Financial Impact of Recent Contract Pricing Changes
Abstract
Three major changes to contract pricing policy for negotiated DoD contracts have occurred since 1982. Progress payments were reduced; the weighted guidelines profit policy was revised; and the methods by which the contractor can recover the cost of special tooling and test equipment were changed. We conducted an impartial assessment of the cumulative financial effects of those changes. Our findings are based on the results of a simulation of monthly contract cash flows for a representative production contract. The simulation shows results using pricing policies applicable in 1982 compared to those in effect in October 1987. We used two alternative measures of the effects of changes in contract pricing: profit as a percent of sales and internal rate of return (IRR) on monthly cash flow. We have carefully selected representative characteristics for DoD contractors, contracts, and policies, for the results are sensitive to those characteristics and may change substantially if other values are used. Our findings on contract returns apply to the negotiated portion of a contractor's business base. Total returns for a contractor include the results from additional work undertaken as a result of competitive selection or commercial work and are not considered in this study.
Document Details
- Document Type
- Technical Report
- Publication Date
- Jul 01, 1988
- Accession Number
- ADA201705
Entities
People
- Donna J. Peterson
- Myron G. Myers
- Nicholas R. Schacht
- Paul R. Mcclenon
Organizations
- LMI