Firm-Fixed-Price Contracts — What Could Go Wrong?

Despite the FAR’s explicit preference for Firm-Fixed-Price (FFP) type contracts — which place the performance cost and financial risk fully on the contractor — the success of FFPs is not a guarantee.

Recently, I wrote about the fact that my favorite contract type is the time-and-materials (T&M) contract, which is, arguably, the LEAST favorite among all the FAR-recognized contracts, due to the high cost and schedule and performance risk that the government retains. On the other end of the government cost spectrum is the FFP contract, “… in which the contractor has full responsibility for the performance costs and resulting profit (or loss).” 

So … now I’m writing about things going wrong under FFP contracts also. … What gives here? Am I some sort of FAR heretic? No, FAR from it. My point is that FAR’s characterizations, constraints and guidance for properly selecting an FFP type contract appear, at times, to get lost behind the FAR’s appropriate preference for using FFPs. 

Notably, the FAR 16.103 guidance on selecting a contract type notes the following:

• Generally, contract type is a matter for negotiation and sound judgment.
• Contract type and prices are related and should be considered together.
• Objectives include reasonable contractor risk and incentives for efficiency, economy.
• Using FFPs requires minimal/predictable cost uncertainty.
• If cost predictability is not present:
  • Other types should be considered.
  • Negotiations should seek to appropriately tie a contractor’s basic profit motive to performance.

BUT — the FAR also is clear that the ultimate selection authority is the contracting officer (CO). In the overwhelming number of federal procurements, a contractor-government negotiation process is not practical or warranted. Therefore, when the CO chooses a FFP contract type (vs. any other type) the choice must be grounded in consideration of the above factors, since the successful offeror will absorb the cost risk. 

How does the CO assess this? Enter the Acquisition Team — and market research findings. Unless the contract requirement is commercial or of a familiar type, the team should find out how much government risk is involved. The information can come from the requirement owner and technically savvy team members, as well as by assessing industry practices and expectations. Even so, the FFP type does not eliminate government risk.

As a Department of Defense (DoD) CO, I was once tasked as part of a team “consulting” in a situation where a contractor was refusing to proceed on performing a FFP contract without getting price relief. The contractor was required to incorporate a new capability into a DoD-unique piece of equipment that the firm had solely developed and produced. 

In addition to being already more than a year late, the firm claimed that it already had incurred 160% of the cost and projected that the remaining effort would end up costing at least another 40%. The contractor was willing to be terminated — and reap all the reputational harm that could ensue — rather than proceed without price relief.  The Government NEEDED the improved equipment. 

Our team couldn’t establish whether the incurred costs were always incurred despite efficient spending, but we found there had been government technical re-direction and interference. We also did find that the firm’s “to-go” cost projection was reasonable. Clearly, the original price was unrealistically low, and the inherent developmental cost risk made the FFP a mistake — at least with the benefit of our hindsight. Relief was reasonable — so long as the government still needed the improved equipment.

FFP procurement of the existing, well-defined equipment would have been reasonable. But the addition of services to incorporate the new capability changed the risk equation to a degree that, realistically, should have been reflected in a different contract type.

What went wrong with the FFP type?

• The FFP contract approach was selected despite the fact that performance risk could not be predicted with reasonable certainty.
• When delays and costs grew significantly, the contractor’s responsibility for the “resulting loss” exposed the fact that under the FFP contract type, the government actually does retain performance (and schedule) risk. That means the government either had to provide relief to the contractor or the government’s underlying contract need would not be met and the government would never recover spent costs and lost time.

This is a very extreme example — but it does illustrate that shifting cost risk to a contractor under FFP does NOT eliminate all the government’s risk to meeting its objectives.

As the Seventh Sense Consulting LLC (SSC) Director of Acquisition Practice, Mr. Patrick Shields has over 45 years of experience as an acquisition/contracting professional and innovative leader. As a Navy Department civilian, he was a major weapons systems contracting officer and manager. Since his civil service retirement, with 2 firms he has provided subject matter expertise support to numerous Federal civilian and DoD organizations, including acquisition strategy/ documentation support for key acquisitions, policy development, and personnel training. He also managed a subscription “ask the expert” response team and authored numerous topical publications for over 25,000 professional employees of subscribing agencies.

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