Date of Award

3-21-2019

Document Type

Thesis

Degree Name

Master of Science in Cost Analysis

Department

Department of Systems Engineering and Management

First Advisor

Scott T. Drylie, PhD

Abstract

Profit earned by defense contractors is a controversial issue among government officials and the defense industry. It is recognized that profits earned by defense contractors are not strictly the product of the dynamics of a competitive market, but of federal profit statutes, contractual incentive schemes, the quality of government oversight, and in a market of less than full competition. As such, there is always concern of whether contractors are earning “excessive" profit -- through policy or failed oversight. The purpose of this research is to investigate the question of reasonable profits from one particular angle -- whether profit margins differ among two different categories of contractors, primes and sub-contractors. We assume rational behavior from contractors, and expect profit to rise where, broadly speaking, opportunity permits. Primes and subs face different opportunity. Principal-agent theory predicts sub-contractors may find opportunity to achieve higher profits. Asymmetric information theory predicts those with a special expertise in figuring out the complex DoD environment may earn higher profits. This study examine whether contractors may earn differential returns based on their distance from oversight, and their relative expertise toward others on projects. The study finds that sub-contractors, in the aggregate do not earn higher median profits than primes. However, it finds that expertise does appear to be a significant characteristic at a finer level of analysis. Expertise correlates with higher median profits. And, sub-contractors who exhibit this expertise earn higher median profits than both their primes and other sub-contractors.

AFIT Designator

AFIT-ENV-MS-19-M-191

DTIC Accession Number

AD1077682

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