Fixed-Price Development Contracting: When Politics Trump Basic Contracting Principles

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Veterans of Government contracting know that despite a myriad of technological advances and the increasing oversight of defense contractors, basic rules of thumb continue to underlie successful contract performance. Failure to fully implement these rules leads to problems, and there is no better recurring example of this than selecting the contract type.

Under a typical fixed-price contract, the contractor commits to completing the entire job at established (fixed) prices. Sometimes this includes pre-defined economic price adjustments, based on certain anticipated events or issues. Basic principles dictate that fixed-price contracts are reserved for situations where specifications are reasonably definite and problems can be specifically anticipated by the contractor up-front. Federal Acquisition Regulation 16.103(b) says, ‘‘A firm-fixed price contract, which best utilizes the basic profit motive of business enterprise, shall be used when the risk involved is minimal or can be predicted with an acceptable degree of certainty.’’ By comparison, under a costreimbursement contract, the work is less defined, and the contractor and the Government effectively become a team: the Government reimburses costs up to an established ceiling; if the job is not complete when that ceiling is reached, the Government may continue to pay for the costs, but typically does not pay any fee on an overrun. A variety of cost-reimbursement arrangements are available to fit the program in question.

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