An Application of Cost Risk in Incentive Contracts.

Abstract

This thesis begins with an examination of the literature concerning incentive contract effectiveness and contractor motivation. Citing the most frequently supported conclusions, the researcher integrates these with a cost risk analysis methodology based upon the Beta distribution. The result is a share curve that automatically adjusts the share ratio based upon estimated cost variance. The researcher suggests that this approach is better at reflecting cost risk than the standard linear design. The share curve provides more risk sharing, especially at higher levels of cost variance, and provides both significant rewards and penalties only for significant deviations from target cost. The final conclusion is that the share curve mitigates the defense contractors' risk averse nature, thus allowing the profit motive to become operative in incentivizing the contractor to control or reduce costs. Keywords: Cost Estimates, Incentive, Cost Analysis, Risk Analysis.

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Document Details

Document Type
Technical Report
Publication Date
Dec 01, 1985
Accession Number
ADA165177

Entities

People

  • Christopher M. Mcgrath

Organizations

  • Naval Postgraduate School

Tags

Communities of Interest

  • Biomedical
  • Human Systems

DTIC Thesaurus Topics

  • Acquisition
  • Air Force
  • Business Administration
  • Computations
  • Contracts
  • Cost Analysis
  • Cost Estimates
  • Cost Overruns
  • Information Science
  • Management Personnel
  • Mathematical Analysis
  • Normal Distribution
  • Organizational Structure
  • Pilot Studies
  • Procurement
  • Standards
  • Statistical Analysis

Readers

  • Economics
  • Life Cycle Cost Analysis
  • Statistical inference.