Open AccessInflation and Price Escalation Adjustments in Estimating Program Cost: F-35 Case Study
Author(s) -
Stanley A. Horowitz,
Bruce R. Harmon
Publication year - 2020
Publication title -
defense acquisition research journal
Language(s) - English
Resource type - Journals
eISSN - 2156-8405
pISSN - 2156-8391
DOI - 10.22594/dau.19-836.27.02
Subject(s) - inflation (cosmology) , price index , econometrics , baseline (sea) , consumer price index (south africa) , index (typography) , cost estimate , economics , quality (philosophy) , work (physics) , computer science , operations research , macroeconomics , monetary policy , engineering , mechanical engineering , philosophy , oceanography , physics , management , epistemology , theoretical physics , world wide web , geology
Applying price indexes presents a challenge in estimating the costs of new defense systems. An inappropriate price index—one not closely linked to the inputs to the systems being costed—can introduce errors in both development of cost estimating relationships (CER) and in development of out-year budgets. To help cost analysts understand the impacts of different price indexes, this article applies two sets of price indexes to the F-35 program. Using hedonic price indexes derived from CERs, the authors isolate changes in price due to factors other than changes in quality by developing a “Baseline” CER model using data on historical tactical aircraft programs available early in the F-35 program. The focus of the work is to improve estimates of acquisition costs. All the data used in the econometric analysis are acquisition cost data. Better cost estimates should improve projections of budget requirements.