US DOD Repeals Preference for Fixed-Price Contracts
On October 28, 2022, the Department of Defense (“DoD”) issued a final rule, DFARS Case 2022-D007, to repeal its prior (2019) requirement that contracting officers must first consider fixed-price contracts and obtain approval from the head of the contracting activity for use of certain cost-reimbursement contracts. The final rule implements section 817 of the National Defense Authorization Act (“NDAA”) for Fiscal Year (FY) 2022 and is effective immediately.
Background
In 2019, the DoD implemented the fixed-price contract preference in the determination of contract type as required by section 829 of the FY 2017 NDAA (Pub. L. 114-328)(DFARS 216.102(1)). Section 829 also mandated that the head of the contracting activity approve awarding cost-reimbursement contracts in excess of $25 million (DFARS 216.301-3(2)). The final rule revises these DFARS sections and removes the fixed-price contract preference and approval requirements.
According to a Senate Armed Services Committee report on the FY 2022 NDAA, “the preference for fixed-price contracts was originally established as an effort to control cost growth on large acquisition programs and to incentivize contractors to actively manage costs,” but the committee “recognize[d] that the fixed-price contract type may not be suitable for all acquisitions.”1 Furthermore, “the committee expects the Department of Defense to select contract types and negotiate contract terms that are appropriate for the product or service being acquired and that effectively account for an acquisition program's risks, requirements, and cost and schedule goals.” And the House Armed Services Committee’s summary of the 2022 NDAA explained that the repeal will also “relieve[] procedural delays that hinder innovative advances in weapon system programs.”
Takeaways
As a result of this repeal of the fixed-price preference, DoD contracting officials will have discretion to select contract types that are appropriate to the needs of the particular buyer and its particular requirements. Agencies select fixed-price contract types for commercial products or services and for products and services where the specifications are reasonably defined.2 Importantly, fixed-price contracts generally place the risk of cost overruns (e.g., cost increases for materials or supplies) on contractors while also allowing contractors to maximize their profits by controlling their costs and through efficient performance. Alternatively, agencies may only use cost-reimbursement type contracts when either circumstances do not allow an agency to sufficiently define its requirements or uncertainties with contract performance do not permit costs to be estimated with sufficient accuracy to use a fixed-price contract type.3 For example, the design, development, and initial production of a major weapon system may be under a cost-reimbursement contract. A cost-reimbursement contract allocates cost or performance risk between the parties depending on a number of potential considerations, including the nature of the work, the stage of development, the pressure to field the technology, and available budgetary resources. Cost-reimbursement contracts also impose administrative oversight burdens on the government and contractors that are generally absent in fixed-price contract types.
Moving forward, contractors may notice that in light of the additional discretion provided to the government, work previously sought under fixed-price contracts may be shifted toward cost-reimbursement in future competitions. In this regard, contractors should be mindful of the differences between the two contract types, most notably the allocation of cost and performance risk as discussed above. Properly accounting for these risks in developing a proposal is especially important as contractors continue to face challenges caused by supply chain delays and growing inflation.
As it is very difficult to challenge an agency’s choice of contract type via bid protest,4 prudent contractors will attempt to shape the procurement in their favor by communicating with the agency. To this end, contractors should express concerns or questions about an agency’s chosen contract type, as appropriate, at various stages in the procurement (e.g., market research, presolicitation conferences, solicitation Q&As). (See FAR 15.201).
1 S. Rept. No. 117-39, at 203 (2021).
4 The Government Accountability Office takes the view that “[i]t is within the administrative discretion of an agency to offer for competition a proposed contract that imposes maximum risks on the contractor and minimum burdens on the agency, and an offeror should account for this in formulating its proposal.” See, e.g., CWTSatoTravel, B-404479.2, Apr. 22, 2011, 2011 CPD ¶ 87 at 9.
