Raytheon 2004 Annual Report Download - page 30

12
GOVERNMENT CONTRACTS
The Company and its various subsidiaries act as a prime contractor or major subcontractor for many different
Government programs, including those that involve the development and production of new or improved
electronic systems or major components of such systems. Over its lifetime, a program may be implemented by the
award of many different individual contracts and subcontracts. The funding of Government programs is subject to
congressional appropriations. Although multi-year contracts may be authorized in connection with major
procurements, Congress generally appropriates funds on a fiscal year basis even though a program may continue
for many years. Consequently, programs are often only partially funded initially, and additional funds are
committed only as Congress makes further appropriations. The Government is required to adjust equitably a
contract price for additions or reductions in scope or other changes ordered by it.
Generally, government contracts are subject to oversight audits by Government representatives, and, in addition,
they include provisions permitting termination, in whole or in part, without prior notice at the Government’s
convenience upon the payment of compensation only for work done and commitments made at the time of
termination. In the event of termination for convenience, the contractor will receive some allowance for profit on
the work performed. The right to terminate for convenience has not had any material adverse effect upon
Raytheon’s business in light of its total government business.
The Company’s government business is performed under both cost reimbursement and fixed price prime
contracts and subcontracts. Cost reimbursement contracts provide for the reimbursement of allowable costs plus
the payment of a fee. These contracts fall into three basic types: (i) cost plus fixed fee contracts which provide for
the payment of a fixed fee irrespective of the final cost of performance; (ii) cost plus incentive fee contracts which
provide for increases or decreases in the fee, within specified limits, based upon actual results as compared to
contractual targets relating to such factors as cost, performance and delivery schedule; and (iii) cost plus award fee
contracts which provide for the payment of an award fee determined at the discretion of the customer based upon
the performance of the contractor against pre-established criteria. Under cost reimbursement type contracts,
Raytheon is reimbursed periodically for allowable costs and is paid a portion of the fee based on contract progress.
Some costs incident to performing contracts have been made partially or wholly unallowable by statute or
regulation. Examples are charitable contributions, certain merger and acquisition costs, lobbying costs and certain
litigation defense costs.
The Company’s fixed-price contracts are either firm fixed-price contracts or fixed-price incentive contracts.
Under firm fixed-price contracts, Raytheon agrees to perform a specific scope of work for a fixed price and as a
result, benefits from cost savings and carries the burden of cost overruns. Under fixed-price incentive contracts,
Raytheon shares with the Government savings accrued from contracts performed for less than target costs and costs
incurred in excess of targets up to a negotiated ceiling price (which is higher than the target cost) and carries the
entire burden of costs exceeding the negotiated ceiling price. Accordingly, under such incentive contracts, the
Company’s profit may also be adjusted up or down depending upon whether specified performance objectives are
met. Under firm fixed-price and fixed-price incentive type contracts, the Company usually receives either milestone
payments equaling 90% of the contract price or monthly progress payments from the Government generally in
amounts equaling 80% of costs incurred under Government contracts. The remaining amount, including profits or
incentive fees, is billed upon delivery and acceptance of end items under the contract.
The Company’s government business is subject to specific procurement regulations and a variety of socio-
economic and other requirements. Failure to comply with such regulations and requirements could lead to
suspension or debarment, for cause, from Government contracting or subcontracting for a period of time. Among
the causes for debarment are violations of various statutes, including those related to procurement integrity, export