The Office of Management and Budget (OMB) is directing Federal agencies to steer away from cost-reimbursement contracts in most situations and look first at firm fixed-price contracts, as outlined in a recent OMB memo.
The memo, released to agencies Jan. 5 , notes the “significant spend” on cost-reimbursement contracts, which pay contractors based on their allowed expenses and do not require delivery of a finished product or service. While allowed, acquisition policy discourages cost-reimbursement contracts and establishes firm fixed price contracts as “preferred for minimizing risk and maximizing value.”
Agencies will need to document their rationale for cost-reimbursement contracts, consult with Resource Management Offices beforehand, and adjust agency policies to limit the use of cost-reimbursement – a step that OMB will take at the governmentwide level as well.
While the memo acknowledges that there are situations well suited for this type of contract, agencies are likely using them beyond their intended context.
“While there is a legitimate role for cost-reimbursement contracts in supporting research, early development, and development in a non-commercial, non-competitive environment, the significant annual contract spend through this contract type, especially for work outside of these situations, suggests a need for greater management attention,” OMB states.
Existing regulations are intended to limit the use of cost-reimbursement contracts, only allowing them when uncertain requirements or uncertain estimates of cost make firm fixed-price contracts infeasible. For technology, the memo cites the example of research into advanced technology applications and leading-edge innovation as areas suited for cost-reimbursement contracts.