17 words that will change acquisition

The stimulus package could limit contracting flexibility

Buried deep within the $787 billion economic stimulus law is a small provision, barely noticeable on a quick skim, that could well change the federal government’s procurement practices for years to come.

The provision is just 56 words long, and the core of it is only 17: “To the maximum extent possible, contracts funded under this act shall be awarded as fixed-price contracts.”

Dynamics of the unknown

Most agencies will receive a hefty sum of money from the $787 billion stimulus package, but they need to spend it fast. The law favors fixed-price contracts, but how can contracting officers award them in a short amount of time?

Many experts advise breaking the contracts into smaller pieces.

An agency can divide a large procurement into manageable chunks, said Elliott Branch, executive director of contracts at the Naval Sea Systems Command. But that means different contractors will likely handle different pieces of the contract, so officials need to consider how all the pieces will fit together.

Michael Sullivan, director of acquisition and sourcing management at the Government Accountability Office, said agencies should tackle projects that are ready to go while planning for short increments in which to accomplish the pieces of a larger procurement.

However, Charles Adolph, former director of test and evaluation in the Office of the Undersecretary of Defense for Acquisition and Technology, said fixed-price contracting doesn’t work well for research and development projects, which have too many unknowns. And once a new technology is ready, the department must integrate it into the current system, which isn’t a simple job.

Beyond that, Adolph said, fixed-price contracting is a valuable option for many situations.
— Matthew Weigelt

President Barack Obama frequently promises change, but the procurement approach of setting a price first and then proceeding with work is old school. Other approaches to federal contracts, such as cost-reimbursement and no-bid awards, have emerged in recent years to give procurement officials more flexibility while accepting more risk.

Obama’s Office of Management and Budget now calls fixed-price contracts “safe investments” for the massive amounts of taxpayer funds going out the door in the stimulus package. Last year, Democratic lawmakers clamped down on cost-plus contracts in the fiscal 2009 National Defense Authorization Act, which became law Oct. 14, 2008. And now, the American Recovery and Reinvestment Act that Obama signed Feb. 17 includes the provision that limits contracts as much as possible to those with fixed prices.

However, many procurement experts are critical, worried that the administration is limiting the use of other contract approaches that have a legitimate place in a contracting officer’s toolbox.

It’s an old debate. While proponents say fixed-price contracts commit companies to performing work for a set amount and allow agencies to budget appropriately, some experts say other contract types offer a flexibility that is necessary in certain situations. And, they add, fixed-price contracts can eventually cost the government more because contractors are likely to base their bids on the upper end of their expected costs. Other contract types, such as cost-plus, allow agencies to pay less if the final cost to the contractor is closer to the lower end of the range.

Many see fixed-price contracts as “the panacea for waste, fraud and abuse,” said Ellen Brown, former legislative director for the Republican staff of the House Oversight and Government Reform Committee. “Those of us who understand government procurement…know it’s not true.”

Avoid risk

In their fiscal 2010 budget proposal, titled “A New Era of Responsibility,” Obama administration officials wrote that cost-type contracts -- any of several kinds that start with the actual cost as a base and adjust the final price to include such things as a profit margin or an incentive for superior work -- are particularly vulnerable to exploitation. Such contracts offer no incentive for companies to control costs, they wrote, adding that those contracts increased 75 percent under President George W. Bush.

Furthermore, many lawmakers have said they believe contractors often take advantage of the government, especially when agencies enter into agreements in which prices aren’t set from the beginning.

The Obama administration said the stimulus package seeks to halt such abuses. Office of Management and Budget officials said agencies should ensure reasonable contractor risk and economic performance when selecting the contract type for a project that will use stimulus money.

“Fixed-price contracts provide maximum incentive for the contractor to control costs and perform effectively and impose a minimum burden upon the contracting parties,” OMB Director Peter Orszag wrote in a memo issued Feb. 18. “These contracts expose the government to the least risk.”

When an agency proposes using a riskier type of contract, it must first make certain it has evaluated all alternatives, Orszag wrote. If the agency doesn’t choose the fixed-price approach, officials must appoint an appropriate number of qualified acquisition employees to oversee the contract.

In his address to Congress Feb. 24, Obama said Cabinet secretaries — just like the mayors and governors who will receive stimulus money — are accountable to him and to the American people for the money they spend.

“Here in Washington, we’ve all seen how quickly good intentions can turn into broken promises and wasteful spending,” Obama said. The administration plans to track stimulus spending at a Web site called Recovery.gov.

Casting a dark shadow

Recovery.gov features another measure that more subtly nudges agencies to choose fixed-price contracts: Other kinds of contracts and sole-source awards must be posted in a special section of Recovery.gov.

“A summary of any contract awarded with such funds that is not fixed-price and not awarded using competitive procedures shall be posted in a special section of the Web site,” the legislation states.

