DoD Inflation Handbook - AcqNotes
DoD Inflation Handbook
Gregory A. Wise Charles B. Cochran
Prepared for
Office of the Secretary of Defense Program Analysis and Evaluation
February 2006
MCR Federal LLC. McLean, Virginia USA
Foreward
This book developed from a PA&E analyst's observations that inflation adjustments had been misapplied to several significant analytical products used to inform decisions in the Department of Defense. In at least one case the misapplication changed the net present value (the deciding factor in the analysis) against the recommendation. The DoD deals in large sums of money, frequently spent over several years. Even small factors can result in large adjustments for major programs. The use of incorrect inflation indices can easily generate a change of millions of dollars for even a relatively small program.
As a result the Office of the Secretary of Defense (Program Analysis and Evaluation) decided to contract for this book. The intent was to provide a relatively comprehensive treatment of the topic of inflation with a focus on common applications and the user/analyst. For those dealing with DoD budgeting and inflation for the first time, the book would provide readily accessible directions and examples. The book is also intended to provide a more rigorous background for the analyst seeking a detailed understanding of the topic, or needing advice for how to handle a particularly complex issue or application. Navigational aids are designed to guide either individual to the appropriate section of the book for their specific purpose.
Arriving at the right combination of ingredients to attain these goals has been a challenge. We hope that we have come near the mark.
The Authors
Table of Contents
1 Introduction ................................................................................................... 1 1.1 How to use this book ............................................................................ 1 1.2 Instructional Text.................................................................................. 1 1.3 Applications.......................................................................................... 2 1.4 Reference .............................................................................................. 3
2 Basic Inflation ............................................................................................... 4 2.1 What Inflation Is................................................................................... 4 2.1.1 Definition ..................................................................................... 4 2.1.2 Current Year Dollars (Then Year Dollars) .................................. 4 2.1.3 Base Year Dollars (Constant Dollars).......................................... 5 2.2 What Inflation Is Not............................................................................ 5 2.2.1 Discount Rate............................................................................... 5 2.2.2 Exchange Rates............................................................................ 6 2.2.3 Interest Rates................................................................................ 7 2.2.4 Depreciation................................................................................. 7 2.2.5 Facilities Capital Cost of Money ................................................. 8 2.3 Simple Inflation Example ..................................................................... 8 2.3.1 An Inflation Index........................................................................ 9 2.3.2 Base Years ................................................................................... 9 2.3.3 Base Year Rates and Indices........................................................ 9 2.4 Inflation for Commodity Baskets ....................................................... 10 2.5 Inflation for Commodity Baskets that Spend Out over Time............. 11 2.5.1 Inflation Indices for Multiyear Funds ........................................ 11
3 DoD Inflation Policy and Guidelines .......................................................... 12 3.1 Office of Management and Budget (OMB)........................................ 13 3.1.1 Inflation Statistics ...................................................................... 14 3.1.2 Inflation Forecasts...................................................................... 15 3.2 Office of the Under Secretary of Defense (Comptroller) ................... 16 3.3 Air Force............................................................................................. 18 3.3.1 Policy ......................................................................................... 18 3.3.2 Exceptions.................................................................................. 19 3.4 Navy ................................................................................................... 19 3.5 Army................................................................................................... 20 3.6 Examples ............................................................................................ 21 3.7 DoD Inflation Policy and Guidelines for Cost Estimates ................... 23
4 Developing and Selecting Indices ............................................................... 24 4.1 Inflation Statistics ............................................................................... 24 4.2 Gross Domestic Product ..................................................................... 24 4.3 Consumer Price Index ........................................................................ 26 4.4 Employment Cost Index ..................................................................... 29
4.5 Refiner Acquisition Cost .................................................................... 31 4.6 Selecting Indices................................................................................. 31 4.7 Constructing Indices ........................................................................... 32 5 The PPBE Process....................................................................................... 35 5.1 Why PPBE? ........................................................................................ 35
5.1.1 Cost Estimates and PPBE .......................................................... 36 5.2 The PPBE Process .............................................................................. 36
