Raytheon 2013 Annual Report Download - page 17

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and requirements could result in reductions to the value of contracts, contract modifications or termination, and the assessment
of penalties and fines and lead to suspension or debarment, for cause, from U.S. Government contracting or subcontracting
for a period of time. In addition, government contractors are also subject to routine audits and investigations by U.S. Government
agencies such as the Defense Contract Audit Agency (DCAA) and Defense Contract Management Agency (DCMA). These
agencies review a contractor's performance under its contracts, cost structure and compliance with applicable laws, regulations
and standards. The DCAA and DCMA also review the adequacy of and a contractor's compliance with its internal control
systems and policies, including the contractor's accounting, purchasing, property, estimating, earned value management and
material management accounting systems. For a discussion of certain risks associated with compliance with U.S. Government
contract regulations and requirements, see Item 1A “Risk Factors” of this Form 10-K.
U.S. Government contracts include both cost reimbursement and fixed-price contracts. Cost reimbursement contracts, subject
to a contract-ceiling amount in certain cases, 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 cost results compared to contractual cost targets; 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, the contractor is
reimbursed periodically for allowable costs and is paid a portion of the fee based on contract progress. Some costs incidental
to performing contracts have been made partially or wholly unallowable for reimbursement by statute, FAR or other regulation.
Examples of such costs include charitable contributions, certain merger and acquisition costs, lobbying costs, interest expense
and certain litigation defense costs.
Fixed-price contracts are either firm fixed-price contracts or fixed-price incentive contracts. Under firm fixed-price contracts,
the contractor 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, the contractor shares with the U.S. 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 contractor'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 contractor
usually receives either performance-based payments (PBPs) equaling up to 90% of the contract price or monthly progress
payments from the U.S. Government generally in amounts equaling 80% of costs incurred under U.S. Government contracts.
The remaining amount, including profits or incentive fees, is billed upon delivery and acceptance of end items under the
contract. The DoD has expressed a preference to utilize progress payments based on costs incurred on new fixed-price contract
awards as opposed to PBPs unless the contractor negotiates for PBPs. Generally speaking and subject to a number of factors,
PBPs can provide improved cash flows as compared to progress payments but introduce risk to contractors in return. In the
event we experience a greater proportion of progress payments for our fixed-price DoD contracts in the future than historically,
it could have an adverse effect on our operating cash flow and liquidity. For a discussion of certain risks associated with fixed
price and cost reimbursement contracts and risks associated with changes in U.S. Government procurement rules, regulations
and business practices, see Item 1A “Risk Factors” of this Form 10-K.
U.S. Government contracts generally also permit the government to terminate the contract, in whole or in part, without prior
notice, at the U.S. Government's convenience or for default based on performance. If a contract is terminated for convenience,
the contractor is generally entitled to payments for its allowable costs and will receive some allowance for profit on the work
performed. If a contract is terminated for default, the contractor is generally entitled to payments for its work that has been
accepted by the U.S. Government. The U.S. Government's right to terminate its contracts has not had a material adverse effect
upon our operations, financial condition or liquidity. For a discussion of the risks associated with the U.S. Government's right
to terminate its contracts, see Item 1A “Risk Factors” of this Form 10-K.
U.S. Government programs generally are implemented by the award of individual contracts and subcontracts. Congress
generally appropriates funds on a fiscal year basis even though a program may extend across several fiscal years. Consequently,
programs are often only partially funded initially and additional funds are committed only as Congress makes further
appropriations. The contracts and subcontracts under a program generally are subject to termination for convenience or
adjustment if appropriations for such programs are not available or change. The U.S. Government is required to equitably
adjust a contract price for additions or reductions in scope or other changes ordered by it. For a discussion of the risks associated
with program funding and appropriations, see Item 1A “Risk Factors” and “Overview” within Item 7 of this Form 10-K. In