Defense Department Profit and Contract Finance Policies and Their Effects on Contract and Contractor Performance

摘要

The Defense Department, through the military services, buys equipment and services for which no open market exists. In negotiating the contracts for these acquisitions, the government has policy guidelines to aid the contracting officer in developing a reasonable amount of profit to pay the contractor. The goal of profit policy is a contract price that reimburses the contractor for its costs, provides the necessary incentives to yield beneficial performance, and provides the contractor with sufficient risk reward. The effect of profit policy on contractor profits is inextricably linked to the type of contract financing policy the government uses in an acquisition. The authors look at the effectiveness of the two policy tools, profit and contract financing, on achieving contract outcomes and contractor financial performance. They also look at how these policies are implemented by the Defense Department. Their methodologies include analyses of profit target setting and actual contract results data in addition to using discounted cash flow modeling to value a contract or contract stream to an investor.