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War Economy

Incentives to Inefficiency

Incentives to Inefficiency

High profits under war contracts were inequitable in a country where rigid stabilisation had been accepted by some other groups of income earners. Weighing much more heavily against the special wartime contracts was the fact that many of them did not make page 362 for speed in completing work. Contracts which provided for payment of labour and costs of materials plus a percentage provided an incentive to inefficiency and spinning out the job. The higher the cost of the job the higher the profit mark-up would be. The incentive for the contractor to save labour time, to conserve materials or to watch wage rates, materials prices and sub-contractors’ costs was gone. In fact any increase in these costs profited the contractor. He received his mark-up on the extra cost. Contracts of this type may well have speeded the allocation of work—for a time some contractors would accept nothing else. They were not designed to hasten the completion of the work.

While pressure of work was at its height, most of the modifications of the cost-plus types of contract did not succeed in removing their fundamental weakness. Attempts to improve wartime contracts involved, for the most part, forward estimates of costs, or at any rate of the profit element in them. The purpose was to avoid the disincentive effect of basing profits on actual costs and, if possible, to provide a profit incentive to keep costs within a fixed figure. Even where contractors were amenable, these attempts usually broke down, either because there was insufficient staff to make forward estimates or because forward estimates proved to be so wide of the mark that adjustments had to be made before the work was finished. Master schedules for defence construction work lost much of their effectiveness in the many cases where quantity estimates were not entered in advance. Target prices for ship construction work were often so far removed from actual costs that contract arrangements had to be adjusted before payment was made, a process which destroyed the original relationship between efficiency and profit.