Monday, June 24, 2019

What are Undefinitized Contract Actions?

This is an update to previously posted articles on Undefinitized Contract Actions. To read previous posts, see Undefinitized Contract Actions (UCAs) and Undefinitized Contract Actions? Government May Lower Profit Percentages.

A Government contract is considered 'definitized' where there is agreement on (i) contract terms, (ii) specification, and (iii) price. An undefinitized contract then means any contract action for which the contract terms, specifications, or price are not agreed upon before performance is begun under the contract.

Undefinitized contract actions allow the contractor to begin work before there is a finalized contract in place. However, since undefinitized contract actions represent a risk to the Government, they are to be used only in rare and select circumstances.

Generally, undefinitized contract actions are to be used only when (i) the negotiation of a definitive contract action is not possible in sufficient time to meet the Government's requirements; and (ii) the Government's interest demands that the contract be given a binding commitment so that contract performance can begin immediately.

Contracting officers normally cannot enter into Undefinitized Contract Actions (UCAs) without higher level approval. UCA agreements must include a not-to-exceed price. This is necessary to ensure there is a limitation to the Government's financial exposure. UCAs must be definitized by the earlier of (i) 180 days (six months) or (ii) the date on which the amount of funds paid to the contractor under the contract action is equal to more than 50 percent of the not-to-exceed price.

UCAs should be rare occurrences but are more common than one would suppose (see GAO report: Observations of Air Force's Use of Undefinitized Contract Actions). Examples where UCAs are utilized include major acquisition programs with long-lead material purchases and where the Government needs to quickly respond to tragedies such as fires, hurricanes, and floods.

The one possible downside to contractors under the UCA process is the potential profit to be made. Sometimes performance is practically completed before the contract can be definitized making a firm-fixed price contract almost a cost-reimbursable contract. The farther down the performance period a contract goes before definitization, the less risk there is to the contractor (in the Government's view) which reduces risk to the contractor and a reduction in the profit percentage.

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