Why is Defense Spending So Lucrative for Private Companies?

[Gokul43201]

A friend of mine works for a metal working company that has been getting contracts from DoD for making (possibly, among other things) the steel shells for the famous ****** ****** bombs.

The company is making a roughly 1000% profit on the contract (they get paid a million bucks for what costs less than a hundred grand). In addition, DoD provided, free of charge, certain special (meaning very expensive) equipment that the company did not possess, that were needed for the job. The company gets to keep the equipment, as a special bonus.

How and why is this happening ? I don't get it !

 

[Entropy]

Because most people need encouragement to participate in murder. Giving people money usually dulls their morality.

 

[BobG]

How they get such a huge profit margin, I wouldn't know. There may be more costs involved that aren't obviously apparent. Nowadays, a fat contract doesn't stay fat very long - an initial contract may be pretty fat, but by time renewal comes around, the company's competitors will have seen how much the government's willing to pay. The most likely cause is that whoever's awarding the contract doesn't have enough expertise to know what a reasonable price is.

If the total is one million, then I'm pretty sure the contract is small enough to award via a sole source contract. Those are usually based on the past relationships between the company and the government (trust - a good thing to have and keep).

The competitive bidding process isn't something that's cost free. The expected savings should outweigh the bidding process (i.e. most contractor bids will be reasonably close to each other provided knowledgeable companies bid for the contracts). Add on to that, that the lowest price from an unknown source may not necessarily be such a great deal. There's been a few contracts won by a company that really didn't have the resources to pull off the deal. You've heard that saying "When you jump out of the plane, just remember your parachute was made by the lowest bidder."

Considering how most big contracts are awarded, the company providing the steel shells may not even be dealing with the government. They could be a subcontractor on a bigger contract. And their ability to judge how much to pay a subcontractor is about as good as the government's - if they have past experience, they'll make sure they're picking a reliable subcontractor at a reasonable price. If the big contract entails some things they may not be that good at (a good reason to subcontract it to someone who does), they may not have enough expertise to know what a reasonable price is.

Then add on the 'intangibles'. A certain percentage of government contracts are supposed to be awarded to small businesses or disadvantaged businesses. Since bidding on major contracts are beyond the means of both groups, they usually get added on as subcontractors to make the major companies' bids more attractive. If you can combine traits - such as a small business owned by a handicapped female minority - you can hit the jackpot as a subcontractor, especially if you stick to one field and actually generate some exerience and a good reputation.

 

[JohnDubYa]

That 1000% profit is not only common, but dissipates very quickly once you pay worker's compensation, wages, insurance... And never mind the research costs.

A plasic model airplane probably costs about ten bucks to purchase. How much do you think it costs to punch out per box? Ten cents? How expensive is styrene plastic?

 

[loseyourname]

Heck, CD's cost a couple of cents to produce, are sold for close to $20, yet record companies are going out of business. I'm amazed that people actually post stuff like this.