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Cost realism in defense contracting

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  • K. T. Wallenius
  • N. K. Womer

Abstract

In this article we report and evaluate a technique developed by the U.S. Navy for the purpose of choosing winners of Research and Development (R&D) contracts from among several competing contractors. The technique is intended to discourage “buy‐in” bidding (i.e., submitting unrealistically low bids for the purpose of winning the bidding competition). We conclude that, within our decision scenario, the technique tends to induce bids that are close to the contractor's expectation of the government cost estimate. The article is descriptive (we discuss the scenario and an existing approach), prescriptive (we offer cost realism scoring rule admissibility requirements), and projective (we explore how admissible realism scoring rules should affect contractor behavior).

Suggested Citation

  • K. T. Wallenius & N. K. Womer, 1989. "Cost realism in defense contracting," Naval Research Logistics (NRL), John Wiley & Sons, vol. 36(5), pages 533-557, October.
    • Handle: RePEc:wly:navres:v:36:y:1989:i:5:p:533-557
    DOI: 10.1002/1520-6750(198910)36:53.0.CO;2-1
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    References listed on IDEAS

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    1. J. Michael Cummins, 1977. "Incentive Contracting for National Defense: A Problem of Optimal Risk Sharing," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 168-185, Spring.
    2. Willis R. Greer, Jr. & Shu S. Liao, 1986. "An Analysis of Risk and Return in the Defense Market: Its Impact on Weapon System Competition," Management Science, INFORMS, vol. 32(10), pages 1259-1273, October.
    3. Grossman, Sanford J & Stiglitz, Joseph E, 1977. "On Value Maximization and Alternative Objectives of the Firm," Journal of Finance, American Finance Association, vol. 32(2), pages 389-402, May.
    4. Schall, Lawrence D, 1972. "Asset Valuation, Firm Investment, and Firm Diversification," The Journal of Business, University of Chicago Press, vol. 45(1), pages 11-28, January.
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    Cited by:

    1. Nam, K. & Chaudhury, A. & Rao, H. Raghav, 1995. "A mixed integer model of bidding strategies for outsourcing," European Journal of Operational Research, Elsevier, vol. 87(2), pages 257-273, December.

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