. Article Review; Profitability and Cost Shifting In Government Procurement Contracts
Briefly discuss the main issue investigated in the article
3. Briefly discuss prior literature
4. Discuss in your words research expectations/hypotheses
5. Briefly discuss the research method: research model, variables, sample
6. Discuss the results by referencing the tables used in the paper
7. Summarize the findings
8. Provide a brief critique of the article
9. Suggest future extension of the article
Article Review; Profitability and Cost Shifting In Government Procurement Contracts
Issue Investigated In the Article
In an article by Chen Hui and Katherine Gunny, the authors examine whether contractors who apply the cost plus method in procurement of contracts obtain a higher profit due to the cost shifting behavior that the method applies. In response, the article looks at the alternative to cost plus; fixed price and why it is preferred by the US government.
Prior Literature Discussions
The authors of the article study previous literature in the field choosing to substantiate the different types of costs and the way in which they can be applied. The first prong that the article focuses on is addressing the problem in the procurement setting. The research notes that a problem such as manipulation of data by contractors is eminent in the cost plus since the government is not able to control or observe all the costs that the contractors use. The research notes that such a case would not occur to the fixed price method. The research blames cost shifting through the cost plus by offering empirical evidence on how contractors have been making supernormal profits over the years.
The following are some of the hypothesis adopted by the research
H1. Government procurement contractors’ profitability is higher in years with a cost plus contract relative to years without cost plus contracts. Since it is not possible for the government to observe all the costs that are involved in procurement of a contract, there is a higher likelihood that the contractors may make cost shifting especially if the contract takes a longer period
H2. Government procurement contractors’ discretionary expenditure is higher in years with a cost plus contract relative to years with only fixed price contracts. This hypothesis hopes to examine the view that Costs plus contracts being able to make adjustment of the price make it possible for organizations to benefits more in the future even if the costs does not directly impact on the governments contract.
H3: Government contractors with cost plus contracts are relatively less profitable when cost accounting standards apply. The outcome of this hypothesis hopes to support the view that whenever accounting standards apply, contractors make lesser profits.
The paper adopts descriptive analysis through the sampling method. A sample selection is made through analysis of contracts between the year 2004 and 2010. Sample 1 are all contracts which include 5745 firm years and 1137 firms, in which case 1315 firm years did involve cost plus contracts while 4439 years never existed. Sample 2 of the research show firms without the cost plus contract in the same period. The data here was 2201 firm years for 383 firms which use cost plus and 1315 firm years and 886 firms which do not use cost plus. Sample 3 includes 1505 firms’ years on 258 firms, in which case 619 is the firm years with cost plus contracts and 886 firms that do not use cost plus. The research adopts sample 3 for main analysis and conducts a sensitivity analysis of sample 1 and 2.
Results by Referencing the Tables in the Paper
The tables act as references points which show where the researchers obtained the data and how they used this data to compute their analysis. The tables directly reflect on both the methodology, research design and the findings
Summary of Findings
The findings of the study confirm HI to be true with a coefficient of 0.008 (p = 0.03). Table 5 as noted in the appendix also confirms H2, while table 6 shows a negative significant correlation which suggests that the profitability of a firm decreases and the application of the accounting standards increases hence confirm H3.
Critique of the Article
H3 of the study indicates that whenever accounting standards are applied, firms will tend to make less profit. One wonders whether it means in other instances when these firms make supernormal profits whether they apply accounting standards
Suggestions to future extension of the article
Further research could focus on unraveling whether firms do apply accounting standards whenever they compute figures and how it would be possible for the government to monitor costs if cost plus is still to be applied.
Chen, Hui, and Katherine Gunny. “Profitability and Cost Shifting in Government Procurement Contracts.” Available at SSRN 2482605 (2014).