Profit and Performance

The Performance of the Defense Acquisition System: 2015 Annual Report contained an analysis of prime and subcontractor profit margins. According to the data, first-tier subcontractors earn higher margins than prime contractors for development and production contracts, leading to the statement that “… these illustrate why the Department of Defense (DoD) has been working over the past few years to motivate prime contractors to control subcontractor prices and ensure profitability aligns with performance…” However, there is no analysis of performance. This implies, without substantiation, subcontractors are earning higher profits than they deserve.

While undeservedly high profits harm the link between pay and performance, so do undeservedly low profits. Such statements, and the behaviors they encourage for the acquisition workforce, undermines outreach efforts to Silicon Valley, Austin, and Boston-based firms, and disincentivizes companies currently within the industrial base, who want to provide the government with world class products and services. DoD should continue to work to ensure that their profit policies align profit with performance and are aligned with their desired industrial base composition and business model.