Friday, September 23, 2016

DoD Prohibition on Use of Cost-Type Contracts for Construction

The Department of Defense amended its FAR Supplement (DFARS) with a final rule that implements a section from the 2012 National Defense Authorization Act that prohibits any form of cost-plus contracting for military construction projects or military family housing projects. Cost-plus contracts include (i) cost-plus-incentive-fee, (ii) cost-plus-fixed-fee, and (iii) cost-plus-award fee contracts.

The reason for the NDAA prohibition is fairly obvious; cost-plus construction contracts frequently encounter cost overruns and these overruns are often significant. Last year, for example, the Department of Energy had to acknowledge that the cost of its Vitrification Plant being constructed under a cost-type contract is projected to go over budget by $430 million. There is no financial risk to the contractor though as the Government simply increases the funding level and the contractor draws down on the funding to cover its expenses. We're not sure about the Vitrification Plant contract but many times, fee (or profit) is added to these overruns.

This new rule is unlikely to have a significant impact as cost-type construction contracts have generally fallen out of favor anyway. In fiscal year 2015, only 19 cost-reimbursement type construction contracts were awarded - two of them to small businesses.

The new rule includes two exceptions to the blanket prohibition; a declaration of war or the declaration of a national emergency by the President where the use of the Armed Forces is authorized.

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