Escalation provisions in DoD procurement: a review of the problem and a framework for analysis.
Eberth, Robert William.
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This study reviewed the opinions and concerns expressed by various government and private industry sources with regard to the use and structure of escalation (i.e., economic price adjustment) provisions in government procurement contracting. There was found to be little general agreement among these sources on many of the aspects of escalation provisions, including the "proper" objectives of such clauses. After this review a framework was designed to facilitate the analysis of the relationship of escalation provisions and price level uncertainty. The specific model employed examined interacting objectives of the government and a firm in a sole-source contract negotiation scenario. A method was developed to approximate the increase in contract price required by the firm as compensation for accepting the risk of uncertain price levels. A criterion was established for the employment of the escalation provision in the modeled scenario.
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