This paper begins with the identification and exposition of the four major issues involved in escalation for Navy contracts. These issues are: why is the change in input prices a particular problem for Navy contracts? Why is escalation a good procedure for dealing with the problem? What are the possible side effects of using escalation procedures? How is the trade-off between administrative cost, accuracy and contractor incentives (moral hazard) reached? For each separate issue as well as for the set of interrelated issues a discussion indicating its general applicability as well as its specific applicability to individual case is given. After the issues discussion the area of implementation of escalation is considered as a series of four questions: What prices should be covered? How should the price changes be measured? When should the measurements be made? How should the price changes be compensated? These questions are given general answers in each case and the set of questions as a whole is also considered. (Author)