Inflation Risk: Assessing Inflation Risk in Multi-Year Proposals
Government contracts are often let for long periods of time – up to ten years or more. When contractors compete for these long-term contracts, the inflation built into the bids (or omitted!) introduces a potentially serious risk area. If the inflation numbers included in the bid are off, the contract will perform at a significantly different cost, and thus return on sales than projected, and, given the size of many government contracts, this risk may be very large in dollars as well, adversely affecting either the contractor or the customer, or both, depending upon contractual arrangements.
This paper will introduce a methodology to quantify the inflation risk introduced in contract bids. The major focus will be in building a model to quantify the result of errors, but historical projected and realized inflation indices for major commodities will be used to forecast possible inflation as well, but of course this part of the research will not be useable outside the commodities analyzed. Both the expected value and the distribution will be developed in order to inform risk projections.
Christopher J. Leonetti is an Operations Research Analyst for Northrop Grumman IT, Intelligence (TASC). Mr. Leonetti currently supports the Federal Aviation Administration (FAA). Prior to his work with the FAA, Mr. Leonetti supported various programs within the National Geospatial-Intelligence Agency (NGA) and was a member of the TASC cost team for the United States Navy’s DDG-1000 and CG(X) programs. Mr. Leonetti also works on Independent Cost Evaluation (ICE) teams doing internal risk assessments. He is the co-author of two professional papers, both of which were presented at the SCEA 2007 conference. Mr. Leonetti received his B.S. from the College of William & Mary in Applied Mathematics with a second major in Government in May 2004 and his M.S. in Computational Operations Research in December 2005.
Brian A. Welsh graduated from The University of Virginia’s School of Engineering and Applied Science in May 2006. There he earned a Bachelor of Science in Systems and Information Engineering and a minor in Engineering Business. In July 2006, he joined Northrop Grumman as an Operations Researcher. Mr. Welsh supports Northrop Grumman on cost and risk estimates specifically dealing with the constructing of new buildings within the Intelligence Community. He presented the paper DoD Military Construction Inflation Index vs. Construction Industry Inflation Indices at the 2007 SCEA conference. Mr. Welsh is also currently pursuing a Master of Science in Operations Research at George Mason University.
Bethia L. Cullis is an Operations Research Analyst at Northrop Grumman IT. She is currently the Section Manager for the C101 section and the Program Manager for all Independent Cost Evaluations (ICEs) required by NGIT, NGNN, NGSS and NGTS. In addition to her ICE work, Ms. Cullis has supported numerous ship programs including DD(X), the DDG 51 class, LHD 8 and LHA 6, the LPD 17 class and CVN 21. She is the lead or co-author of three professional papers, all of which were presented at the SCEA 2007 conference and one of which was presented at the Naval Postgraduate School’s Acquisition Research Symposium. For the past two years she has taught at the SCEA national conference. Before joining Northrop Grumman in 2004, Ms. Cullis completed her undergraduate degree in Economics and English at Case Western Reserve University. She also worked as an analyst for Newry Corporation, a competitive consulting firm in Cleveland, OH.
Richard L. Coleman is a 1968 Naval Academy graduate, received an M. S. with Distinction from the U. S. Naval Postgraduate School and retired from active duty as a Captain, USN, in 1993. His service included tours as Commanding Officer of USS Dewey (DDG 45), and as Director, Naval Center for Cost Analysis. He has worked extensively in cost, CAIV, and risk for the Missile Defence Agency (MDA), Navy ARO, the intelligence community, NAVAIR, and the DD(X) Design Agent team. He has supported numerous ship programs including DD(X), the DDG 51 class, Deepwater, LHD 8 and LHA 6, the LPD 17 class, Virginia class submarines, CNN 77, and CVN 21. He is the Director of the Cost and Price Analysis Center of Excellence and conducts Independent Cost Evaluations on Northrop Grumman programs. He has more than 65 professional papers to his credit, including five ISPA/SCEA and SCEA Best Paper Awards and two ADoDCAS Outstanding Contributed Papers. He was a senior reviewer for all the SCEA CostPROF modules and lead author of the Risk Module. He has served as Regional and National Vice President of SCEA and is currently a Board Member.
Peter J. Braxton holds an AB in Mathematics from Princeton University and an M.S. in Applied Science (Operations Research) from the College of William and Mary.
He has worked to advance the state of knowledge of cost estimating, Cost As an Independent Variable (CAIV), Target Costing, and risk analysis on behalf of the Navy Acquisition Reform Office (ARO), the DD(X) development program, and other ship and intelligence community programs. He has co-authored several professional papers, including ISPA/SCEA International Conference award-winners in CAIV (1999) and Management (2005). He served as managing editor for the original development of the acclaimed Cost Programmed Review Of Fundamentals (CostPROF) body of knowledge and training course materials and is currently undertaking to lead a large team of cost professional in a comprehensive update thereof. He serves as SCEA’s Director of Training, a Northrop Grumman Technical Fellow, and Director of Research within TASC’s Management Consulting Division. He was named SCEA’s 2007 Estimator of the Year for contributions in Education.
Eric R. Druker graduated from the College of William and Mary with a B.S. in Applied Mathematics in 2005 concentrating in both Operations Research and Probability & Statistics with a minor in Economics. He is employed by Northrop Grumman as a Technical & Research lead. He performs cost and risk analysis on several programs within both the Intelligence and DoD communities. He was a recipient of the 2005 NGIT President’s award for his work on Independent Cost Evaluations during which he helped to develop the risk process currently used by NGIT’s ICE teams. As a member of Northrop Grumman’s ICE working group, he has helped shape the cost and risk practices used on independent cost estimates and evaluations across the corporation. In addition to SCEA conferences, Eric has also presented papers at the Naval Postgraduate School’s Acquisition Research Symposium, DoDCAS and the NASA PM Challenge. He has also performed decision tree analysis for NG Corporate law and built models for Hurricane Katrina Impact Studies and Schedule/Cost Growth determination.