Use Of Fixed-price Contracts Research Articles

Creditor protection and government procurement contracting

This paper examines the effect of creditor protection on the choice of government procurement contract types. We use the staggered adoption of anti-recharacterization laws (ARLs) as a quasi-natural experiment to investigate the research question. ARLs strengthen creditors’ rights to repossess collateral in bankruptcy and thus enhance creditor protection. Using a dataset of U.S. government contracts, we find a significant shift from the use of fixed-price contracts to cost-plus contracts after the adoption of ARLs. The effect is more pronounced for firms with higher default risk and stronger firm-government ties. We also find that the government is more likely to switch away or reduce the contract value for contractors affected by ARLs. Overall, our findings point to an important relation between debt contracts and government contracts.

Firm-to-Firm Relationships and the Pass-Through of Shocks: Theory and Evidence

Abstract Economists have long suspected that firm-to-firm relationships might lower the responsiveness of prices to shocks due to the use of fixed-price contracts. Using transaction-level U.S. import data, I show that the pass-through of exchange rate shocks in fact rises as a relationship ages. Based on novel stylized facts about a relationship's life cycle, I develop a model of relationship dynamics in which a buyerseller pair accumulates relationship capital to lower production costs under limited commitment. The structurally estimated model generates countercyclical mark-ups and countercyclical pass-through of shocks through variation in the economy's rate of relationship creation, which falls in recessions.

The impact of industry consolidation on government procurement: Evidence from Department of Defense contracting

We study the relationship between market structure and public procurement outcomes. In particular, we ask whether and to what extent consolidation-driven increases in industry concentration affect the way in which the government procures its goods and services. We focus on the defense industry, by far the largest contributor to federal procurement spending in the U.S. This industry experienced a sharp increase in the level of concentration during the 1990s, driven by a series of large mergers between defense contractors. Using detailed microdata on Department of Defense (DoD) contract awards, we estimate the causal effect of industry concentration on a series of procurement outcomes, leveraging the differential impact of these mergers across product markets. We find that market concentration caused the procurement process to become less competitive, with an increase in the share of spending awarded without competition, or via single-bid solicitations. Increased concentration also induced a shift from the use of fixed-price contracts towards cost-plus contracts. However, we find no evidence that consolidation led to a significant increase in acquisition costs. We infer that the government’s buyer power, especially relevant in this context given the government is often the only purchaser, constrained firms from exercising any additional market power gained by consolidation.

Firm-to-Firm Relationships and the Pass-Through of Shocks: Theory and Evidence

Economists have long suspected that firm-to-firm relationships might lower the responsiveness of prices to shocks due to the use of fixed-price contracts. Using transaction-level U.S. import data, I show that the pass-through of exchange rate shocks in fact rises as a relationship grows older. Based on novel stylized facts about a relationship’s life cycle, I develop a model of relationship dynamics in which a buyer-seller pair accumulates relationship capital to lower production costs under limited commitment. The structurally estimated model generates countercyclical markups and countercyclical pass-through of shocks through variation in the economy’s rate of relationship creation, which falls in recessions.

Research on Cost Risk Identification of Metallurgical EPC Project

This paper describes the current status of our EPC projects in China, noting metallurgical EPC projects as complex process, long construction period, the use of fixed-price contracts, and other features make it faces huge cost risk, so it is necessary to conduct a cost risk management, while the metallurgical EPC project risk identification is the basis for subsequent risk management. Then, the specific metallurgical EPC project for the case describe in detail the methodology and process of cost risk identification, and ultimately the formation of risk breakdown structure table.

The Price of Air Power: Technological Change, Industrial Policy, and Military Aircraft Contracts in the Era of British Rearmament, 1935–39

During the Second World War leading belligerents such as Britain, the United States, and Germany, favored the use of fixed-price contracts for purchasing military aircraft. These contracts were believed to encourage economical and efficient production. Yet only Britain succeeded in developing contractual procedures based primarily upon the fixed price. This article examines the evolution of British contractual policy in the later 1930s, drawing upon both corporate and official records to explain why Britain succeeded where both America and Germany failed. Efforts to develop the fixed-price system in Britain were initially frustrated by the technological revolution which transformed aviation during the 1930s. Moreover, divided opinions within both the government and the aircraft industry helped prevent the emergence of a coherent contractual policy. By 1939, however, British aircraft manufacturers were unanimous in their support for fixed-price contracts.

Chapter 12 - A Private Contractor's Approach to Decommissioning Costs

Generic cost estimates are important in giving a general impression about the magnitude of the overall task of decommissioning. Site-specific cost estimates, however, are necessary for each individual power plant so that differences in design, site, and history will be reflected as accurately as possible. Thomas LaGuardia has more experience in preparing such estimates than anyone else in the U.S. In this chapter he gives an insider's view of cost estimates which will be valuable to the utility operator who wants to know whether an estimate is adequate without being overinflated, to the regulator who is responsible to the citizens, and to the public who ultimately will pay the bills. He discusses various types of contracts such as fixed price, time and materials, cost-plus -fixed-fee, and utility-to-DOC fixed price, recommending the use of fixed-price contracts for subcontractors and a cost-plus-fixed or incentive fee for the primary contractor. He stresses the need for site-specific estimates.

The Case of the Profitable Bloodhound

The pricing of defence contracts is a matter that has attracted much attention on both sides of the Atlantic in recent years. In the United States, the Secretary of Defence, Mr. Robert McNamara, has made a great effort to reduce the cost to the government of equipment bought from private manufacturers. He has advocated a greater use of fixedprice contracts in which the contractor has an incentive to keep his costs down since he retains all his cost savings in addition to the agreed profit. In order to induce manufacturers to accept such contracts, Mr. McNamara is prepared to allow a widening of profit margins to a maximum of 25% on cost in exceptional circumstances. He believes that, despite this increased profit margin, the fixed-price contract results in a lower price than where the manufacturer has not such a strong incentive to limit costs.' In Britain, the results of one such fixed-price contract have aroused considerable public interest and comment. They are a useful indication of the difficulties and pitfalls facing Mr. McNamara in his task. The contract in question was that placed with Ferranti Ltd., a leading manufacturer of electronic equipment for the production of the guidance system of a missile known as Bloodhound I. A government enquiry in July, 1964 revealed that Ferranti had made a profit of over ?5.7 million in selling the missiles to the government for ?12 million on a fixed-price contract. The profit was so large that it raised serious doubts about the effectiveness of fixed-price contracts-and indeed about the efficiency of the entire system of government contracting.