Some Recommendations for Improvements in the Theory and Practice of DoD Incentive Contracting.
Final rept. 1 Jun-24 Aug 84,
NORTH CAROLINA STATE UNIV RALEIGH DEPT OF INDUSTRIAL ENGINEERING
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Fundamental theoretical deficiencies are shown and revision is recommended in the DoDs newly proposed procedure for adjusting shared savings to encourage cost reducing capital investment by contractors. It is also shown that inconsistencies between conceptually correct economic figures and their counterparts computed under government accounting standards cause underallowance of intended contractor profit incentive. Also, though standard models under uncertainty allow the contractor to choose his sharing fraction for cost underruns and overruns so as to maximize his expected utility or, equivalently his risk-adjusted value, it is shown that this approach does not, in general, yield Pareto-optimality and hence is not in the best interest of either the contractor or the government. Contrary to a claim in the literature, it is further shown that sharing may well be an incentive for cost reduction, but care must be used to assure Pareto-optimality in the final solution. Recommendations are made for follow-on research including joint consideration of time streams and uncertainty, multiattribute analysis, and other extensions in the theory.
- Administration and Management
- Economics and Cost Analysis