Government contracting options

by Edward G. Keating

Contractors represent a sizable and potentially growing portion of the Air Force's repair system. This report asks the question, How should the Air Force design its repair contracts to ensure high-quality, responsive repair? By developing an economic model of contractor motivations and behavior and simulating how contractors would respond to different types of contracts, the report aims to derive the government's optimal repair contract. The simulation suggests that a contract combining a sizable lump-sum payment with cost-sharing for required expensive spares can be a desirable approach. The contractor should be required to maintain a specified weapon system availability role. Such a contract assumes the contractor has fairly detailed information about the weapon system. These contracts are probably most appropriate for mature weapon systems with predictable usage patterns.