Date of Award

3-21-2019

Document Type

Thesis

Degree Name

Master of Science in Cost Analysis

Department

Department of Systems Engineering and Management

First Advisor

Jonathan D. Ritschel, PhD

Abstract

Adjusting fixed price contract prices over long periods of performance is vital to protect both the government and contractor from market price fluctuations. This is accomplished via an Economic Price Adjustment (EPA) clause which currently utilize forecasts of producer price indexes (PPI) as a baseline. There is currently a lack of research on if the use of these forecasts as a baseline for calculating EPAs is the best alternative. This research involves determining the validity of using Global Insight (GI) forecasts for the purpose of calculating EPAs in fixed price contracts. Two EPA clauses are examined as a case study proxy for what may be occurring on a broader scale DoD wide. The PPI of interest to this research is PPI 336411, which covers the aircraft manufacturing industry. The GI forecasts of PPI 336411 are compared to Bureau of Labor Statistics (BLS) managed actuals of the index to assess the accuracy as well as the Forward Pricing Rate Agreement (FPRA) derived escalation rates to determine if the government is estimating escalation in line with the contractor. A change point analysis is then conducted on the historical values of PPI 336411 to determine if significant changes in the dataset are influencing the accuracy of forecasts. Lastly, a retrospective approach to EPA clauses is recommended which utilizes changes in actuals to calculate EPAs, as it resulted in a lower mean absolute percent error (MAPE) than the prospective approach with respect to actuals. The outcome of this research is a recommendation that the EPA clauses be rewritten to support a retrospective approach to calculating EPAs.

AFIT Designator

AFIT-ENV-MS-19-M-173

DTIC Accession Number

AD1077063

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