President Donald Trump issued an executive order April 30 that seeks to shift government procurement toward greater use of firm-fixed-price contracts.
It is a change that could have implications across the Department of Energy’s nuclear weapons complex where “cost-plus” contracts are common.
When it comes to nuclear remediation contracts, vendors often don’t know the full extent of radioactive contamination until they get started on the new job, one corporate executive told Exchange Monitor this week.
“For too long, federal procurement has tolerated unpredictable costs, bloated overhead, and weak performance incentives,” Trump said in the order on “Promoting Efficiency, Accountability and Performance in Federal Contracting.”
“The United States Government must adopt the best business practices to protect taxpayer dollars, hold contractors accountable, and achieve demonstrable returns on investment,” Trump added.
“Many government contracts, however, operate on what is known as a “cost-reimbursement” model,” according to the order. “Under that model, government contractors are guaranteed reimbursement for their allowable incurred costs, and may receive profit margins on top of expenses. Cost-reimbursement contracts frequently allow for poorly defined product or service deliverables and increase the government’s exposure to overspending by providing little incentive to control costs.”
A review of spending across the federal government in fiscal 2024 identified roughly $120 billion obligated on cost-reimbursement consulting contracts alone, according to the order. Such contracts should be very rare, President Trump said in the order.
To the extent allowed by law, Trump said to avoid “cost inflation,” his administration will seek to make fixed-price contracts with performance consideration the default for most government contracting.
“Within 90 days of the date of this order, each agency head shall review and, to the maximum extent practicable and consistent with law, seek to modify, restructure, or renegotiate its 10 largest non-fixed-price contracts by dollar value,” Trump said.
“Government contractors may see a shift as to existing contracts,” according to a May 5 analysis by the Snell & Wilmer law firm.
“Regardless, the new executive order will have a significant impact on request for proposals strategies, teaming agreements, subcontract pricing and awards, and regulatory compliance that may impact equitable adjustments and future pricing,” according to the analysis. “As such, companies at any tier of government contracting should evaluate the executive order’s impact on their pricing models, risk exposure, and contracting strategy.”
The White House Office of Management & Budget must issue implementation guidance within 45 days, the law firm said. Within 120 days, the administration must propose Federal Acquisition Regulations amendments and develop a fixed-price contracting training program in coordination with various agencies.