OMB: Cost-plus contracts increased, decreased

Agencies have nearly doubled the amount of money they spend through cost-reimbursement contracts in the past eight years. But at the same time, those contracts’ share of overall federal spending has declined, according to a new report.

The amount obligated under such contracts rose 90 percent in that time period. Agencies obligated $71 billion under cost-reimbursement contracts in fiscal 2000 and $135 billion in fiscal 2008, according to a report the Office of Management and Budget sent to several congressional committees in March.

However, the percentage of total obligations awarded under such contracts fell from 35 percent in 2000 to 25 percent in 2008, OMB said.

“This near-doubling in cost-reimbursement contracts call into question whether these vehicles are being used excessively or without adequate justification, and whether agencies have the necessary skills and capacity — both within acquisition and program offices — to successfully administer these contracts,” OMB Director Peter Orszag wrote in the report.

Cost-reimbursement contracts include an award or incentive fee that the contractor earns based on its performance.

OMB is developing new guidance on contracting after President Barack Obama announced his intention to reform government procurement. He is concerned that cost-reimbursement contracts could waste money and has said he prefers fixed-price contracts because they let the contractor carry most of the risk.

In the fiscal 2009 National Defense Authorization Act, Congress directed OMB to determine the extent to which agencies use cost-reimbursement contracts.

To develop the guidance, OMB plans to work closely with the five departments that have used that type of contract the most. NASA and the Defense, Energy, Health and Human Services, and Homeland Security departments accounted for 95 percent of the dollars obligated under cost-reimbursement contracts in 2008, the report states.

DOD used the most cost-reimbursement contracts last year. It obligated $88.5 billion, accounting for 65 percent of the total of $135 billion. DOE obligated 15 percent, followed by NASA with 9 percent. HHS and DHS obligated 4 percent and 2 percent, respectively.

Using information in the Federal Procurement Data System (FPDS), OMB found that 60 percent of total obligations in 2008 — or $315.7 billion — had fixed prices. Under time-and-materials contracts, which are the most risky for government, agencies awarded $27.5 billion, which is 5 percent of total obligations in 2008, the report states.

Ray Bjorklund, senior vice president and chief knowledge officer at FedSources, said people should be careful not to read too much into the report.

In addition to a 90 percent increase in the amount of money going to cost-reimbursement contracts, there’s been a 149 percent increase in the total number of dollars reported, he said. That total has climbed from $208.3 billion in 2000 to $517 billion in 2008. Many of the newly reported purchases are for fixed-price procurements that are below $3,000, which is the micro-purchase threshold. Those numbers weren’t being reported in 2000, he added.

“As rich as the FPDS dataset is, you have to be careful that you’re not letting the increasing richness of the data lead you to the wrong conclusion,” Bjorklund said.

About the Author

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

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