Monday, October 17, 2011

Contract Line Item Pricing

The Department of Defense has issued instructions to its acquisition personnel regarding the integrity of contract line item pricing. This was prompted by a recent review that found during the first five months of fiscal year 2011, about 38 percent (1.7 million out of 4.4 million line items) of contract line items contracted for, had no unit of measure or used "lump sum" as the unit of measure. According to DoD, contracts must define clear requirements that reflect supplies and services acquired in order to enable accurate contract completion and payment. Historically, analysis of what the Government is actually buying has been hampered because too many supplies and services lack any unit of measure that corresponds to the quantity required.

DoD has now mandated that no contract action can be issued using "lump sum" or "dollars" as a unit of measure. Contract pricing arrangements should ensure prices are proportional to work performed and that actual deliveries can be traced to the prices.

This change could affect the timing and frequency of contractor reimbursements (e.g. public vouchers and progress payments). Contracting officers (and contractors) often use "lump sum" pricing as a means of aligning reimbursement/payments with work performed. In the futures, reimbursements will need to be more closely aligned with deliverables.

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