Advertisement

You will be redirected to the page you want to view in  seconds.

Downside of fixed-price contracting: Inflated bids

Mar. 10, 2011 - 06:00AM   |  
By SARAH CHACKO   |   Comments
Malcolm O'Neill, assistant secretary of the Army for acquisition, logistics and technology, said contractors intentionally bid high to offset some of their risk for fixed-price contracting.
Malcolm O'Neill, assistant secretary of the Army for acquisition, logistics and technology, said contractors intentionally bid high to offset some of their risk for fixed-price contracting. (Sheila Vemmer / Staff)

The Obama administration's push for more fixed-price contracting may not be best for the Army's operations, a senior Army official said Wednesday.

Malcolm O'Neill, assistant Army secretary for acquisition, logistics and technology, told members of the Professional Services Council that contract officers see contractors intentionally bid high to offset some of their risk.

"There is risk when you take something fixed price," O'Neill said, referring to contractors. "But in my experience when you offer a fixed-price bid, it's 10 percent to 15 percent more than you need."

"Is [the contractor] accepting risk? No. He's providing a cushion," O'Neill said.

The administration classifies cost-reimbursement contracts as "high risk," along with time-and-materials contracts and sole-source awards. The Office of Management and Budget has asked agencies to cut by 10 percent their use of each of these three contract types.

With cost-reimbursement contracts, O'Neill said he would like to see more incentive fees to encourage the contractor to finish work on time. The contractor earns more of the fee if work is done on time and under budget and less if the project is late and costs more than expected.

O'Neill outlined the Army's efficiency goals for acquisitions, including a plan to grow warfighting capabilities 2 percent to 3 percent annually without increasing budget resources by the same amount. O'Neill said he'd like to give program managers the ability to reallocate savings they identify to the projects they think need it.

For example, if the program executive officer of ground combat systems saves money and wants to apply those savings to developing the M1 tank, he should be able to do that, O'Neill said. The Army or Defense Department comptroller can always say no and direct the money to other spending priorities, he said, but overall more flexibility should be given to the program managers.

O'Neill said he has received the preliminary results of an acquisition review commissioned last year to study the Army's acquisition policies, work force and processes, including how the Army acquires and manages equipment. O'Neill said the report will be released after he and other Army leaders decide how they are going to implement the data.

More In Acquisition

More Headlines