What is the DoD policy or guidance on estimating contractor labor rates escalation, and the accompanying documentation?
There are no escalation rates published for contractors that would be meaningful for all situations. The published inflation rates have been a known source of cost underestimating because they are based too much on national averages across all industries and locations. Military acquisition is usually more tied to high-tech development and therefore is not represented well by the national average. However, not all military acquisition is high tech, therefore there is not really a good single rate to use for it either.
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The federal workforce's pay increases in lockstep across the country based on the desires of Congress and loosely tied to other rates and assumptions. Since the entire federal workforce is moved at the same time, it is possible for the government to publish escalation rates. That is not true for contractors. Contractor pay is highly dependent on the industry, the skill-set demand, and the area of the country the contractor is located in. For example, a tire manufacturer is not likely to have the same escalation rate as a software development company. Also, a California based operation is likely to have a higher rate than a Mississippi based company. A sole-source contractor is likely to have a higher escalation rate than a competitive bid contractor. Therefore it becomes impossible to dictate from a central point all the possible factors that could go into a good escalation rate. There may be some reasonable parametric equations available, but a table is not very likely.
The best method for calculating an escalation rate is through an analysis of historical data for the contractor in question. If the contractor is not known, then at least an analysis of the industry would be a good starting point. Regardless of the method chosen, the final rate has to be justified if it is different than the published inflation rate. Current best practice is to do the industry/contractor research that is required and include that in the rate justification.