Undefinitized Contract Actions? Government May Lower Profit Percentages

Undefinitized Contract Actions (UCAs) are those contract actions for which the contract terms, specifications, or price are not agreed upon before contract performance begins (see DFARS 217.7401). UCAs are used when the negotiation of a definitive contract action is not possible in sufficient time to meet the Government's requirements and the Government's interest demands that the contractor be given a binding commitment so that contract performance can begin immediately.

Normally, UCAs must be definitized withing 180 days (six months) but there are provisions for a 90 day extension, if warranted. UCAs however cannot be definitized until the contractor submits a "qualifying proposal".

A "qualifying proposal" means a proposal containing (i) sufficient data for the DoD to do complete and meaningful analyses and audits of the data in the proposal and (ii) any other data the contracting officer has determined DoD needs to review in connection with the contract (definition at DFARS 217.7401(c)). . So, for example, if a contractor's proposal passes the proposal adequacy checklist found at DFARS 252-215-7009, we would presume it to be a "qualifying proposal".

Contractors need to submit their qualifying proposals as soon as possible. Waiting runs the risk of reduced profits. Why? Because the longer you wait, the less uncertainty there is in final cost of the contract. Costs are more likely to be based on actual costs because they've already been incurred rather than estimates of future costs.

Under the proposed regulations, the contracting officer shall assess the extent to which costs have been incurred prior to definitization of the contract action. When costs have been incurred prior to definitization, contracting officers are instructed to generally regard the contract type risk to be in the low end of the designated range. If a substantial portion of the costs have been incurred prior to definitization, the contracting officer may assign a value as low as zero percent, regardless of contract type. Zero percent profit seems pretty extreme and probably is. We've never seen a negotiated profit rate that low, regardless of circumstances.

But suppose that the reason for not definitizing a contract in a timely manner is the Government's fault. It happens. Is it fair to penalize a contractor under those circumstances? No, and the proposed regulations provide for that.

However, if a contractor submits a qualifying proposal to definitize an undefinitized contract action and the contracting officer for such action definitizes the contract after the end of the 180-day period beginning on the date on which the contractor submitted the qualifying proposal, the profit allowed on the contract shall accurately reflect the cost risk on the contractor as such risk existed on the date the contractor submitted the qualifying proposal. 

For this reason, as we stated above, it is important for contractors to submit "qualifying proposals" as soon as possible. Failure to do so jeopardizes the profit potential of the contract.