The Pentagon is encouraging the use of special contract clauses to help save money when private contractors merge, restructure and downsize.
DoD last week amended its contracting rules to promote the use of "reopener clauses" when the government hires a contractor between the time the firm announces a merger and when the merger is completed. Reopener clauses can ensure that the government doesn't get stuck with higher prices during the life of noncompetitive, fixed-price contracts, since mergers and other restructuring efforts often lead to lower costs.
"Since the late 1980s, defense contractors have been restructuring their business operations to increase efficiencies and become more competitive in the defense marketplace," DoD said in an Apr. 16 Federal Register announcement of the change. "The repricing clause should ensure that DoD receives its appropriate share of restructuring savings."
In a July 1998 report ("Defense Contractor Restructuring: DOD Risks Forfeiting Savings on Fixed-Price Contracts," NSIAD-98-162), the General Accounting Office found that reopener clauses could save DoD a lot of money.
GAO reported on one $49 million foreign military sales contract that included a reopener clause. The contract, awarded in April 1995, was modified in September 1997 to include $1.8 million in recouped restructuring savings, or about four percent of the total contract price.
GAO recommended that DoD require such clauses in contracts. DoD is instead reminding contracting officers that they can use reopener clauses when they see fit.
Sometimes, reopener clauses are not worth the hassle, DoD says, because the administrative cost of reopening a contract outweighs potential savings.
But because DoD is constantly awarding fixed-price contracts to defense industry firms involved in mergers, there are many cases when reopener clauses can save the department money before the firms officially reduce their prices as a result of the mergers.
The change to DoD's procurement rules is in section 231.205-70 of the Defense Federal Acquisition Regulation Supplement.