Enhancing Cost Realism through Risk-Driven Contracting: Designing Incentive Fees Based on Probabilistic Cost Estimates

Abstract

A risk-driven contract structure is proposed to enhance the cost realism of competitive proposals for the Engineering and Manufacturing Development (EMD) phase of the acquisition life cycle. The authors employ an economic theory framework to discuss how cost-plus contracts typically used during this phase have inadvertently reinforced the sources of contractor and government optimism bias. By mapping probabilistic cost estimates to profit distributions, risk-driven contracts offer a structured method to expose contractors to more cost risk during EMD. Holding contractors accountable for their cost estimates and cost performance should enhance the realism of cost proposals, limit the government's ability to commit to too many programs, and reduce the cost growth that continues to plague the defense acquisition system.

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Document Details

Document Type
Technical Report
Publication Date
Apr 01, 2012
Accession Number
ADA563821

Entities

People

  • Josef Oehmen
  • Ricardo Valerdi
  • Sean P. Dorey

Organizations

  • Defense Acquisition University

Tags

Communities of Interest

  • Human Systems
  • Weapons Technologies

DTIC Thesaurus Topics

  • Acquisition
  • Air Force
  • Business Administration
  • Contractors
  • Contracts
  • Cost Analysis
  • Cost Estimates
  • Cost Reductions
  • Costs
  • Engineering
  • Governments
  • Industrial Engineering
  • Life Cycles
  • Military Acquisition
  • Procurement
  • Systems Engineering
  • Test And Evaluation

Readers

  • Defense Acquisition Program Management
  • Government Contracting/Procurement.
  • Systems Analysis and Design