5.2.1 Planning ..................................................................................... 37 5.2.2 Programming ............................................................................. 39 5.2.3 Budgeting................................................................................... 41 5.2.4 Execution ................................................................................... 42 5.2.5 The Schedule.............................................................................. 43 6 PPBE Applications and Examples .............................................................. 44 6.1 Background......................................................................................... 44 6.2 Converting Between Constant and Then Year Dollars....................... 44 6.2.1 Constant Year to Then Year ...................................................... 45 6.2.2 Then Year to Constant Year ...................................................... 45 6.2.3 Then Year to Then Year ............................................................ 46 6.2.4 Constant Year to Constant Year ................................................ 46 6.2.5 Examples.................................................................................... 47 6.3 Inflation Forecasts .............................................................................. 47 6.4 Pay Raises........................................................................................... 51 6.5 Composite Inflation Rates .................................................................. 53 6.6 Outlay Rates ....................................................................................... 55 6.6.1 Budget Authority, Total Obligational Authority and Outlays ... 57 6.7 Indices................................................................................................. 58 6.7.1 Army .......................................................................................... 58 6.7.2 Navy/Air Force .......................................................................... 60 6.8 Appropriations and Funding Cycles ................................................... 62 6.8.1 Full Funding............................................................................... 62 6.8.2 Incremental Funding .................................................................. 62 6.8.3 Supplemental Funding ............................................................... 63 6.9 Contracts............................................................................................. 63 6.10 Advanced Topics: Inflation Statistics................................................. 64 6.10.1 Consumer Price Index................................................................ 64 6.10.2 Gross Domestic Product ............................................................ 72 7 Budget Analysis Applications and Examples.............................................. 76 7.1 Background......................................................................................... 76 7.2 Trends over Time................................................................................ 76 7.2.1 Adjusting for Inflation ............................................................... 76 7.2.2 Budgets ...................................................................................... 77 7.3 Budget Shares ..................................................................................... 79 7.4 Evaluating Proposals and Past Performance....................................... 80 7.5 Forecast vs. Actuals............................................................................ 83 7.5.1 Differences Between Forecasts and Actuals.............................. 83
7.5.2 Budget Shortfalls Due to Higher than Expected Inflation ......... 83 7.5.3 Supplementals for Budget Shortfalls ......................................... 84 7.6 Net Present Value ............................................................................... 84 7.7 Selected Acquisition Reports (SARs)................................................. 86 7.8 Advanced Topic: Accounting for Inflation Risk ................................ 87 7.8.1 Interpolation Between Two Data Points .................................... 87 7.8.2 Fitting a Curve to the Data......................................................... 88 8 Cost Estimation Applications and Examples .............................................. 93 8.1 Background......................................................................................... 93 8.2 Cost Estimating Relationships (CERs)............................................... 93 8.3 Constant and Then Year Dollar Conversions ..................................... 95 8.4 Cost Risk ............................................................................................ 97 8.5 Schedule Risk ..................................................................................... 98 8.6 Inflation Risk .................................................................................... 100 8.7 Complex Risk ................................................................................... 101 8.7.1 Using Spreadsheets .................................................................. 105 I. Appendix I: Problems and Solutions......................................................... 109 Chapter 6 Problems ....................................................................................... 109 Chapter 6 Solutions ....................................................................................... 116 Chapter 7 Problems ....................................................................................... 127 Chapter 7 Solutions ....................................................................................... 130 Chapter 8 Problems ....................................................................................... 136 Chapter 8 Solutions ....................................................................................... 139 II. Appendix II: Sample Economy ................................................................. 147 Guide to Using Handbook.................................................................................. 155 Acronyms........................................................................................................... 158 Glossary ............................................................................................................. 160 References.......................................................................................................... 163 Index .................................................................................................................. 165
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related download
- commonly confused words then vs than
- the proper use of then than
- dod inflation handbook acqnotes
- math 8 homework 2 solution
- than or then
- name date
- than vs then mcdaniel college writing center
- than then rules to remember
- r if else and loops medical university of south carolina
- claims for va benefits and character of discharge
Related searches
- sf handbook hud handbook 4000 1
- inflation in germany wwi
- how to calculate inflation rate from cpi
- how to calculate inflation using cpi
- how to find inflation rate with cpi
- inflation with minimum wage increase
- urinary catheter balloon inflation volume
- bank of canada inflation calculator
- long term inflation forecast usa
- long term inflation outlook
- inflation 2021 forecast
- projected inflation rate for next 10 years