1. Defense Contract Incentives and the Health of the Defense Industry DAEC October 7, 2003
Mr. Terry Marlow
Vice President
Government Division

2. Industry Concern
Public statements indicate a perception that program cost and schedule growth results primarily from contractors’ failure to manage performance
Recently issued profit incentive policies may encourage use of high risk contracts too early in program development
Some recent award fee provisions may result in zero fees for minimal cost growth on risky development contracts

4. Industry Position
Industry shares Government’s Desire to Minimize Cost and Schedule Growth
However, major causes are often beyond contractors’ control
Requirement changes
Unforeseen technical challenges
Inadequate budgets
Cost estimate optimism in competition

5. Current Investment Environment
Defense-Industrial Initiatives Group
AAA
AA+ AA
AA- A+ A A-
BBB+
BBB
BBB-
BB+ BB
BB-
12/1992
12/1993
12/1994
12/1995
12/1996
12/1997
12/1998
12/1999
12/2000
12/2001
12/2002
Source: Factset, S&P Compustat, CSIS Analysis

6. Industry Proposal
Government/Industry Collaboration to Achieve Balance in Services’ Profit Policies
Aggressive Use of Draft RFPs to Facilitate Discussion of Appropriate Contract Incentives Prior to Implementation in a Competitive Solicitation
Permit changes to draft RFPs to accommodate industry comments
We appreciate Navy and Air Force willingness to work with industry to resolve this matter