Contract Models for Increased Total Value Creation in Combat Aircraft Programs : A Case Study of Saab AB Aeronautics and FMV

Sammanfattning: Combat aircraft programs between a manufacturer and government are critical for both parties, asit involves significant costs, lengthy development times, and high risks. If successful, suchprograms can result in improved defense capabilities for the government and financial gains forthe manufacturer. However, due to the high technical uncertainty, value creation in the programscan be challenging. The purpose of this study was thus to examine how the total value creation,consisting of value for both parties, can be increased by choosing suitable contract models for theprogram, as contract model is of utmost importance due to its direct implication on value creationfor both actors in the programs. The purpose was answered by conducting a literature and casestudy, where the latter was made on the context of combat aircraft programs between Saab ABAeronautics and The Swedish Defense Materiel Administration (FMV). From the literature study, relevant theory regarding value creation, co-creation of value, andcontract models were identified and compiled. Different drivers of value were researched, basedon potential benefits and sacrifices for the actors in the combat aircraft programs, and categorizedinto technical and commercial factors. Extensive dialogues, risk sharing, and structures fordecision making, were identified as important mechanisms of co-creation of value. Finally,different contract models, categorized into fixed-price contracts, incentive contracts, and cost-pluscontracts, and their influence on the drivers of value and co-creation of value was discussed. Fromthe literature study, it was clear that there was no consensus of what contract model is most suitablefor a combat aircraft program, even though there were similarities in the literature of some authors. The case study consisted of eight interviews with representatives of both Saab AB Aeronauticsand FMV. Based on the answers of the interviews, a deeper understanding of what drives valueand co-creation of value in the programs was established, as well as how the contract models affectthese factors. When analyzing the empirics of the case study with the literature study, it was clearthat different phases of the program were of utmost interest, since what drives value differs in eachphase. Thus, as different contract models are suitable for different reasons, it was apparent thatone contract model is not sufficient for the whole program. Instead, the recommendation of thisstudy is that different contract models during different phases are suitable to increase the totalvalue creation in a combat aircraft program. For the first two phases of the program, initial studies and conceptualization, a cost-plus contractis recommended, as it could be damaging for technical value creation with incentives for costsavings. For the third phase, development and industrialization, an incentive contract isrecommended, since it enables experimentation and creation of technical value, while stilldecreasing the risk of excess spending and cost for the actors. For the final phase, production, afixed-price contract is recommended, as it allows for commercial value creation for both actors,without risk damaging the technical value creation. To conclude, this study develops the previousliterature with new findings on the connection of the theoretical areas. Further, it provides practicalrecommendations for manufacturers and governments involved in combat aircraft programs.