Fixed-Price-Incentive Contracts: DOD Has Increased Their Use but Should Assess Contributions to Outcomes
Department of Defense guidance encourages the use of fixed-price-incentive contracts to acquire major weapon systems, where appropriate. These contracts can provide contractors with incentives to keep costs in check and stay on schedule.
We found that the DOD's use of these contracts has increased since 2010; they accounted for about half of all DOD obligations for its major weapon systems in 2019. But the DOD has not assessed whether using these contracts has actually kept costs and schedules in line.
We recommended that the DOD assess its use of these contracts.
An F-15 Fighter Jet
What GAO Found
The Department of Defense (DOD) has encouraged the use of fixed-price-incentive (FPI) contracts where appropriate. These contracts can provide defense contractors with a profit incentive for effective cost control and performance depending on how they are structured. Over the 10-year period from fiscal years 2010 through 2019, obligations on FPI contracts for major defense acquisition programs (MDAPs) grew to account for almost half of the $65 billion in obligations for fiscal year 2019.
Percentage of Obligations by Contract Type for Major Defense Acquisition Programs from Fiscal Years 2010 through 2019
DOD guidance, including Better Buying Power initiatives, influenced DOD's use of FPI contracts over the last decade for the selected contracts GAO reviewed. In addition, when selecting a contract type, contracting officers also considered factors including the availability of cost or pricing data, previous experience with the contractor, and the previously used contract type. DOD has not assessed the extent to which use of FPI contracts has contributed to achieving desired cost and schedule performance outcomes.
Why GAO Did This Study
DOD spends billions of dollars annually using fixed-price type contracts to acquire its MDAPs, among other things. In 2010, DOD's Better Buying Power guidance encouraged the use of FPI contracts as a way to obtain greater efficiency and productivity in defense spending.
Congress included a provision in statute for GAO to report on DOD's use of fixed-price type contracts, including FPI. This report examines (1) the extent to which DOD has awarded FPI contracts associated with MDAPs from fiscal years 2010 through 2019, and (2) the factors that influenced DOD's decision to use FPI contracts and the extent to which DOD assesses their use, among other objectives.
GAO analyzed government contracting data by contract type for fiscal years 2010 through 2019 on contracts for 101 MDAPs. GAO further analyzed a non-generalizable sample of 12 contracts including six FPI and six firm-fixed-price (two of each type from each of the three military departments); conducted file reviews; reviewed policy documentation; and interviewed DOD officials.
GAO recommends that DOD conduct an assessment of its use of FPI contracts for major defense acquisition programs, including the extent to which share lines and other contract elements contributed to achieving desired cost and schedule performance outcomes. DOD agreed with GAO's recommendation.
Recommendations for Executive Action
|Department of Defense||The Secretary of Defense should conduct an assessment of DOD's use of FPI contracts for MDAPs, including the extent to which share lines and other contract elements contributed to achieving desired cost and schedule performance outcomes. (Recommendation 1)||
DOD concurred with our recommendation, and in August 2022, DOD completed an assessment of its use of fixed-price-incentive contracts. The assessment includes an analysis of cost, schedule, and technical incentives as well as the overall outcomes of various fixed-price-incentive contracts. Use of this tool will help DOD better understand its use of fixed-price-incentive contracts and the extent to which share lines and other contract elements contributed to achieving desired cost and schedule performance outcomes.