Avoiding Terminations, Single Offer Competition, and Costly Changes with Fixed-Price Contracts

Abstract

Contracts that are fixed-price provide the benefit of cost control and certainty, however are less likely to succeed when uncertainty exists regarding other contract requirements. Their use remains contentious in certain areas of acquisition and existing acquisition literature largely fails to provide empirical foundations that would guide contracting officers in choosing between fixed-price and cost-based mechanisms. This research illuminates this debate by testing several hypotheses regarding relationships between contract characteristics and fixed-price contract performance Here, performance is measured across four dependent variables, in the form of contract characteristics relevant to the risks and potential benefits of fixed-price contracts: a) the number of offers received for competed contracts, b) the number of change orders per contract, c) the extent to which change-orders raised the contracts' cost ceiling (ceiling breaches), and d) whether the contract was terminated. This research presents a dataset, populated by completed, publicly reported DoD contract data from FY2007-FY2013 . It finds that fixed-price contracts are more likely to face termination but are not systematically more likely to receive fewer bids or experience more change orders or ceiling breaches than cost-based contracts. Of the circumstances tested, longer duration contracts proved most consistently challenging to fixed-price contracts.