Stan Soloway, president and chief executive officer of the Professional Services Council, an industry trade group, said that approach puts contracting officers under pressure to keep their work out of the spotlight. Posting the information in a separate section could cast a dark shadow over the contract by implying there’s something unsuitable about it, even when it might be the best kind of contract for that procurement, Soloway said.

Contracting officers prefer to do their work in quiet obscurity, but they can face significant repercussions for making bad acquisition choices. “They already feel like they’re on the front lines,” Soloway said.

One contracting officer, who spoke on condition of anonymity because he is not authorized to discuss legislation, criticized the micromanaging nature of the provision. “When are they going to stop telling me how to do my job?” he asked.

The officer said he and his fellow professionals understand the procurement process better than members of Congress do. Although lawmakers act like they know the process as well as the people in the field do, he said, they fail to recognize that contracting officers need many options for finding the best fit for agencies seeking a contractor’s services.

Learn from the past

In an era in which development proceeds rapidly in areas such as back-office information technology systems and military combat systems, contracting lessons from a decade ago can offer insight.

Computer software development expanded rapidly in the 1990s. However, it was still new, and agencies struggled to write clear definitions when buying new software that would work with old systems. At the time, the government used fixed-price contracts to buy software, Brown said. With the companies taking on the risk, the government paid a lot more for the software.

“Fixed-price contracts are completely appropriate when we know what we’re going to buy,” said Paul Kaminski, chairman of a National Research Council study on systems engineering for the Defense Department and undersecretary of Defense for acquisition and technology from 1994 to 1997. If there’s uncertainty, “I think we end up on the wrong end of the bargain negotiating a fixed-price contract.”

Experts agree that returning to the era of fixed-price contracts won’t protect the government from ballooning costs and could even lead to overpriced contracts.

Sen. Joe Lieberman (I-Conn.), chairman of the Homeland Security and Governmental Affairs Committee, said fixed-price contracts aren’t a simple solution to saving money, but they do work in certain circumstances.

“No acquisition of any kind, however diligent, can overcome a fatally flawed statement of work,” said Elliott Branch, executive director of contracts at the Naval Sea Systems Command.

About the Author

Matthew Weigelt is a freelance journalist who writes about acquisition and procurement.

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Reader comments

Wed, Mar 18, 2009

How do these 17 words "change acquisition" at all? The FAR already contains limits against cost-reimbursement contracting. (See FAR 16.3) Furthermore, the preface "To the maximum extent possible" is entirely subjective. The phrase renders the rest of the rule meaningless.

Wed, Mar 11, 2009 Michael Lent

It's hard to imagine the emergence of a widely accepted definition of a "risk threshold" that would guide the government to select a fixed-price vs. cost-reimbursable contracting method. The proc-noscenti would mull and debate this even more than "inherently governmental"--with, one fears, similar lack of an outcome. Government often has little appreciation of what appears risky to a contractor--and vice versa. Also, small businesses tend to shun fixed-price work, as their little enterprises can't absorb the financial shock of a failure. And this works against the worthy goal of more small-business participation.

Tue, Mar 10, 2009 Lou Virginia

It seems to me we had this debate and the fixed price fixes everything approach was tried extensively by Robert McNamara - it was called "Total Package Procurement". It was an absolute disaster with billions of dollars expended on procurements which were eventually abandoned. There is no substitute for a competent contracting officer and a competent government technical customer. If either is missing, the procurement will fail - regardless of contract form.

Tue, Mar 10, 2009

Huh? "Other approaches to federal contracts, such as cost-reimbursement and no-bid awards, have emerged in recent years to give procurement officials more flexibility while accepting more risk." First, CR contracts have been around for oh maybe a century, and non-competitive contracts have been around longer. Both have reasonable application in the world of gov contracting, particularly when involving things that are unique, groundbreaking tech, and things never been done before. Attempting to re-allocate financial risk to industry through forcing FFP contracts in inappropriate circumstances will yield higher costs as contractors base pricing on risk. Once we hear stories of contractors with 'excessive profits' because they guess right on a FFP development effort, and we'll hear barking for a return to CR pricing. And there's no evidence suggesting use of CR and non-competitive contracts has increased as a precentage of contract actions or dollars awarded - political commentary to the contrary is misleading as it cites doubling of the overall procurement budget, which means CR and NC awards increase, in whole dollar terms, as well. This is not a trending increase, it is consistency.

Sun, Mar 8, 2009 geek Fl

Overstate the military value and capabilities and maturity of the technology and under estimate the time and money it will take. The cost of failure in R&D is being given more time and money. The longer it takes in R&D the more lucrative the contract is. The above is why so few major programs ever make it into production. Talk about all the money you have saved with your best practices and the management programs you have deployed to get the program back on track. Lean Six Sigma, Green Belts, Total Quality Management, Acquisition Reform, Enterprise Management, are no substitute for delivering what you said you could on time, within budget with the desired performance.

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