There are two common types of contracts used when private firms contract to provide services to governmental agencies: cost-plus and fixed-price. The cost- plus contract allows the contracting firm to recover the costs associated with providing the product or service plus a reasonable profit. The fixed-price con¬ tract provides for a fixed payment to the contractor. When a fixed-price contract is used, the contractor’s profits will be based on its ability to control costs relative to the price received.

A Wall Street Journal article announced that, in May 1996, Alliant Tech- systems Inc. was being investigated for the way that it accounted for its govern¬ ment contracts. Specifically, the company was being investigated because of suspicions that costs related to fixed-price government contracts were being shifted to cost-plus government contracts.

[SOURCE: Andy Pasztor, “Alliant LTnit Is Said to Face Criminal Probe,” Wall Street Journal (May 3, 1996), pp. A3, A6. Reprinted by permission of The Wall Street Journal, © 1994 Dow Jones &< Company, Inc. All Rights Reserved Worldwide.]

a. Why would a company that conducts work under both cost-plus and fixed- price contracts have an incentive to shift costs from the fixed-price to the cost-plus contracts?

b. From an ethical perspective, do you feel such cost shifting is ever justified? Explain.

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