Are Cost-Plus Defense Contracts (Justifiably) Out of Favor?

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Authors
Wang, Chong
San Miguel, Joseph G.
Subjects
DoD contracts
fixed-price contracts
cost-plus contracts
information asymmetry
agency problem
budget-based cost-plus scheme
Advisors
Date of Issue
2013
Date
Publisher
American Accounting Association
Language
Abstract
A common tenet is that the use of cost-plus contracts contributes to cost overruns in the context of Major Defense Acquisition Programs (MDAPs). Accordingly, policy-makers express a preference for fixed-price contracts as opposed to cost-plus contracts. While fixed-price contracts may be superior in certain scenarios, such scenarios are limited in the MDAP context. We document three potential unintended negative consequences of fixed-price contracts. We argue that the notion that fixed-price contracts are better than cost-plus contracts for limiting cost overruns is misleading.
Type
Article
Description
The article of record as published may be found at http://dx.doi.org/10.2308/ogna-50558
Series/Report No
Department
Graduate School of Business and Public Policy (GSBPP)
Organization
Naval Postgraduate School (U.S.)
Identifiers
NPS Report Number
Sponsors
Naval Postgraduate School Acquisition Research Program
Funder
Format
15 p.
Citation
Wang, Chong, and Joseph G. San Miguel. "Are Cost-Plus Defense Contracts (Justifiably) Out of Favor?." Journal of Governmental & Nonprofit Accounting 2.1 (2013): 1-15.
Distribution Statement
Rights
This publication is a work of the U.S. Government as defined in Title 17, United States Code, Section 101. Copyright protection is not available for this work in the United States.
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