Army skeptical of fixed-price contracts

Service’s top acquisition official tells industry group he prefers cost-type contracts so that vendors share in the financial risk.

The Obama administration might be embracing fixed-priced contracts as the preferred method for purchasing goods and services from the private sector, but that strategy is not necessarily being implemented by the Army.

During a speech on Wednesday to service contractors, Malcolm O'Neill, assistant Army secretary for acquisition, logistics and technology, offered a surprisingly frank critique of fixed-price contracts.

"There is risk when you take something fixed-price," O'Neill told members of the Professional Services Council, an industry trade association. "But my experience has been that when you offer a fixed-price bid, it's 10 percent to 15 percent more than you need."

O'Neill's office often has argued against using fixed-price awards because of the belief that contractors build a cushion into their bids to compensate for the potential risks that occur during the length of a contract.

The Army wants the contractor to share the risk using more cost-plus, incentive-based contracts in which the vendor is rewarded for coming in ahead of schedule and potentially punished, through the loss of award fees, for delays. Cost-type contracts also can be more easily modified if the government's requirements change, O'Neill said.

The Obama administration has repeatedly classified cost-plus contracts as "high risk," lumping them in with time-and-materials contracts and sole-source awards. The Office of Federal Procurement Policy has encouraged agencies to cut by 10 percent their use of each of the three contract types.

Recent data, however, suggest that agencies' use of cost-plus contracts actually has gone up. While agencies have cut their spending on time-and-materials contracts -- considered the highest risk to taxpayers because of the potential for escalating costs -- most of those contracts were converted to cost-reimbursement vehicles rather than fixed-price contracts, OFPP Administrator Daniel Gordon said last month.

O'Neill said he has received no direction from the Pentagon or the White House to use fixed-price contracting when he thinks it's inappropriate. In some instances, he has counseled against fixed-price contracts because the Army's estimated costs were 20 percent less than the lowest offer. He described the dichotomy as "should cost versus would cost."

In a brief presentation, O'Neill stressed the principles of the Defense Department's ongoing efficiency initiative to save money through reducing overhead costs, improving business practices -- including more contract competition -- and eliminating troubled programs.

"We have every reason to do our jobs better," O'Neill said. "If I can do the job of 10 people with eight people, that makes me feel good."

The funds saved from the efficiency initiative will largely be reinvested in the warfighter, Defense officials have said. The ultimate goal is a 2 percent-to-3 percent net annual growth in warfighting capability without a commensurate budget increase.

O'Neill said contractors will play a critical role in helping reach that goal. "You have got to play shortstop on our team," he said.

The Army, for its part, recently completed a study that looked at contract requirements, overall funding and acquisition policies. The resulting plan, which eventually will be made public, now is being reviewed by Pentagon leadership.