DoD Institutes Preference for Fixed-Price Contracts
On Nov. 27, 2018, the U.S. Department of Defense (DoD) issued Class Deviation 2019-O0001, which, effective immediately, requires contracting officers to consider the use of fixed-price contracts, including fixed-price incentive contracts. The class deviation arises from section 829 of the National Defense Authorization Act for Fiscal Year 2017 (2017 NDAA), which established the preference for fixed-price contracts.
The class deviation also includes requirements for certain high-value contracts. For these contracts, the contracting officer is required to not just consider the use of a fixed-price contract, but, in fact, cannot award a cost-type contract unless approved by the head of the contracting activity. The threshold for this approval is $50 million for contracts awarded after Oct. 1, 2018, but before Oct. 1, 2019, and $25 million for contracts awarded on or after Oct. 1, 2019.
Notably, the class deviation includes a blanket approval for cost-type research and development contracts valued in excess of $25 million, so long as the contracting officer determines in writing that it is not possible to provide an equitable and sensible allocation of program risk between the government and the contractor, and that the level of program risk does not permit realistic pricing.
The class deviation contains one anomaly; although the class deviation applies "effective immediately," it also provides that the preference for fixed-price shall apply to "cost-reimbursement contracts in excess of $50 million to be awarded after Oct. 1, 2018." This retroactive application results from DoD delayed implementation of the 2017 NDAA. Section 829 required that the Defense Federal Acquisition Regulation Supplement (DFARS) be updated "no later than 180 days after the date of the enactment of this Act" or May 29, 2017. Despite the extended implementation period, DoD delayed implementation beyond Oct. 1, 2018—after which Congress required the preference be applied to contract awards over $50 million. DoD lacked the authority to modify this requirement.
The class deviation remains in effect until it is incorporated into the DFARS. Holland & Knight's Government Contracts team will post further updates when the DFARS is updated.