The Role of Inflation and Price Escalation Adjustments in Properly Estimating Program Costs: F-35 Case Study

Report Number: SYM-AM-16-074

Series: Acquisition Management

Category: Cost Management

Report Series: Symposium Proceedings

Authors: Stanley Horowitz, Bruce Harmon

Title: The Role of Inflation and Price Escalation Adjustments in Properly Estimating Program Costs: F-35 Case Study

Published: 2016-05-01

Sponsored By: Acquisition Research Program

Status: Published--Unlimited Distribution

Research Type: Other Research Faculty

Full Text URL: http://acquisitionresearch.net/files/FY2016/SYM-AM-16-074.pdf

Keywords: Cost estimation, F-35 program

Abstract:

Applying price indexes presents a challenge in estimating the costs of new defense systems. An inappropriate price index can introduce errors in both development of cost estimating relationships (CERs) and in development of out-year budgets. In this paper we apply two sets of price indexes to the F-35 Joint Strike Fighter procurement program, both to help cost analysts understand the impacts of different price indexes and to provide guidance in their choice. We approach this problem via hedonic price indexes derived from CERs. These indexes isolate changes in price due to factors other than changes in quality over time. We develop a