USING REAL OPTIONS FOR MAKING SUSTAINMENT DECISIONS WITHIN COMPLEX INTEGRATED ENGINEERING-MANAGEMENT ACQUISITION SYSTEMS UNDER OUTCOME-BASED CONTRACTS

Outcome-based contracts are growing in popularity for both governmental and nongovernmental acquisitions of critical systems. These contracts allow the customer to buy the performance of the system rather than purchase the system, and/or to buy the availability of the system rather than pay for maintenance. Hence, they are highly quantified 'satisfaction guaranteed' contracts where 'satisfaction' is defined by the outcomes received from the system, usually articulated as a time (e.g., operational availability). However, their effectiveness in lowering costs and improving performance depends on the ability of the customer to properly structure and implement contract incentives to promote vendor behavior that reduces costs and improves performance while delivering the customer's desired outcomes. Unfortunately, the contract design (if done at all) is always performed separate from the engineering design process and provided (best case) as a requirement to the engineering design process. This process (or lack of process) creates significant risks for all parties. For systems that are subject to performancebased contracts, contract failure may mean hundreds of millions of dollars spent by the customer (potentially the public) for either no outcome or inadequate outcome, or result in the contractor being driven out of business, which can lead to disaster for both parties.