Letter: Limits to cost-plus contracting not a solution to limit waste

Regarding "McCain wants to end cost-plus contracting" :

Many reacted with surprise when they heard during the September 26 debate that Senator John McCain would stop the use of cost-plus contracting. For a few years, McCain has discussed a requirement to use fixed-price contracts for research and development unless the Department of Defense deems the program so technically challenging as to make fixed-price contracting impractical.

It certainly generated a buzz within our community, and that is good because it means many recall that history has shown us that this is not a good way to go.

The anti-cost contract push is not just coming from McCain, however. In 2007, Rep. Henry A. Waxman introduced H.R. 1362, the “Accountability in Contracting Act,” to require agencies to limit the use of abuse-prone contracts. It sought to minimize the use of cost-reimbursable type contracts because “[f]ixed price type contracts provide the taxpayer the best value for the least risk in procuring items whose costs are well understood. Cost-plus contracts, the other main type of contract, leave the government vulnerable to wasteful spending since they provide the contractor with little or no incentive to control costs.”

The reaction to the statement during the debate is coming from all quarters of the procurement community, and your article did a service by bringing together some very good comments.

The acquisition community has seen other attempts to control costs by the use of firm-fixed price contracts. Some may recall that concerns about overruns resulted in the use of what was called “total package procurement” back in the 1970s. Total package procurement required a fixed-price type contract for design and development work, and fixed-price options for production and spares. The concept failed. Major programs suffered losses and massive claims resulted. One program was the C-5A and the contract was converted to a cost-plus fixed-loss agreement. After a few years, the total package procurement concept was killed, and guidance was issued requiring the use of cost-plus contracts for development work and prohibiting the use of fixed-price production contracts for the development of major systems.

Then, in the 1980s, there was another push for fixed-price contracting as a means to control costs on large development programs. The A-12 program remains a reminder of that push. That fixed-price contract resulted in a well know termination and claim. The termination of the A-12 program and the litigation that followed were factors that caused Congress to enact legislation to limit the use of fixed-price contracts for development efforts.

The Federal Acquisition Regulation addresses contract types. FAR Part 16 provides the types that are available and establishes criteria for selecting a particular contract type, including limitations on the use of cost-type contracts. In many situations, a fixed-price contract type will be the preferred contract type. But, we should not ignore history.

Fixed-price contracting in certain circumstances, especially where development uncertainties and risks are significant, is inappropriate. A legislated preference for fixed-price contracts regardless of the particular situation will lead to the scenarios that we have seen before.

Michael W. Mutek
Vice President and General Counsel,
Raytheon Intelligence and Information Systems