As the result of a study on the profitability of defense
contractors, a profit and pricing policy for most negotiated
production-type contracts became effective on October 1, 1976. To
encourage greater investment, the Department of Defense (DOD)
allowed the imputed cost of capital for facility investment on most
negotiated defense contracts and recognized the level of facility
investment in establishing a profit objective for use in
negotiating a profit rate with contractors. Contractors did not
respond positively to attempts by DOD to encourage greater
investments in new or upgraded plants and equipment which would
lower production costs, since limited emphasis was given to
facilities investment in establishing the government's
prenegotiation profit objectives. The new policy provided that only
10 percent of the government's profit objectives would be based on
the level of the contractors' investments in plant and equipment.
Unfortunately, the new profit policy did not encourage contractors
to increase their investments in cost reducing facilities, but
resulted instead in the negotiation of higher profit rates on an
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