Cost Growth: Effects of Share Ratio and Range of Incentive Effectiveness

This report addresses cost growth problems that have been experienced with CPIF contracts in the Army Materiel Command, especially those problems related to the incentive structure itself. The data base is composed of 53 randomly selected CPIF contracts completed between 1964 and 1971 with initial price of 500,000 or more. The important major findings are that a The use of the most probable cost for target costs directed by ASPR as opposed to expected cost, produces about 20 percent contract cost growth. b There is a positive correlation between contractors share of underrun and contractual adjustments and a negative correlation between overrun and the contractors share for overruns. c The contractors share of underrun and overrun is less than the negotiated share, on the average, while his profit for final costs which are above the upper limit of the range of incentive effectiveness is occasionally far greater than the negotiated minimum profit.