According to a new study, firm-fixed-price contracts aren’t always firm

» Click here to learn more about Trevor Brown

» Click here to read an abstract of the article

Federal Computer Week, a strategy and business management website for government leaders, has written a story on Brown and Kim’s research on fixed-price contracts. »Click here to read the story

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NEWS

Professor Trevor Brown has won a grant from the U.S. Department of the Navy's Naval Postgraduate School to further his research on contract design. The $78,000 grant provides Professor Brown the resources to assess how the characteristics of different goods and services and the relative bargaining strength of vendors impact whether the Department of Defense relies on fixed price or cost reimbursement types of contracts. The results of this study will help the Department of Defense secure the best possible value when it buys goods and services. This new research will build on work Professor Brown has conducted with Yong Woon Kim, a graduate of the Glenn School's doctoral program.

A new study by Dr. Trevor Brown, associate professor at The Ohio State University’s John Glenn School of Public Affairs, and Dr. Yong Woon Kim, the study’s lead author, has found that short-term, fixed-price contracts for the Department of Defense, Department of Homeland Security and the Department of Health and Human Services are often dramatically extended or modified, risking cost overruns, delivery delays and diminished product quality even for simple products and services.

The Importance of Contract Design looked at five years of contracts (2004-2008) for the three federal agencies and examined whether they followed best practice guidelines. The results indicate that while the majority of firm-fixed-price contracts followed the guidelines many of the contracts were increased in value and length because of frequent modifications to the initial agreements.

“Federal agency officials with responsibility for procurement, policy makers and overseers of contracting practices will benefit from the study,” said Brown. “The current push in Washington is to increase the use of fixed-price contracts because it’s thought to lower costs and reduce risk. On the one hand, the results suggest the use of fixed-price contracts is high so the cost savings should accrue. However, the data suggest that in some cases what appear to be short term, competitive bids, fixed-price contracts have been changed through negotiations over time into long term, sole source contracts.”

In 2004, Fort Lee Virginia entered into a one-year contract for trash collection and recycling at a firm fixed-price of $250,834. Two years later the contract was modified to a 10-year, $4,577,814 contract without going through a competitive bid process.

Though more study is needed, Brown feels the driving cause for the deviations from contract policy have to do with contract regulation requirements. “It’s costly for agencies to go hunting for competitive bids because of the onerous regulatory requirements. My intuition is many of these agencies are test-driving a supplier over the first couple of years. If they’re happy with the quality, rather than go back to the market, they just re-up the incumbent supplier over the long term,” said Brown.

One primary recommendation Brown has is for policy makers to find ways to reduce the regulatory burden of competitive bidding.

The Importance of Contract Design is to be published in the Public Administration Review this fall.