Delays in Definitizing Letter Contracts Can Be Costly to the Government

PSAD-80-10: Published: Nov 16, 1979. Publicly Released: Nov 16, 1979.

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A review of the use of letter contracts by the Army and the Navy was made to determine whether such contracts were being definitized in a timely manner and the impact of any untimely definitizations. Frequent delays in definitizations which exceeded the time limits set forth in Department of Defense regulations sometimes compromised the Government's negotiating position and thus increased costs. In addition, neither the Army nor the Navy exercised the unilateral determination clause which provides the authority for the contracting officer to unilaterally set the price when agreement cannot be reached in definitization negotiations. Selected letter contract data from specific Army and Navy operations were analyzed, and a detailed examination was made of procurement records for 87 of the 389 letter contracts awarded between July 1, 1973, and March 30, 1979, that had not been definitized within the time period set out in Defense regulations. Letter contracts are the least desirable method of contracting for supplies and services and can be costly to the Government, because under a letter contract the contractor has little incentive to control costs. Delays in definitization usually allow the contractor to accumulate more actual costs, which gives the advantage in the negotiations to the contractor. Thus, timely definitization is necessary to assure that the Government obtains a fair and reasonable price.

In many instances, the time taken to definitize letter contracts greatly exceeded that set forth in Defense regulations. In the case of many Navy letter contracts, the Navy did not reflect this situation by negotiating lower profit rates commensurate with the decrease in cost risk. In other instances, the delays caused the Government to incur costs that the Government would normally bear. Despite Navy promises to take corrective action, the situation had not improved since the Naval Audit Service began periodic reports on delays in December, 1968. GAO determined that judicious use of the unilateral determination clause could lessen the time period for definitizing letter contracts. Procurement officials indicated several reasons for their reluctance to use this clause when negotiations become stalemated. Among these were the belief that it might cause sole-source contractors to become difficult to negotiate with in the future; the infeasibility of making price determinations based on estimates or judgments in certain types of procurements; the questionable timeliness, cost, and feasibility of making and litigating such actions; and the timeliness of a decision under the contract disputes procedures. GAO viewed these arguments as conjectural, and suggested that they be tested in some actual cases to determine the long-term benefits and costs. The possible long-term benefits of demonstrating the Government's willingness to use its unilateral determination authority when contractors delay negotiations may easily justify any cost and delay involved in litigating a few cases.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Defense should establish specific guidelines for contracting officers to use in determining when to unilaterally definitize letter contracts instead of leaving this determination to the discretion of the contracting officer. The regulations should trigger such unilateral action when the contractor has incurred some specified percentage of the total estimated cost of the procurement. In addition, military departments should be required to recognize significant cost reimbursements enjoyed by contractors under letter contracts when negotiating profit.

    Agency Affected:


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