Analysis of Incentive Contracts with Respect to Risk

The study discussed incentive contracts and cost overruns as related to industrial risk categories. The various aspects of risk considered by the Department of Defense had contract modifications as a common factor reflecting risk. Based on the average percentage of contract modifications, industrial commodity categories were rated in terms of risk. Statistical tests were performed which analyzed the tendency of incentive contracts, grouped by commodity categories, to over or under run target costs. It was concluded that high risk commodity categories usually overran target costs. Methods of reducing risk were discussed.