POSTSCRIPT II SELECTING THE BEST TYPE OF CONTRACT

37 Nash & Cibinic Rep. NL ¶ 22

Nash & Cibinic Report | April 2023

The Nash & Cibinic Report

Acquisition Planning

Ralph C. Nash

¶ 22. POSTSCRIPT II: SELECTING THE BEST TYPE OF CONTRACT

We continuously report on the pendulum that swings on the issue of selecting the best type of contract. See our latest effort in Fixed-Price Contracts: Is the Congressional Preference Going Away? , 36 NCRNL ¶ 8. See also Selecting the Best Type of Contract: Department of Defense Guidance, 30 NCRNL ¶ 28, and the Postscript at 35 NCRNL ¶ 25. Now we have two new developments—a Department of Defense Inspector General Report and some new guidance in the Defense Federal Acquisition Regulation Supplement.

The DOD IG Report

This report, Audit of the Military Services’ Award of Cost-Reimbursement Contracts, DODIG-22-137 (Sept, 26, 2022), see 64 GC ¶ 296(h), contains the following findings that cast more light on the use of cost-reimbursement contracts by the DOD:

Military Service contracting officials did not consistently award cost-reimbursement contracts in accordance with Federal and DoD regulations and guidance. Specifically, contracting officials consistently complied with cost-reimbursement contract requirements, when awarding 38 of 83 cost-reimbursement contracts, valued at $20.54 billion. However, contracting officials did not consistently award the remaining 45 cost-reimbursement contracts, valued at $6.94 billion in accordance with Federal and DoD regulations and guidance. Specifically, of the 83 contracts reviewed, contracting officials did not:

• obtain approval for the use of 11 cost-reimbursement contracts valued at $24 million;
• justify the use of 3 cost-reimbursement contracts valued at $5.32 million;
• document the possibility of a transition to a firm-fixed price contract for 42 cost-reimbursement contracts, valued at $6.55 billion;
• ensure adequate Government resources were available to award and manage 8 cost-reimbursement contracts, valued at $969.41 million; or
• determine the adequacy of the contractor’s accounting system in consultation with auditors or functional specialist for 1 cost-reimbursement contract, valued at $280,000.

The last three bullets indicate deficiencies that need to be corrected. But the first two indicate failures to follow the bureaucratic requirements that have been imposed to deter the use of cost-reimbursement contracts. To us that means that Contracting Officers are using their discretion to use the right type of contract but are avoiding the delays that would result from getting all of the necessary approvals or creating the detailed justifications that have been required. While some might look askance at such shortcuts, it could be argued that this is the type of initiative that is necessary to speed up the procurement process.

The DFARS Changes

At 87 Fed. Reg. 65512 (Oct. 28, 2022), see 64 GC ¶ 330(a), the DFARS was amended to implement the statutory provisions discussed at 36 NCRNL ¶ 8. First, the provisions at DFARS 216.102(1) and (3) were deleted. The first required COs to “first consider the use of fixed-price type contracts.” The second was a cross reference to provisions dealing with foreign military sales. All that is left of that paragraph states:

In accordance with section 811 of the National Defense Authorization Act for Fiscal Year 2013 (Pub. L. 112-239), use of any cost-reimbursement line item for the acquisition of production of major defense acquisition programs is prohibited, unless the exception at [DFARS] 234.004(2)(ii) applies.

Second, the provisions at DFARS 216.301-2(2) was deleted. This provision required obtaining approval of the head of the contracting activity before awarding a cost-reimbursement contract for over $ 25 million. All that remains of that paragraph is the following provision:

For contracts in connection with a military construction project or a military family housing project, contracting officers shall not use cost-plus-fixed-fee, cost-plus-award-fee, or cost-plus-incentive-fee contract types (10 U.S.C.A. 2306(c)). This applies notwithstanding a declaration of war or the declaration by the President of a national emergency under section 201 of the National Emergencies Act (50 U.S.C.A. 1621) that includes the use of the Armed Forces.

This provision seems unduly strict but it has been in effect for a number of years.

Third, DFARS 236.401(d)(ii) was deleted. This provision required the approval of the head of the contracting activity for cost-reimbursement contracts over $ 25 million.

Fourth, DFARS 216.006(b)(i) was deleted. This provision allowed the use of cost-reimbursement contracts for research and development work if the CO determined that the level of risk did not permit accurate pricing. Interestingly, also deleted was the statement that the Undersecretary of Defense for Acquisition and Sustainment had approved the use of cost-reimbursement contracts for research and development over $25 million. Presumably, COs know this is still so because they no longer have to obtain any approvals for such contracts.

The End Result

The interesting aspect of these developments is that they tend to cancel each other out. The DFARS changes relax the need for the bureaucratic efforts which the DOD IG recommended be more strictly adhered to. All in all, COs have been given more power to exercise their discretion to select the best type of contract and that is a good thing. RCN

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