Contract Pricing:

DOD's Use of Unpriced Contracts

NSIAD-87-91: Published: Apr 30, 1987. Publicly Released: Apr 30, 1987.

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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) use of unpriced contracts to determine if contracting officers used them properly and priced them on time. Unpriced contracts authorize contractors to start work and incur costs before final agreement on terms and conditions, including price.

GAO found that: (1) although unpriced contracts can be a useful tool to support urgent operational needs, such contracts are not a desirable form of contracting because they place the federal government in an unfavorable negotiating position; (2) unpriced contracts do not provide incentives to achieve cost controls, since the contractor operates in a cost-plus mode until negotiations are complete; and (3) DOD has taken action to reduce the backlog of unpriced contracts and has issued policy guidance to deal with problems associated with them. GAO noted that recent legislation restricts DOD use of unpriced contracts by: (1) requiring that the heads of agencies approve requests for unpriced contracts prior to award; (2) limiting the amount of funds that can be obligated; (3) restricting unpriced contract use to urgent requirements; (4) limiting scope modifications on existing unpriced contracts; and (5) restricting the amount of profit allowed on unpriced contracts.

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