The impact of inflation on profit as determined by contractual provisions of Naval FPIF shipbuilding contracts.
Ippel, Terry Alan
Sovereign, Michael G.
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The contractual provisions contained in Naval FPIF Shipbuilding contracts determine to a large extent the impact of inflation on contract profitability. The concern of shipbuilders regarding the inflationary erosion of profitability is due in part to the long-term nature of shipbuilding contracts . An analysis is made of the payments and escalation provisions contained in fourteen major shipbuilding contracts signed over a span of eight years. Profit profiles for seven of these shipbuilding contracts are generated based upon six payment thresholds. The profit profiles, when expressed in terms of deflated dollars, present value at 15% and present value of deflated dollars at 157% show a declining trend in profitability. Three separate approaches for providing escalation coverage for profit are discussed. It is recommended that one of these approaches be implemented in future shipbuilding contracts
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