Adjustments for Defense Acquisition

July, 2018
Stanley A. Horowitz, Bruce R. Harmon, and Daniel B. Levine See more authors
Acquisition program managers are required to develop budget projections in terms of then-year dollars. That means they must adjust their future costs for escalating prices. Following a reasonable interpretation of guidance from the Department of Defense Comptroller, program managers have sometimes estimated these costs using a measure of economy-wide inflation, the Gross Domestic Product deflator. But price escalation for a particular kind of defense system may be systematically higher or lower than overall inflation. We used a hedonic cost-estimation approach to develop a price escalation index for fighter aircraft. Applying this index can vastly improve the development of budget requirements compared to using estimates of general inflation.