The Construction of Defense Department Contracts in Thin Markets

Abstract

U.S. federal government agencies spend a lot of money through contracts. In Fiscal Year 2013 federal agencies spent $460 billion on contracts, over one third of all discretionary spending. Some of these contracts are for simple products, like paper clips or grounds maintenance, but other contracts are for far more complex products, like advanced weapon systems or program management services. Given the significant amount of money spent on federal contracts annually and the importance of some of these contracts for agency operation, the way in which contracts are constructed impacts the ability of federal agencies to achieve their core missions and functions. This paper examines the impact of product characteristics and market conditions on the construction of contracts for products purchased by the Department of Defense. Analyses focus on contract type (fixed price versus cost reimbursement), contract length, and contract value.