Contract Pricing:

Obligations Exceed Definitized Prices on Unpriced Contracts

NSIAD-86-128: Published: May 2, 1986. Publicly Released: May 19, 1986.

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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 were using them properly and pricing them on time.

Unpriced contracts authorize contractors to start work and incur costs before final agreement on terms and conditions, including price. DOD establishes a ceiling price for these contracts that limits the government's liability and is usually based on the contractor's estimated cost for the work. GAO found that DOD obligated an average of 12 to 37 percent more than was needed for these contracts and was funding them at ceiling prices. These contracts provide contractors with little incentive to control costs. GAO found that many of the contracts remain unpriced much longer than the 180-day limit. GAO believes that a limit on obligations for all unpriced contracts could prevent excess obligations in the future and provide contractors with an incentive to submit proposals and negotiate contracts on time.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD fully concurred with and implemented this recommendation. An accomplishment report is in process.

    Recommendation: The Secretary of Defense should: (1) review existing unpriced contracts to deobligate excess funds; and (2) implement controls on a DOD-wide basis to prevent excess obligations on future unpriced contracts.

    Agency Affected: Department of Defense


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