The authors explore defense contractor motivations and identify mechanisms that might more closely align those incentives with Department of Defense goals. They also analyze major defense acquisition programs to determine if it is possible to identify programs that might incur a future Nunn-McCurdy breach by reviewing a number of acquisition programs that have incurred breaches and analyzing them for common characteristics.

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Management Perspectives Pertaining to Root Cause Analyses of Nunn-McCurdy Breaches, Volume 6

Contractor Motivations and Anticipating Breaches

by Mark V. Arena, John Birkler, Irv Blickstein, Charles Nemfakos, Abby Doll, Jeffrey A. Drezner, Gordon T. Lee, Megan McKernan, Brian McInnis, Carter C. Price, et al.

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Research Questions

  1. What motivates contractors to seek government contracts?
  2. How can government influence the contracting process?
  3. Can a methodology be developed to identify programs that are likely to breach?

With an eye to making defense acquisition more effective and efficient, the authors explore defense contractor motivations in pursuing defense contracts and identify mechanisms that might more closely align those incentives with Department of Defense goals. They enumerate several motivations that drive contractors, most of which center on the financial aspects of running an enterprise. Then, they turn to the other side of the negotiating table and identify areas of influence or levers that the government can use to align the contracting process more closely with contractor motivations. They also analyze major defense acquisition programs to determine if it is possible to identify programs that might incur a future Nunn-McCurdy breach by reviewing a number of acquisition programs that have incurred breaches in the past and analyzing them for common characteristics. Their analytic framework enables oversight officials to identify programs with a greater risk of incurring a critical cost breach, which enables officials to focus more intently on a smaller set of programs and which provides hypotheses about what to look for in these programs.

Key Findings

Several Factors Motivate Corporations to Seek Government Contracts

  • Corporations want to establish dominance or presence in a sector.
  • They want to establish a steady cash flow.
  • They want to increase their company's stock prices and pay dividends.
  • They want to increase their business to achieve economies of scale and move into new business areas.
  • They want to reduce elements that might cause program uncertainty and therefore affect future profitability.

The Government Has Several Ways to Influence the Contracting Process

  • Competition is an important way for DoD to control the costs of acquiring equipment.
  • DoD can allow foreign sales, which are potentially lucrative to industry.
  • Government and industry can share risks (overruns) and rewards (underruns).
  • Government can motivate industry by employing variable-fee contracts.
  • DoD can relieve what is perceived by industry as an excessive and expensive oversight process.

A Methodology to Identify Programs That Might Breach Has Been Developed

  • Using a multistep process, the model predicted five of the nine programs that breached in 2010.
  • The methodology identified 39 programs to watch, because of their higher likelihood of breaching.

Recommendations

  • Government should tailor a contract's form, type, and incentives to each situation.
  • DoD must understand the motivations of the people and firms with which it negotiates.
  • DoD should increase its use of two levers: foreign sales and payment terms.
  • Government should keep in mind that deals are made between people, and this personal dimension to contracting should be addressed in acquisition training.
  • DoD should examine its oversight and auditing processes to assess whether it is generating value.
  • DoD should make a better effort to review how various incentives influence contractor responsiveness.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Contractor Incentives

  • Chapter Three

    A Methodology for Anticipating Nunn-McCurdy Breaches

  • Chapter Four

    Concluding Observations

  • Appendix A

    Membership of the COG

  • Appendix B

    Truth-Revealing Incentive Mechanisms Manages Asymmetric Information Example

  • Appendix C

    Executive Compensation

  • Appendix D

    Exploration of Multiyear Use

  • Appendix E

    Evolution of Nunn-McCurdy Legislation

Research conducted by

This research was sponsored by OSD PARCA (Office of the Secretary of Defense office of Performance Assessments and Root Cause Analysis) and conducted within the Acquisition and Technology Policy Center of the RAND National Defense Research Institute, a federally funded research and development center sponsored by the Office of the Secretary of Defense, the Joint Staff, the Unified Combatant Commands, the Navy, the Marine Corps, the defense agencies, and the defense Intelligence Community.

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