Seeking to keep costs in check, the Pentagon has proposed an amendment to federal regulations that would endorse using more contracts with price ceilings.
The move is not surprising considering the growing calls from the Pentagon for greater attention to efficiency and careful spending. But determining the right kind of contract for a given program remains a complex task, and even military officials remain skeptical of relying too heavily on contracts with a firm price.
The Defense Department, which is now accepting comments on the rule, said in its proposal that the regulation is meant “to incentivize productivity and innovation in industry.”
Contracting officers would be required to give special consideration to using “fixed-price incentive” contracts, which adjust a company's profit based on how closely the final cost adheres to the target cost. Companies get more if they come in under budget, but receive less and could even take a loss if they come in over budget. The proposed rule sets 120 percent as a price ceiling.
Ashton Carter, the Pentagon's top official for acquisition, said last year that fixed-price contracts make sense for programs in which the Defense Department is sure of what it wants.
The structure “incentivizes productivity gains . . . [because] the better [the contractors] do at controlling cost, the more they make, which is fine with us because we've gotten the price that we want,” he said.
Still, officials have said they recognize the limits of fixed-price contracts. Malcolm O'Neill, the Army's top acquisition official, said earlier this month that they could cost the Army more because contractors typically build in extra costs.
Additionally, the contracts make it more difficult for the service to make revisions to a program, said O'Neill, and can invite protests if the Army changes a purchase and doesn't reopen it to competition.
“If all of a sudden, you say, ‘Well, I want a 120mm gun on that vehicle instead of a 105mm,' then . . . all bets are off,” he said. “Whereas with cost contracts, all you do is modify it and say, ‘Okay, I want you to add this.' ”
He said the Army has received no direction to use more fixed-price contracts and doesn't have a quota.
Using more fixed-price contracts will likely affect companies' bottom lines, if not immediately, said Byron Callan, a director at Washington-based investment research firm Capital Alpha Partners.
“It's going to have an impact,” he said. “It's just you don't know how and where it's going to show up.”
The Pentagon said it doesn't expect the regulation to take a toll on small businesses, which are more likely to provide commercial products and to already use fixed-price contracts.