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Many items purchased by the Department of Defense (DoD) are one of a kind and involve very advanced and specialized technology. As a consequence, the DoD often finds itself procuring items from a sole source. When competition cannot be used to determine a price for the product, the DoD must instead attempt to determine a fair price for it based upon the anticipated costs of producing it. In a noncompetitive procurement, the firm must submit extremely detailed estimates of its anticipated costs of production. DoD negotiators use this information and any other available information to create their own estimate of the cost of production. A complicated set of regulations, collectively referred to as profit policy, are then used to calculate a profit for the contract. The negotiators' estimate of a fair price consists of the anticipated cost plus the profit. Armed with these calculations, the negotiators then attempt to obtain a price as close to the calculated fair price as possible. This report provides an economic analysis of the regulations used to calculate the part of the fair price referred to as profit. It argues that profit actually consists of many conceptually distinct components, each performing a distinct economic function. Thus, this report provides an overall economic framework in which to understand the function of profit in the procurement process. Such understanding is, of course, a necessary precondition to a debate over modifying it.