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In Jan 2017, OSD CAPE released updated guidance on using Inflation and Escalation to estimate defense systems costs.
When defense analysts attempt to estimate the
cost of systems, they are chiefly concerned with understanding the cost effects
of defense decisions. These decisions
come in two broad forms: what to buy and how much to buy. To properly estimate the cost of a new
system, the analyst needs to understand the relationships between historical costs,
technical characteristics, and quantity orders.
In order to derive realistic relationships, and ultimately estimate the
final cost, the analyst will have to account for the effects of persistent
underlying cost increases that occur regardless of individual programmatic
decisions, specifically inflation and escalation. This Handbook will help analysts use price
indexes to both estimate realistic program costs as well as present those costs
in a way that facilitates decision making.
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