Thursday, June 27, 2019

NDAA 2020 - Government's Use of Firm Fixed Price Contracts

The Senate version of the 2020 NDAA (National Defense Authorization Act) is calling for two studies of the Defense Department's use of fixed-price contracts, one by DoD and the other by GAO (General Accountability Office).

The DoD's review will focus on how the Department informs decisions to use fixed-price contracts to support broader acquisition objectives, to ensure that such decisions are made strategically and consistently. It is to include decisions on the use of the various types of fixed price contracts, including fixed-price incentive contracts.

The GAO review is similar in scope. It will focus on (i) a description of the extent to which fixed-price contracts have been used over time and the conditions in which they are used, (ii) an assessment of the effects of the decisions to use of fixed-price contract types, such as any additional costs or savings or efficiencies in contract administration, and (iii) an assessment of how decisions to use various types of fixed-price contracts affects the contract closeout process.

To understand why the Senate is calling for these studies, one needs to go back to Section 830 of the FY 2017 NDAA. That provision, which has been enacted into law, requires the Defense Department to use firm fixed-price contracts for foreign military sales (FMS). There are several reasons why the Government likes fixed price contracts:

  1. Fixed price contracts provide greater incentive than cost-reimbursement contracts for the contractor to control costs and perform efficiently 
  2. Fixed price contracts shifts risk from the Government to the contractor
  3. Fixed price contracts reduce administrative costs

The Government's push (and preference) for fixed price contracting may have resulted in situations where contractors are losing too much money. Some acquisitions are not well suited for fixed price contracting (such as developmental programs) and the Government's propensity for fixed price contracts has had undesired consequences.

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