Whither The Cost Plus Contract?

Over the last several years the Federal government has increased the amount of money flowing to contractors. While this is especially true of the Defense Department it is also in all other parts of the Executive Branch. Cost Plus contracts have been criticized as they transfer the risk from the contractor to the Government. One of the Obama contracting reform planks has been the reduction in use of these types of contract. In a cost plus contract the Government pays the contractors all of the costs they incur. Some of the contracts have award or fixed fee based on how well the contractor performs, in others the contractor ads a factor to make profit on the service.

According to Federal News Radio the Government spent about $135 billion on cost plus contracts in 2008. While this is a significant increase over the total value in 2001 they make up a smaller percentage of all contracts issued. Most of the contracts were issued by DoD and the Department of Energy.

Cost plus contracts are traditionally used for services and development contracts. That is because it is not always easy to predict the total amount of money required to design, fabricate and test something. It is more realistic to estimate how much work is required and the time it will take to accomplish the goal rather then the exact cost. A company would be foolish to accept a fixed price contract for developing a new system as they would end up eating the cost overruns. The Federal Acquisition Regulations recognize this and allow the Government contracting officer to choose the best type of contract for use based on what is being bought.

The contracts are also used for services when the Government buys discrete hours of labor or work towards a fixed metric. Some Contractor Logistics Support (CLS) contracts are cost plus as they buy hours of support or performance. Fixed Price contracts, on-the-other-hand, are used to purchase things when the costs are established. Normally for the Defense Department this is when a system goes in to full rate production and the cost for each item are similar.

This might explain why the current DoD budget has a higher ratio of fixed to Cost Plus contracts at the present time. In 2000 there may have been several new systems in development that are in production now. If the Defense Budget stabilizes how Gates’ has proposed with a focus on keeping existing systems in production in support of the current “Overseas Contingency Operations” then the amount spent on Cost Plus will continue to decline. That doesn’t necessarily mean that defense spending will be less or more efficiently spent just because of what it is buying there will be a natural shift to that contract type.

Of course the problem with DoD development programs has been that they tend to be more complex and require more time to develop and more testing. These factors greatly increase the amount of funding required to complete the contract. If it is a cost plus then it seems like the contractor is getting much more money then originally planned. If the Government changes the requirements of the system being developed this can also add cost and time. This is why the contractor will file for an equitable adjustment to the contract in order to prove that changing requirements or needs cause the cost increase.

Gates’ also intends to reduce the service costs to DoD by converting his contractor work force who are often on cost plus or time and material contracts to civil servants. This will reduce the use of that contracts but might not save any money. He is transferring his personnel costs to the fixed part of his budget rather then using a service contract to pay for them.

Once new systems begin to be developed, which will happen, as eventually the Navy needs new ship designs, the Air Force aircraft and the Army ground vehicles, then cost based contracts will have to be used. Then the cycle will start over again with Congress and the Media complaining that too many are being used at too great a cost to the Government.