Profit Limitation: Regulated Industries and the Defense-Space Industries
Volume:Volume 3, No. 1
Issue: Spring 1972
Pages: pp. 3-25
Authors: Arthur E. Burns
Title: Profit Limitation: Regulated Industries and the Defense-Space Industries
Abstract: An effective profit limitation policy must employ control techniques that yield a profit outcome, or ceiling, consistent with policy norms. In general, utility profit regulation achieves this by allowing a profit sufficient to attract capital and provide a "fair" return including a risk premium. Whatever else may be said, such regulation is articulated.
In the defense-space industries fee determination is generally cost-based and a minor element in procurement price policy. Profit outcomes are indeterminant, varying with capital turnover rates. Subsequent renegotiation provides for the recapture of "excessive" profits. But the Renegotiation Act establishes no norms; the Act is devoid of analytical guidelines. There is no articulated profit limitation policy in the defense-space sector.
Studies reveal "inequities" in cost-based fee arrangements and progress payment policy. Prime contractors fare better than subcontractors, as do large compared with small contractors. Capital intensity and cost reduction are discouraged. To lesson these deficiencies a 1972 landmark policy shift gives capital equal weight with cost in a partial acceptance of regulated profit policy.
This paper suggests a functional profit analysis as a renegotiation policy guide, based on court decisions and Department of Defense policy change.