Infotech and the Law

Defense Study Backs Fixed-Price Contracts, Past Performance

Richard Rector

By Richard Rector

As part of a continuing effort to reform its acquisition policy, the Defense Department is evaluating recommendations that would increase the use of fixed-price contracts, as well as further elevate the importance of past performance in source selections.

The recommendations are included in the "Report of the Price-Based Acquisition Study Group," released for public comment in December 1999. The report recommends sweeping changes to Defense Department procurement policy, with a focus on increasing the military's ability to make purchases without relying on contractor cost data.

In theory, the shift to price-based acquisition would further eliminate differences between government contracting and commercial purchasing. This integration would, in turn, reduce prices for military products, provide greater access to leading-edge technologies and reduce the infrastructure needed to administer cost-type contracts.

As a practical matter, price-based acquisition would mean changing the risk equation in military contracts. That translates, in plain terms, to an increased use of firm-fixed-price contracts by the Defense Department. In fact, the report specifically contemplates the use of firm-fixed-price contracts in situations now reserved for incentive or cost-type contracts, including the acquisition of both research and development efforts and new weapons systems.

If you think this sounds like a bad idea ? not to mention an old one ? you are not alone. Industry groups and procurement experts have raised significant concerns about such a shift in acquisition policy.

A principal concern is whether the fundamental premise for price-based acquisition, which is the identification and reduction of program risk before contract formation, can truly be realized. Risk reduction has always been easier to postulate than accomplish, particularly in military acquisitions involving complex and often dynamic requirements.

Critics also have pointed to previous failures of Defense Department policies that promoted fixed-price contracts (e.g., total package procurements in the 1970s, fixed-price development contracts in the 1980s) and questioned how price-based acquisition would avoid the same pitfalls. Industry has good cause for skepticism: The occasionally spectacular failures of fixed-price contracting with the Defense Department often occurred at the contractor's expense.

Anticipating this criticism, the report describes eight specific changes in law and policy that would be made to implement price-based acquisition. One of these changes would make past performance "at least equal to the highest ranking factor in every [Defense Department] source selection valued at over $1 million." In other words, past performance would take on primary importance in all significant Defense Department acquisitions.

The report attempts to justify this change by stating that the increased emphasis would "correct one of the major contributors to the problems of the 1980s ? a problem where successful offerors tended to suffer no long-term business impacts from deliberately underpricing or making too many promises."

This conclusion is tenuous at best. There is no evidence in the report to support the notion that contracting problems in the 1980s were caused by an inability to fairly evaluate offerors' past performance, nor do the events from that period support such a conclusion.

In fact, when Congress acted to correct the problems with fixed-price contracting in the 1980s, it principally criticized the Defense Department for presuming that "the inherent risk in engineering development" could be reduced before such development. The Defense Department itself recognized the same problem in 1987, concluding that the promise of fixed-price development contracting "is largely illusory for complex development efforts."

In addition, although past performance was not given as much weight in the 1980s as it is today, it was routinely considered in major systems acquisitions at the time. Thus, the Defense Department had the opportunity then, and has an even greater opportunity today, to appropriately downgrade contractors that promise too much and deliver too little.

If such downgrading did not happen in the 1980s or is not happening today to the Defense Department's satisfaction, then the failure is driven not by the relative importance of past performance as an evaluation factor, but by the manner in which past performance is being evaluated. In other words, it is not the weight that is given to past performance that should be enhanced; rather, it is the accuracy, consistency, and rigor of the evaluation process that needs improvement.

Richard Rector is a partner in the Government Contracts Group of Piper & Marbury LLP in Washington. His e-mail address is

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