Defense Financial And Investment Review Appendix 2 Facilities Capital As A Factor In Contract Pricing PDF Download

Beginning in 1976, facilities capital became a determinant of price in contracts negotiated by the Department of Defense. Facilities capital became a determinant of profit in the weighted guidelines profit policy and, at the same time, an amount based on facilities capital became an allowable cost under Cost Accounting Standard 414. This report presents results of an investigation into the role and effectiveness of facilities capital as a factor in contract pricing. A statistical analysis was first conducted to ascertain whether negotiated contract prices reflect the amount of facilities capital employed. Regression techniques are applied to a large data base of contracts negotiated between 1980 and 1982. In addition to testing the sensitivity of pricing to facilities capital, other factors such as the composition of costs, size of award, Military Service, and type of contract were tested as determinants of price. The response by defense contractors to the investment incentives of the revised pricing policy was then determined. A model of contract pricing was developed to evaluate the effectiveness of alternative policies to encourage cost-reducing investments. Finally, in a separate analysis, a comparative evaluation of the financial riskiness of defense companies and firms serving commercial markets was conducted.