Is a Policy Shift Brewing on Fixed Price Contracts?

080929-D-7203C-005At a Navy conference in Arlington last week, Secretary of the Navy Ray Mabus told contracting and government officials:  “(The Navy is) going to demand more accountability from contractors on behalf of the taxpayers.”  He continued, “Unless we control costs, we will not get the Navy that we need, and we will not have the assets to meet all of our missions and assignments.”

While Secretary of Defense Robert Gates told top contracting executives last week that he wants “steady, consistent growth in defense budgets,” he gave no indication whether those increased contracting dollars would come in the form of fixed price or cost-plus contracts.

From recent comments, it seems like the DoD is moving at least a little bit toward fixed-price contracts.  Amid calls from Congress and the White House for more contractor accountability, this comes as no surprise.  Whether it is an effective measure of cost control is up for debate, however.

Jacques Gansler, the leader of an army report entitled ‘Urgent Reform Required,’ believes that circumstances have shifted towards a “Global War on Contractors.”  On the subject of fixed-price contracts, he says “I could go down a long list of programs where they tried to use fixed price on development programs. They show, overwhelmingly, that the cost tends to rise during that program. That’s because technology changes, threats change, requirements change, opportunities to get even better systems change. I don’t know of any programs in the history of defense that don’t have requirements changes after the initial bid.”

So, while the jury is still out on the effectiveness of fixed-price contracts at controlling costs, it seems like the government is going to move partially toward fixed-price contracts (take the recent RFP for the Air Force tanker, for example).

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