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Fixed-price federal contracts contain risks that must be taken into account

by Marion C. Blakey, AIA President & CEO
Originally appeared in Washington Business Journal, August 05, 2011

There has been a long-held belief among some reformers — including, it seems, President Barack Obama — that the use of fixed-price contracts is a good way to reduce costs to taxpayers because it ensures the government pays no more than the agreed-upon price and rewards industry for effective management in the form of increased profits. Besides, this is a commercial best practice; the type always preferred for government contracting.

There are two problems with this line of thinking. First, reward is not the only thing that shifts with fixed-price contracts. Risks also shift, from government to industry, and that can be a huge problem. Second, there is a political limit to how much reward contractors can receive before watchdogs and auditors start talking about “excess profits.”

Fixed-price contracts have an important place in contracting when they are used appropriately. They can be a good vehicle for reducing costs while recognizing reasonable rewards when three elements are present — stable requirements, stable technology and stable funding. In other words, risk is understood and can be priced.

Read more at the Washington Business Journal.