Combating principle-agent relationship problems: use of the truth revealing incentive mechanism

Abstract

The purpose of this MBA professional report is to introduce the Truth Revealing Incentive Mechanism (TRIM) as a tool to help the government obtain more accurate cost estimates and control program costs. The TRIM is an economic mechanism based on principal-agent relationships that uses incentives to align contractors' interests with those of the Government. The TRIM combats principal-agent problems by extracting a contractor's true estimated costs. The TRIM is structured so that revealing the true estimated cost offers the contractor the highest potential fee. This report describes the principal-agent theory, identifies principal-agent problems in the current DoD contracting environment, discusses how the TRIM addresses these problems more effectively than traditional cost-reimbursement contracts, and explains how and where the TRIM can be applied. This report also includes an electronic version of the TRIM in Microsoft Excel format, as well as a practitioner's guide to help contracting officers use the TRIM.