Reduced Profit Margins for Undefinitized Contract Actions

Sometimes, due to exigencies of Defense Department needs, the Government will authorize contractors to proceed with the work and submit the associated pricing proposal at a later date. These actions are typically referred to as "undefinitized contract actions" or UCAs.

As work progresses without a contract, a lot of the "risks" associated with performance evaporates. Ultimately, actual cost are rolled into the contract price while cost to complete remain the only uncertainty. The longer a contractor performs under a UCA, the less risk there is to that contractor.

Profit and Fees are based on risk perceptions. Fixed price contracts are awarded higher fees than cost-type contracts for obvious reasons. The Defense Department uses a tool called the "Weighted Guidelines Method" to calculate a reasonable fee range for each contract. See DoD Weighted Guidelines for Determining Profit or Fee. The concern has been, for some time, that contracting officers do not adjust the fee for UCA's where a substantial portion of the work has already been performed resulting in less risk for the contractor.

That's about to be corrected.

The Defense Department finalized a new rule last week to provide a more transparent means of documenting the impact of costs incurred during the undefinitized period of an UCA and to recognize when contractors demonstrate efficient management and internal cost control systems through the submittal of a timely, auditable proposal in furtherance of definitization.

According to the Defense Department, sometimes contracting personnel have not documented their consideration of the reduced risk to the contractor of costs incurred during the undefinitized period of a UCA. While such costs generally present very little risk to the contractor, the contracting officer should consider the reasons for any delays in definitization in making their determination of the appropriate assigned value for contract type risk.

Under the new rule, the weighted guidelines method adds two new factors; contract type risk based on incurred costs at the time of qualifying proposal submission and contract type risk based on government estimated cost to complete.

You can read more about the proposed rule here.