Delays in Definitizing Letter Contracts Can Be Costly to the Government

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.