Arguing that the federal procurement process has long “tolerated unpredictable costs, bloated overhead, and weak performance incentives,” President Trump issued an Executive Order late last month making fixed-price or performance-based contracting the default for federal government contracts.
The April 30 EO, “Promoting Efficiency, Accountability, and Performance in Federal Contracting,” states that cost-reimbursement contracting “should be the exception, granted only in limited circumstances and with appropriate senior-level accountability at the agency.”
Under the EO, federal agencies are required to use fixed-price or performance-based contracts to the “maximum extent consistent with law.” Agency contracting officers would need to justify in writing the use of non-fixed-price contracts, such as cost-reimbursement, time-and-material, and labor-hour contracts. If such a contract exceeds certain thresholds, the contract must be approved by the agency head in writing. This applies to any contract over $10 million for most agencies, with the exception of the Department of Defense (where the threshold is $100 million), NASA ($35 million), and DHS ($25 million).
The EO exempts from the requirement contracts that support emergency responses and certain research-and-development contracts.
In addition, the EO requires each agency to review and seek to modify or renegotiate its 10 largest non-fixed-price contracts by dollar value “to facilitate use of fixed prices and performance-based incentives for contract deliverables to the maximum extent practicable.” Agencies are required to report twice a year to the Office of Management and Budget (OMB) the number of, value of, and written justifications for, any non-fixed-price contracts they issue.
The EO requires OMB to issue guidance within 45 days to agencies “to ensure consistent implementation of this order” and requires the Administrator for Federal Procurement Policy within 120 days to propose changes to the Federal Acquisition Regulation (FAR) to align it with the EO.
The FAR currently establishes a preference for fixed-price contracts, but the EO would take that further by requiring contracting officers to justify in writing when a different contract vehicle is used. Generally, fixed-price contracts shift the financial risk from the federal government to the contractor.
Federal procurement experts say that the EO itself will not affect current contracts, other than each agency’s 10 largest non-fixed-price contracts. Until OMB guidance is issued in 45 days and the FAR is amended, experts say that the impact of the EO on prospective contracts may vary, depending upon how agencies respond to the Order.
ACRA will continue to monitor the issue and provide guidance as it becomes available.