Fixed-Price Development Contracts: A Historical Perspective
MARYLAND UNIV COLLEGE PARK CENTER FOR PUBLIC POLICY AND PRIVATE ENTERPRISE
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The Department of Defense DoD continues to struggle to contain the costs of its weapons programs. In 2003, the Government Accountability Office found that the costs of major defense 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. 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 remedies over substantive reform often guides policy decisions. The DoD already spends the vast majority of its acquisition funds on fixed-price contracts for specified quantities of products, usually with good results. 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. This report adopts a historical perspective to analyze the effectiveness of fixed-price contracts in acquiring MDAPs. We begin with a brief survey of the different contract types employed by the DoD. Next, we examine the theoretical basis for the various contract types as well as the contexts within which they will provide the most benefit to the parties involved. We then examine three DoD aircraft acquisitions that relied on fixed-price contracts to highlight the various risks associated with fixed-price contracting the C-5 Galaxy, the F-111 Aardvark, and the A-12 Avenger II. We also provide a brief overview of the F-117 Nighthawk program, which used a cost-reimbursement contract during the development phase.
- Attack and Fighter Aircraft
- Transport Aircraft
- Administration and Management
- Logistics, Military Facilities and Supplies