A Study on Improving Initial Cost and Contract System to Enhance Price Competitiveness of Military Supplies in the Defense Industry
Authors:   Asia-Europe Perspective Association, Hur Kyung , Lee Chul-Won 
Published: June 2018

The defense industry has contrasting emblematic purposes between the government which buys the products and the company which sells such goods. In the process of acquiring weapon system, the government is placed in a position where it has to maximize military value according to the limited national defense budget. On the other hand, a business firm has to maximize its profit and secure its profitability in order to maintain and develop the business itself. Thus the buyer and the seller have conflicting symbolic values that they purse regarding the defense supplies. Moreover when selecting a subject for contracting matters, due to the feature that high-degree weapon system has, high technological skill and specialized manufacturing system of a specific company is needed. This then makes the marketing conditions of the defense industry form a bilateral monopoly environment and the determining of the cost is relied on the limited cost information that the company provides.
The cost and the contract system for the defense industry have been the subject of numerous relevant studies and advancements since the 1970s; however, many problems have presented themselves such as a number of disagreements and distrust, and the occurrences of absurdity between the government and companies due to conflicts of interest in relationships between the efficient operation of budgets for national defense and the guarantee of appropriate profits for fostering and supporting the defense industry during the execution process. In the meantime, the government has maintained the cost and the contract system which approve cost data that occurs in companies, in order to protect and cultivate the defense industry. However, the government has reached a time to radically revise the cost and the contract system for defense industrial goods in order to expand exports of defense industrial goods through the extension of the base of the defense industry and the development of weapons systems with international competitiveness and cost reductions.
This paper proposed the implementation of an integrative cost management system to reasonably and efficiently manage a cost accounting system for the enhancement of price competitiveness of defense industrial goods out of the cost systems for defense industrial goods. It also suggested the application of standard rate of general management ratio and the simplifying methods for the complicated profit system so that companies can endeavor to reduce costs by themselves. Concerning the promotional plans for the incentive contract system that is not well utilized in the defense contract system, the paper proposed the abolishment of the approximation contract system which probably leads to wasteful budgets with an increase in profits along with an increase in costs incurred, planned to make compensation of incentives for cost reduction, and planned to enter into a incentive contract with partners who produce and provide major functional goods.
In addition, in consideration of characteristics of the weapons system for defense industrial goods, there should be a plan such that the fixed-price contracts according to the price fluctuation of the governmental contract law adjust the amount of price fluctuation occurring in partners or sub-contractors, and detailed instructions for adjusting contract the amount by price fluctuation, which is appropriate for an intermediary fixed contract of which the duration of the contract is long-term, should also be established.
The proposed improvement strategies for the cost and the contract system may be somehow insufficient, and generate side-effects and limitations during its implementation in reality; however, if the system is further researched and developed, it is sure to be committed to the maximization of the transparency, reliability of the defense industry, and the promotion of exports with the increase of price competitiveness of defense industrial goods.