“False Learning” Effects Due to

Improper Inflation Normalization

Raymond P. Covert
The Aerospace Corporation
15049 Conference Center Drive, CH1-410
Suite 600
Chantilly, VA 20151
E-mail: raymond.p.covert@aero.org

© 2002 The Aerospace Corporation

Wednesday, December 08, 2021 1
 Outline
 Hypothesis
 Sample Problem
 Results
 Recommendations

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 Hypothesis
 Actual cost data from programs with multiple SV buys
normalized to BY$ using DoD Inflation may produce
false inflation
 DoD Inflation indices do not exactly mirror actual rate
inflation
 Compounding of constant errors produces exponential
differences with time
 These exponential differences may be falsely interpreted as
learning or a cost improvement effect

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 Sample Problem
 Assume sample program of 4SVs built (in the past)
from 1980-1984
 All BY80$250M
 60/40 phasing
 Assumed “true” inflation of 6% per year

BY1980 1980 1981 1982 1983 1984

Vehicle $M 1.000 1.050 1.103 1.158 1.216
SV1 250 0.6 0.4 PHASING
SV2 250 0.6 0.4 PROFILE
SV3 250 0.6 0.4
SV4 250 0.6 0.4

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 Sample Problem (continued)

 Results in these TY “actual” costs

 May be in the form of cost reports

Vehicle TY$M 1980 1981 1982 1983 1984

SV1 294 172 123 0 0 0
SV2 275 0 161 114 0 0
SV3 294 0 0 172 123 0
SV4 315 0 0 0 184 131
TOTAL 1178 172 283 286 306 131

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 Sample Problem (continued)
 Now normalize data to DoD inflation indices
 Constant inflation case is trivial exponential issue
 Will definitely show learning

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 Results
 Learning “produced”
 Also SV$ “tip-up” effect

Year 1980 1981 1982 1983 1984 1985

DoD 3600 0.503 0.563 0.614 0.644 0.669 0.692
BY02$M 1.988951 1.777436 1.627689 1.551657 1.494853 1.445699
SV1 532.94 335.2178 197.7231 0 0 0 0
SV2 479.47 0 296.5847 182.8871 0 0 0
SV3 459.14 0 0 274.3306 184.8049 0 0
SV4 465.93 0 0 0 277.2073 188.7217 0

Signs of learning in BY02$M

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 93% Induced Learning

Actual inflation 6.0%

Induced Learning
-0.1053
y = 525.71x
600
R2 = 0.8839
BY90
400
$M

Norm. to BY 02
200
Real TY$
0
0 2 4 6
Vehicle Number Tip-up effect

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 90% Induced Learning

Actual Inflation 1.0%

Induced Learning
-0.1502
600 y = 484.99x
2
R = 0.9981 BY90
400
$M

Norm. to BY 02
200
Real TY$
0
0 2 4 6
Vehicle Number

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 Induced Increase in T1 Cost
False Inflation Effect on T1

540.0

530.0

520.0 Linear error

Normalized BY00 T1

510.0

500.0

490.0

480.0
0% 1% 2% 3% 4% 5% 6% 7% 8%
True Inflation

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 Induced Learning
False Learning

0.94

0.94

0.93

0.93 Linear error

Learning Curve Slope

0.92

0.92

0.91

0.91

0.90

0.90
0% 1% 2% 3% 4% 5% 6% 7% 8%
True Inflation

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 Effect of Inflation on Learning and T1
 Bigger difference in learning causes
 Steeper LCS
 Larger T1
 Tip-up Effect

Inflation 1% 2% 3% 5% 6% 7%
Veh1 485.3 494.6 504.0 523.2 532.9 542.8
Veh2 437.5 445.7 454.0 470.9 479.5 488.2
Veh3 408.9 418.7 428.6 448.8 459.1 469.6
Veh4 395.4 408.8 422.6 451.1 465.9 481.1
T1 485.0 493.0 501.1 517.4 525.7 534.1
lcs 0.90 0.91 0.91 0.92 0.93 0.94
b -0.1502 -0.141 -0.1319 -0.1141 -0.1053 -0.0966

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 Recommendations
 Cost data archives should contain relevant
information to calculate true inflation
 Material costs by year
 Labor costs by year
 Labor hours by year
 Compute “true inflation indices” by WBS
 Re-regress actual costs to counter effects of false
learning / T1 / Tip-up
 Experiment with 100% LCS to calculate an estimated
“true inflation index”

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