Applicability of fixed-price contracts for successful cost control

Abstract

The current budget-constrained environment in the Department of Defense (DoD) has motivated DoD officials to adopt contracting methods to enhance systems affordability. One method, often seen as desirable, is using fixed-price contracts to save money, increase price certainty and limit DoD liability. Conventional wisdom for successful use of fixed-price contracting relies on establishing firm requirements for new systems and developing solutions with mature technology, design, and manufacturing techniques — with stable funding. Yet, the DoD environment may appear to encourage requirements flexibility well into the design and build phase, which can result in substantial price increases, schedule delays, and increased program risk. This desire for requirements flexibility is exacerbated in space systems acquisition due to long development and manufacturing schedules, and small manufacturing lot sizes. How can the DoD effectively use fixed-price contracting as a tool to promote acquisition efficiency and to control costs, while acknowledging the difficulties in the acquisition environment? This paper presents the results and recommendations of an objective suitability analysis of firm-fixed-price (FFP) and fixed-price incentive, firm (FPIF) type contracts in government space systems acquisitions, particularly within the DoD, and provides supporting rationale and guidance for successful use of fixed-price contracts. The study is based on a combination of government acquisition guidance, literature on the use of fixed-price contracts in government acquisition, and interviews with seasoned program managers who successfully delivered space systems using fixed-price contracting. The study's findings point toward the need for a cultural change in the DoD acquisition community to foster an environment that encourages successful fixed-price contracting in the right circumstances and preemptively addressing the potential unintended consequences in a changing environment. Its recommendations are distilled into four categories: technical baseline, socio-political issues, contractual-managerial issues, and program orchestration.