The Use of Inflation Indexes in the Department of Defense

Abstract

The 2009 Weapon System Acquisition Reform Act (WSARA) requires the 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 with a discussion of the rationale for using inflation indexes in general, in the government as a whole, and in the DoD. It then identifies the regulatory and statutory provisions that support the issuance of inflation guidance by the Under Secretary of Defense (Comptroller; USD[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 indices provided by the USD(C). Finally, it compares the Comptroller rates with some alternatives and considers whether modifications to current practices might better meet the DoD's needs for realistic cost estimation.