The Department of Defense's (DoD) expanded use of performance based contracts increasingly forces aerospace and defense (A&D) companies to accept the lion's share of risk. 

Process inefficiencies and poor planning that could be passed on to customers through cost plus contract are now directly absorbed by the provider and present a real threat to profitability. Yet, because these types of deals are relatively new and complex, most original equipment manufacturers (OEMs) face tremendous challenges in attempting to calculate the risks. To protect themselves, many "just add a risk multiplier to the cost of the contract" (as one A&D executive put it to us). We believe the problem with this approach is that there's no way to know if the "fudge factor" is the right size. If it’s too low, the provider could face big losses. If it's too high, the provider's bid may not be competitively priced.

Thankfully, we have developed a better way. Deloitte Consulting LLP and MCA Solutions, Inc. have collaborated to develop a point of view titled "Pricing Performance Based Logistics Contracts: A Risk-based Approach" that describes a methodology using emerging tools and techniques to more accurately identify, price and manage the risk inherent within performance based logistics contracts. The outlined approach should be considered by OEMs as they quantify their risks and design performance based contracts that are sustainable, profitable, and competitive. Learn more by downloading the attachment below in PDF format.