Government Contracts Monitor

Short Take: The Slow Death of Cost Reimbursement Contracts

November 25, 2014

Contracting personnel are required to obtain approval of cost reimbursement contracts at least one level above the contracting officer. FAC 2005-50 states “the contracting officer shall document the rationale for selecting the contract type in the written acquisition plan and ensure that the plan is approved and signed at least one level above the contracting officer.” The documentation must “detail the particular facts and circumstances,” for example, the “complexity of the requirements, uncertain duration of the work, contractor’s technical capability and financial responsibility, or adequacy of the contractor’s accounting system, and associated reasoning essential to support the contract type selection.” In addition, contracting personnel are required to identify cost-reimbursement contracts that are suitable for transition to firm-fixed-price contracts. According to a recent IG audit, however, this is not being done. DoD Needs to Improve Processes for Issuing and Managing Cost?Reimbursement Contracts (Nov. 7, 2014)

Of the 604 contracts reviewed by the IG, contracting personnel did not implement the increased oversight and related requirements of the FAR regarding the use of cost-reimbursement contracts in 411 – 68% – of all cases.

Of the 604 contracts reviewed, contracting personnel failed to:

Obtain approval for the use of 202 cost-reimbursement contracts;
Justify the use of 121 cost-reimbursement contracts;
Document the possibility of transitioning 227 contracts to firm-fixed-price;
Ensure Government resources were available for 138 contracts; and
Verify the adequacy of the contractor’s accounting system for 167 contracts.

Contracting personnel provided various reasons for why they failed to meet the new rule, including that they simply were unaware of the requirements. Not surprisingly, the IG was not happy with these findings.

The recommendations flowing from this audit focus on the IG’s perceived need to reinforce or clarify current regulations regarding limiting the use of cost-reimbursement contracts, since such arrangements allegedly increase DoD’s contracting risks and provide less incentive for contractors to control costs.

What does this mean? Look for DoD to move away from cost reimbursement contracting and push contractors into higher risk firm fixed price agreements.

Attorneys

Lindsay Simmons