The Effect Of Recognizing The Cost Of Facilities Capital In Defense Contracting PDF Download

DOD'S profit policy includes a provision to recognize the millions of dollars defense contractors incur annually in financing working capital costs on fixed-price contracts. Working capital costs consist of the contractor's work in process costs-material, labor, and overhead that are not financed through progress payments' or other payments. In negotiating contract prices, DOD does not attempt to prepare an exact calculation of such costs, but instead tries to give general recognition to the contractor's working capital costs under varying contract circumstances, financing policies, and economic environments. If DOD'S policy does not appropriately consider a contractor's working capital financing costs, it could affect contract profits, either to the contractor's or the government's disadvantage. DOD'S policy generally recognizes the important factors that affect contractors' working capital financing costs. Our analysis of a sample of contracts showed that in the aggregate the policy resulted in approximately the right amount of these financing costs being included in the profit objective. That is, the costs likely to be incurred during the life of the contract were close to the amounts estimated by DOD. While this was true in the aggregate, there were differences of 10 percent or more in most of the individual contracts between DOD'S estimate and our estimate of working capital costs. On individual contracts, therefore, if contracting officers do not adjust for the specific circumstances of that contract, too much or too little profit could be included in the contract price.