Choosing the proper contract type is crucial in properly allocating risk, and incentivizing the desired performance by the contractor. As such, Contracting Officers (COs) have a range of contract options, depending on circumstance, to fulfill this objective. According to the Department of Defense’s (DoD) recent “Guidance on Using Incentive and Other Contract Types”:
“The chosen contract type and negotiated pricing should:
- Result in a reasonable degree and balance of risk between the Government and the contractor; and
- Provide the contractor with the greatest incentive for efficient and economical performance.
Generally, contract types vary according to:
- The degree and timing of the responsibility/risk assumed by the contractor for the costs of performance; and
- The amount and nature of the profit incentive offered to the contractor for achieving or exceeding specified standards or goals.”
Unfortunately, too often Congress or the Department has been overly-prescriptive in setting rules and guidelines for contract type. This has most recently manifested itself in Better Buying Power’s preference for incentive-type contracts, based off data on statistical price outcomes contained in the 2014 version of the Performance of the Defense Acquisition System Annual Report. However, previous studies have debunked that preference. A 2009 Institute for Defense Analyses (IDA) report found that although contracts with incentive fee provisions generally have less cost growth, greater use of incentive fee provisions would not lead to better contract outcomes for DoD. And in 2013, an IDA report found that firm fixed price (FFP) contracts for production when the system is mature and stable provides greater incentive for contractors to invest in cost-reduction than fixed price incentive fee (FPIF) contracts. This also leads to lower prices for the government, while simultaneously rewarding that investment with higher profits.
NDIA believes that empowering the acquisition workforce to leverage their knowledge, skills, and experience to choose the appropriate contract type and tailor contract terms based on the specifics of the program will lead to the best outcomes for the warfighter, taxpayer, contractor, and DoD, alike.