Fixed-Price Deals May Not Control Costs, Pentagon Says

Fixed-price defense contracts aren’t necessarily more effective in curbing overruns during the development and initial production of weapons systems, according to a Pentagon study.

That “does not absolve us from the need to carefully consider and select the most appropriate contract type given the maturity, system type and business strategy for each system,” according to the Pentagon’s first annual report on ‘Performance of the Defense Acquisition System.’’

Fixed-price contracts require companies to bear increasing shares of an overrun until they are paying 100 percent. They make money if they are able to bring in a contract at less than the fixed target cost. Watchdog groups and some lawmakers have championed the contractors as a better deal for taxpayers than cost-reimbursable deals in which the government is responsible for overruns.

“A lot of the things we thought were important may not be as important as we believed,” Frank Kendall, undersecretary for acquisition, told the Armed Forces News Service in comments on the report posted today.

Kendall’s “Better Buying 2.0” initiative calls for limiting the use of fixed-price development contracts on the argument that they saddle contractors with too much risk in that phase of a weapons program.

The report outlines cost increases for the Pentagon since 1994 when a wave of major defense consolidations started, with a statistical sample of programs by five top contractors that grew in cost.

Boeing, Lockheed

A chart of cost increases by prime contractors on Pentagon-wide development contracts from 1994 to 2011 lists Boeing Co. with median cost overruns of 46 percent, Lockheed Martin Corp. with 42 percent, General Dynamics Corp. with 36 percent, Northrop Grumman Corp. at 31 percent and Raytheon Co. at 25 percent.

The report also includes a compilation of major programs canceled since 1995 by the military services “without producing any or very few operational units.” The Army led with 14 programs.