Department of Defense

Change Major Defense Program Contracting Paradigm

Contract types should be focused on the program phase. Currently, MDAPs are usually put on one kind of contract (Cost Plus Award Fee, Firm-Fixed Price, etc) for the life of the contract. For example: Cost Plus Award Fee (CPAF) contracts should be reserved for early-lifecycle phases such as concept definition, up through Critical Design Review (CDR). At CDR, the requirements should be stable and the design well understood. The initial phase of the program would end at CDR; there would be a priced option to extend the contract past Milestone C received at CDR. Once the program is “locked down” and the contract option to enter into production is let, that should be a Firm-Fixed Price (FFP) contract for programs assessed as low risk. By using CPAF during requirements definition and preliminary design phases of a program, this incentivizes the contractor to design in innovation, but reimburses for actual costs accrued in design and requirements trades with the Government. FFP in production incentivizes the Government to keep requirements stable and incentivizes contractors to provide realistic pricing that they must live with during production. For medium-risk programs, Cost Plus Fixed Fee (CPFF) production contracts could be let, which incentivizes contractors to keep costs down to maximize the profit margin on a contract. Additionally, letting a core contract for preliminary work with options to extend into production/fielding and sustainment (further breakdowns by LRIP/FRP could be possible) would also allow the Government to cancel programs no longer needed or experiencing large overruns/Nunn-McCurdy breaches without the exorbitant termination costs normally encountered that end up guaranteeing “Zombie programs” that are too big to cancel. In short, this strategy would allow the government to tailor contract types to properly incentivize itself and the contractor to deliver best value for the government while giving the Government an out.

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Idea No. 5416