Risk in Fixed-Price Contracts
DEFENSE ACQUISITION UNIV FT BELVOIR VA
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Current federal policy expresses a strong preference for fixed-price contracts in federal contracting. Firm-fixed-price contracts are depicted as existing on the extreme left of the continuum of risk. As we progress through the various fixed price flavors and into cost-type contracts, the assertion is that risk shifts from the vendor to the government. We even describe contract types on the extreme right e.g., labor hour and time and material as high risk. While, on the surface, this assertion appears reasonable, we do ourselves and the taxpayer a disservice when we couple this belief with the assumption that there always exists goodness in shifting risk to the vendor. Cost, schedule and performance risk are only three of the characteristics of an acquisition approach that source selection authorities and the contracting professionals supporting them must consider in selecting vendors and the underlying contract structure. Two of the weaknesses in the processes that lead to government contracts are a much too simplistic view of the concept of uncertainty in government contracts and the universally shared misuse of language that has evolved as a consequence of this overly simplistic view. Uncertainty is an extremely complex concept. In the absence of omniscience, efforts to predict to any useful degree of certainty what events will have an effect on your contract and whether they will occur are exercises in futility. Nonetheless, we cannot wait for things to happen. We have needs that exist today, so we act and make our best guesses about future events.
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