Fixed-Price Development Contracts: A Historical Perspective

Abstract

The Department of Defense (DoD) continues to struggle to contain the costs of its weapons programs. In fact, there are indications that over the past few years, cost growth has actually increased. In 2003, the Government Accountability Office (GAO) found that the costs of major development acquisition programs (MDAPs) exceeded initial estimates by a combined total of $186 billion. By 2007, this figure increased to $302 billion, and by 2011, MDAPs exceeded their initial estimates by $402 billion (GAO, 2011). Moreover, the cost of DoD programs in absolute terms has also increased. In its recent effort to reduce the costs of military acquisitions, the Obama administration mandated that the DoD increase the use of fixed-price contracts. However, the enduring problem of increasing costs suggests multiple, systemic failures occurring within the acquisition process. Unfortunately, the tendency to promote simplistic (and often ineffective) remedies over substantive reform often guides policy decisions. The fact is that the DoD already spends the vast majority of its acquisition funds on fixed-price contracts for specified quantities of products, usually with good results: quality products are furnished to the DoD at agreed-upon prices. When it comes to major development programs, there may be a good reason that the DoD has come to rely more on cost-reimbursement (as opposed to fixed-price) contracts. Unlike other DoD programs, MDAPs are often associated with a high level of uncertainty. This uncertainty may stem from a variety of sources, including the use of immature technologies or budgetary challenges or the need to make changes as the design matures. Cost-reimbursement contracts are more appropriate when there are system performance uncertainties or when there is a likelihood that changes will be required, making it difficult to project accurate cost estimates with sufficient accuracy to allow for fixed-price contracts.