The rate setting process implemented by the USTRANSCOM J8 Program Analysis & Financial Management Directorate (USTC J8 or TCJ8) is of importance, as accurate rates yield proper and equitable recoupment of costs from customers and ensure USTC can achieve an accurate Net Operating Result (NOR) in each given year. This research sought to identify areas in which the current rate setting methodology can be improved. We initially examined the use of six months of historical cost data versus a full year of data to set rates, concluding that there is not a statistically significant difference with respect to their relative effect on the NOR; USTC should proceed with their current practice. The research also identified outliers, first with regard to likelihood of historical rates not being set by the prescribed process and second with regard to whether the rates set by the prescribed process would be an outlier in terms of the marginal contribution to the net operating result. We found that approximately 8%, 10%, and 4% of the rates in FY14–FY16 were likely set using budget analyst experience in lieu of the prescribed method, for the most part imposing a reduction in the prescribed rates. Adapting classical Statistical Process Control (SPC) methods, we found that the prescribed rate setting method does work in aggregate but can induce recurrent outlier rates. However, a pattern in these outlier rates remains elusive – some are self-correcting – but the demonstrated methodology is shown to be useful for identifying outlier rates that do merit budget analyst experience-informed judgment for rate setting
