Many predict that, among other procurement and regulatory reforms, the new administration will implement policies favoring the award of fixed-price government contracts and grants. Throughout the years, the procurement pendulum has swung back and forth in favor of and against fixed-price contracting. For example, in 2017, the Department of Defense (“DoD”) implemented a preference for fixed-price contracting and required approval of cost-reimbursement contracts in excess of $25 million by the head of the contracting agency. In 2022, DoD reversed course and removed both the preference and approval requirement. 

For taxpayers, fixed-price contracting may seem appealing; however, for government contractors, fixed-price contracts present significant risk. Fixed-price contracting is often criticized because it deprives the government from receiving the best solutions and performance and instead results in awards to the lowest price, technically acceptable offeror. The federal government typically prefers fixed-price contracts because of budget and funding certainty, and because a fixed-price contract assigns all performance risk to the contractor. 

Absent actual or constructive changes to the contract requirements, a contractor generally is not entitled to a cost or price increase under a fixed-price contract. This applies to large and small business contractors. A large government contractor recently reported it will recognize a significant loss on fixed-price space and defense programs, which already caused the company years of losses, due to issues such as increased production costs and disruptions from a recent strike. However, the impact on small businesses that cannot absorb the level of losses of a large business can have much more dire consequences. 

Contractors have limited options to mitigate the risk associated with fixed-price contracts. First, notwithstanding the fixed-price label, a contractor should seek to include in its fixed-price contract the ability to request equitable price adjustments (“EPA”) for circumstances beyond what a contractor can reasonably assume/predict. For example, while a contractor generally can make assumptions regarding supply chain risk, contractors could not reasonably assume supply chain costs or the cost of certain materials would increase as much as 25 percent or 50 percent, as occurred during the COVID pandemic. A contractor could seek inclusion of an EPA clause that is triggered only when costs exceed a high threshold, such as 25 percent. To be clear, the applicable contracting officer will resist including any sort of EPA clause in a fixed-price contract. And contractors need to be careful conditioning their quotes or proposals on inclusion of an EPA clause as their offer could be deemed non-responsive and eliminated from consideration. 

Second, when possible, contractors should negotiate statements of work (“SOWs”) and Performance Work Statements (“PWS”) that include reasonable, achievable performance. For example, for research and development contracts, a contractor should never promise or guarantee successful performance. This would include guaranteeing Food and Drug Administration approval of a drug under a government grant or 100 percent completion of a project. Rather, contractors should attempt to negotiate milestones and goals that do not guarantee success. Obviously, this approach would not apply to some contracts such as construction contracts or the sale of existing products that require no development.

Third, a contractor can seek to negotiate a dollar cap on what it is required to spend to complete performance of a fixed-price contract. Yes, this sounds similar to a time and materials (“T&M”) contract, but the dollar cap in this case would go beyond the funds available under a T&M contract. At the same time, the dollar cap gives the contractor a level of certainty that failure to achieve a specific result will not drive the contractor into bankruptcy.

Many contracting officers will resist and reject the contractor requests discussed above. But contracting officers should consider that the approaches allow more companies to compete for awards, and ensures the government has access to more companies, including small businesses, willing to contract with the government. Absent such measures, competition is reduced and those that opt to compete will propose higher prices to mitigate risk. Bottom line, if the predictions are accurate and the government shifts its contracting preferences to fixed-price contracts, contractors need not immediately throw-in the towel. In most procurements, so long as a company submits a compliant offer, offerors can submit an alternative proposal that includes one or more of the approaches above. These are novel approaches that could mitigate the contractor’s risk in fixed-price contracting to more acceptable levels.