Kelman: Rethinking fixed-price contracting

It makes sense to convert some work to fixed-price contracts, but agencies will need more acquisition staff

Agencies are under pressure from the Obama administration and Congress to increase the use of fixed-price rather than cost-based contracts. Many contracting professionals have pushed back. However, in my view, we should see the new push not just as a threat but also as an opportunity to re-examine standard practices.

The argument for fixed-price is straightforward. Contractors have little incentive under cost-based contracts to keep costs under control, because costs — or labor rates under time-and-materials work — are passed on to the customer. To be sure, government keeps a more watchful eye on costs in cost-based contracts. But in practice, this doesn’t occur as much as it should because of workforce shortages. Even with larger staffs, it is really difficult to know whether contractor personnel could have worked more diligently or with fewer people than they did. But contracting folks worry there will be pressure to make contracts — particularly service contracts — fixed-priced even when it doesn’t make sense.

There are two potential problems, distinct though often mixed together. One is a situation in which the government knows what it wants, but it’s unclear how much effort it will take a contractor to meet the requirement. An example would be a requirement to develop technology to save 20 percent of fuel costs for a fighter plane, for a maximum cost of x dollars per plane, without sacrificing any performance specifications. If the requirement is research intensive, forcing contractors to bid a fixed price will lead many not to bid and others will inflate bids radically to compensate for the risk. Classic examples of this problem are the late 1980s’ policies that encouraged fixed-price weapons development contracts, which then produced a series of fiascoes.

A second kind of problem is where government isn’t, or can’t be, specific about what it wants. In such situations, a fixed-priced contract is meaningless, because it is unclear what the customer will get for the price. A poorly specified requirement will produce a poorly delivered service. Requirements changes, which are common, then require negotiating change orders in a sole-source environment, potentially vitiating benefits of a fixed price.

I believe there are opportunities for increasing fixed-price contracting. For example, some requirements get competed and re-competed without changing dramatically. It should be possible to convert these projects to fixed-price. Of course, sometimes requirements are genuinely almost impossible to specify, but other times government could do a better job if agencies had the inclination — and the resources, which workforce deficits often mean we don’t — to spend the time necessary to analyze and specify the requirements. That would bring performance benefits beyond simply making the contract fixed-price. And agencies should develop a past-performance sub-factor that rates the extent to which contractors respect the government’s interests when negotiating change orders.

The administration and Congress need to understand that more fixed-price contracting requires more acquisition professionals to develop requirements. Contracting folks need to step up to the plate and agree that, if given the resources, we will use some of them to improve requirements, allowing more work to be fixed price.

About the Author

Kelman is professor of public management at Harvard University’s Kennedy School of Government and former administrator of the Office of Federal Procurement Policy. Connect with him on Twitter: @kelmansteve

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Reader comments

Mon, May 4, 2009 acd New Jersey

Steve, Wish I believed that Congress read your blog as religiously as I do, have studied under you (while at OFPP) and folks like Ida Usted, Dave Drabkin and Angella Styles. Alas, I digress. Truth of the matter is this. GSA learned long ago how to write performance specs (albeit not named that). The JOC contracts identified by another smart reader are also a way to go. Having been on both sides of the negotiation table for many more years that I care to admit, I will say this. Low price gets low value. Go back to your roots. When you buy a car, do you buy the cheapest and expect high quality? Why can't the fed recognize that their "Industry Partners" are better at what we do full time, then they try to due, part time? I do not intend to offend KO's or CO's anywhere. But haveing been one of the good one's, getting "rewarded" with more work for each outstanding contractual effort, I too, was overworked and undervalued, thus the reason for my hasty departure ( I gave 2 weeks notice, left the unused leave AL and SL) and ran from the place overjoyed!!!! CO's and KOs need 1) respect, 2) authority 3) consistent training 4) more of them 5) adequate recognition. So do the tech profs writing the specs, conducting the site visits, and administering the perfomance during the POP (COTRs). The administration needs to back way off, or they are doomed to fail...again and again, and iaw ARRA, in a very public and what is certain to be humilitaiong way!!!!!!!!!!

Mon, May 4, 2009 Paul S.

In my opinion, the Govt uses FFP-Deliverables when they want FFP-LOE (aka FFP-Labor Hrs). This has recently been more true as the COs have been pressured to move to FFP contracts/TOs. This approach is not neccessarily in the Govt's best interest.

Thu, Apr 30, 2009

Taking your thoughts a step further in regards to renovation construction, firm fixed pricing has been utlized by many agencies at the federal and state levels for many years under Job Order Contracting. Through JOC an owner obtains an on-call contractor who at the time of the award doesn't know what type of projects will be placed over the term of the contract. Many times the owner doesn't know either, except that they will typically fall within a certain threshold. One of the key advantages of JOC is that it allows the owner, owner reps (A/E and end-user) to work along with the contractor to develop a well defined scope of work, prior to issuing a notice to procede. Using a 3rd party unit price book and a coefficient (which was provided as the pricing indicator at the time of the bid submission) the contractor will then develop a line item estimate for the total cost to construct the project. It is ann estimate until approved by the owner. Along with joint scoping, JOC allows for negotiation of the line items by the owner and contractor so that everyone is in agreement as to which items and quantities will be used to construct. Once approved by the owner, this estimate then turns into a firm fixed lump sum cost to construct. If a change order arises (owner driven or via unforseen circumstances), the owner has the benefit of knowing that the cost of the change order is based on the unit price book and coefficient. Since JOC is a performance based construction delivery method, the contractor has great incentive to meet the expectations of the owner in regards to quality and timeliness of completion of each project at a fair and reasonable price or they know they will not recieve additional task orders under the contract.

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