The Impact of the Weighted Guidelines Profit System on Defense Contract Fees.

by George R. Hall

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An examination of the defense contract fees negotiated by the DOD and how they have changed since the introduction in 1964 of the weighted guidelines system (WGLS) for computing fees. Target fee rates on 10,054 defense contracts negotiated between 1959 and 1967 were examined, as well as the actual fee rates and the earning on contractors' assets. The study shows that the WGLS has resulted in higher average target profit rates, although there is considerable dispersion in average fee rate changes for different products and types of contracts, with the larger firms generally reaping the greater benefits. Actual fee rates--on the basis of a small sample--seem to indicate less variance between large and small firms and show less overall increase. No simple relationship seems to exist between changes in target fees and changes in rate of return. Profit opportunities were increased, but raising the profitability of defense investment seems to have been, on the whole, unsuccessful.

This report is part of the RAND Corporation research memorandum series. The Research Memorandum was a product of the RAND Corporation from 1948 to 1973 that represented working papers meant to report current results of RAND research to appropriate audiences.

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