Last month, the Department of Defense (DoD) released the 2013 annual report, Performance of the Defense Acquisition System. Details from the report were highlighted in a recent article which raised the question of value differences of cost-plus versus fixed-price contracts.
The report stated, “No single contract type is best” and went on to suggest that relying on contract type alone is not necessarily the most affordable solution.
Specifically, the report said no single contract type; whether fixed price or cost-plus, yielded better cost control, and advised that it was preferable to select the most appropriate contract type and incentive structure and select the most appropriate contract type.
Many in the acquisition industry have debated the value of each model, and both fixed price and cost-plus have their own set of risks and rewards. The guidance given by DoD acquisition advised that “intelligent acquisition is key.” The report strongly called for the need for proper cost analysis and acquisition knowledge in order for waste avoidance.
Fixed price contracts are those which have a set price for goods and services and in most cases are held to that price regardless of cost of production. The benefit of fixed price is that the government knows up front what the exact budget and costs will be during the period of performance. There are no unexpected fees with a fixed price contract. The disadvantages are lack of flexibility or changes that may arise.
Cost-plus contracts are priced to account for actual work performed and production costs; and are subject to change depending on any costs occurring during the contract period. It is important for acquisition professional to give careful consideration and a thorough cost to benefit analysis in order to anticipate the business requirements and costs which may arise.
The report concluded the bottom line is about the getting the best value and benefits of goods and services acquired in a responsive time compared to the costs to the taxpayer.