Profitability and Cost Shifting in Government Procurement Contracts

33 Pages Posted: 19 Aug 2014

See all articles by Hui Chen

Hui Chen

University of Zurich

Katherine Gunny

University of Colorado at Denver

Date Written: August 18, 2014

Abstract

We examine whether contractors with cost plus contracts earn a higher profit, and whether the higher profit is associated with cost shifting behavior, using a unique set of data of federal procurement contracts between the years 2005 and 2010. Prior research often examines government contractor profitability without differentiating the contract types, which is a key determinant to the contractor’s ability to cost-shift. We identify firms that are awarded with cost plus contracts in some years and without in other years. We find their profitability significantly increases during the years that cost plus contracts are awarded. We also find that these firms exhibit greater discretionary expenditures during the years with cost plus contracts, relative to the years without, which is consistent with cost shifting behavior. However, effective monitoring through the Cost Accounting Standards helps mitigate such behavior.

Keywords: Government procurement, cost shifting, cost plus contracts

JEL Classification: M41, H57

Suggested Citation

Chen, Hui and Gunny, Katherine, Profitability and Cost Shifting in Government Procurement Contracts (August 18, 2014). AAA 2015 Management Accounting Section (MAS) Meeting, Available at SSRN: https://ssrn.com/abstract=2482605 or http://dx.doi.org/10.2139/ssrn.2482605

Hui Chen (Contact Author)

University of Zurich ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

Katherine Gunny

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

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