Effects of incentive contracts in research and development: A preliminary research report

Five research and development contracts that were converted from a cost reimbursement basis to a form of cost incentive contract were studied by interviews with government and contractor personnel associated with the projects. The analyses of these contracts indicate that during negotiations for incentive conversions, contractors avoid risk by some combination of stalling and allowing time to reduce technical uncertainty or by refusing to negotiate agreements that contain cost sharing possibilities. Little evidence was found that would support the theoretical assertion that contractors would alter their behavior to seek the improved profits possible under R&D incentive contracts. However, the evidence does indicate that losses on incentive contracts are highly motivating and may even lead to harmful shortcutting and work stoppage threats.