Cost-plus contracts have utility, and the government should use them when appropriate.
Republican presidential nominee Sen. John McCain reignited the long-running debate over cost-plus contracting when he said he would prohibit the government’s use of the contracts if he is elected president. His comment, made during the first presidential debate Sept. 26, has received a fair amount of press attention and discussion. Rarely does an issue directly related to federal procurement take center stage during a presidential debate. McCain’s comment has led to a debate about the benefits and risks associated with cost-plus contracts.
Historically, the government has used such contracts — often referred to as cost-reimbursement contracts — when it is desirable to shift some of the risk from the contractor to the government. The contract type is most commonly used when the product or service cannot be explicitly defined. For example, the government often uses cost-plus contracts for research and development projects and for services that are difficult to price.
The contracts have advantages and disadvantages. One advantage is that contractors have an incentive to provide high-quality work because they know they will be fully reimbursed for their costs.
Consequently, the government prefers to use cost-plus contracts when long-term quality is more important than cost. An obvious disadvantage is that such contracts require more oversight to ensure that the government pays only the allowable and allocable costs. Cost-plus contracts have utility, and the government should use them when appropriate.
However, debate is beneficial. It highlights some of the challenges the acquisition system faces.
To effectively address the recurring problems with the contracts, we need to understand their root causes.
Poorly defined requirements and performance measures are a principal cause of most problems associated with cost-plus and other types of contracts. The lack of clear requirements and measures makes it difficult for contractors to accurately estimate their costs, which is why cost-plus contracts are often the victim of huge cost overruns and mismanagement. Although contract requirements might not need to be as well defined for a cost-plus contract as for a fixed-price contract, the description of the product or service to be procured must provide enough detail for contractors to give the government accurate cost estimates.
The government has emphasized the need for acquisition professionals to write clear requirements and performance measures for many years, but that directive is easier to articulate than accomplish.
Unquestionably, the government’s ability to draft clearly defined requirements is essential to successful contractor performance and cost management. A contractor’s ability to properly assess risks and accurately estimate costs is directly related to how well the requirements are written. That is why it is important for every government contract and task order to have clearly defined requirements and performance measures. If that basic objective is met, the debate over the use of cost-plus contracts will quickly subside.
Burton is a partner at Washington law firm Venable and former deputy administrator of the Office of Federal Procurement Policy.
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