A Reappraisal of Incentive Contracting Experience

by Irving Nuttall Fisher

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An examination of the cost-saving effects claimed for incentive contracts and of the prospects for increasing their effectiveness. Statistical analysis of 1007 Air Force contracts for major weapon systems, completed during FY 1959-1966 and totaling nearly $15.7 billion, indicates that while incentive contracts may motivate contractors to reduce actual costs, they also encourage them to overstate target costs. The evidence indicates that the underruns commonly associated with incentive contracts are not related to the incentive features of the contract or to improved cost control and efficiency on the part of the contractor. While incentive contracts may make both the government and contractor more cost conscious, other means--increased use of competition and improved governmental cost-estimating techniques--must be employed to reduce target cost and obtain an overall reduction in the cost of major weapon systems.

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