The Use of Performance Incentives in DOD Contracting
Abstract
Performance incentives have a long and interesting history in the Department of Defense (DoD). As a result of policy guidance, numerous contracts written during the 1960s and 1970s based profit, in part, on objectively measured performance characteristics. Such contracts may have renewed policy relevance today because of both the change from detailed design-to-performance specifications and the implementation of Cost as an Independent Variable (CAIV). During a time of rapid technological change, performance incentives may also support the decentralized execution of a centralized planning process. In this analysis, particular attention is paid to the DoD cost-effectiveness model developed during the 1960s. Using the policy prescription of this model, the author examines the empirical relationship between the performance achieved by contractors and such variables as the cost-sharing ratio, target cost, and target profit. Recently, economists have extended this model by emphasizing the distinction between accounting profit and economic profit when contractor effort is unobservable. He argues that the government is likely to know a great deal about the contractor's effort and that contracts combining performance incentives with subjectively determined award fees may have very desirable properties. The F/A-18E/F contract is an important example of this type of incentive arrangement.
Document Details
- Document Type
- Technical Report
- Publication Date
- Jan 01, 1998
- Accession Number
- ADA487905
Entities
People
- Gregory G. Hildebrandt
Organizations
- Naval Postgraduate School