Myth: “Fixed-price contracting” is preferable to “cost-plus contracting” because cost-plus contracts place all of the financial risk on the government.

The facts:
Fixed-price contracting and cost-plus contracting both have a very valuable place in government contracting when used appropriately.

According to the Federal Procurement Data System, fixed-price contracting represents the overwhelming majority of contracts awarded by the federal government. Fixed-price contracts are best suited when the government customer knows exactly what services and/or goods it requires, in what quantities and/or timeframe. Under fixed-price contracts, contractors assume the bulk of the risk, requiring them to be efficient and to complete the tasks on time and as assigned. However, not every contract lends itself to a fixed-price structure.

Many programs that contractors support include projects that encompass significant uncertainty, in budgets, needs, technology development and more. When requirement uncertainty exists—such as in emergency environments or in research and development work—it is in the government’s best interests to utilize cost-plus contracts.

Cost-plus contracts are in no way “risk-free” or “blank checks” for contractors. While the government does assume more risk with a cost-plus contract than with a fixed-price contract, since the government is bound to cover a contractor’s legitimate costs incurred, those costs are subject to extensive scrutiny and can be denied if the government determines the charges are inappropriate. Moreover, when an opportunity presents significant risk of performance, that "risk" is often reflected in a higher contract price, even in a highly competitive market place.

The key to ensuring cost-plus contracts work as intended is well defined contract requirements, effective contract administration and personnel, and the use of appropriate incentives to reward contractor performance.

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