Executive Order Encourages Fixed-Price Federal Contracting: Commercial Challenges and Bid-Protest Impacts

The White House recently issued an executive order requiring executive branch agencies to default to fixed-price contracts rather than cost-reimbursement models or undergo a written justification and approval process to proceed with nonfixed price contracts. The order maintains that, by imposing fixed costs and defining outcomes and deliverables, fixed-price contracts provide the government more control over costs, reward proper service, and penalize poor performance. It contends that, by contrast, cost-reimbursement models result in the opposite: limited control over costs and subpar performance and deliverables.

The order, titled Promoting Efficiency, Accountability, and Performance in Federal Contracting, comes within the greater context of this administration’s push for better competition in government contracting, including encouraging agencies to procure commercial goods and services when possible.

As required by the order, all executive agencies will default to fixed-price contracts in their procurement, as defined in Part 16 of the Federal Acquisition Regulation (FAR), or contracts that tie profit to performance-based metrics. Nonfixed-price contracts will require written justification from a contracting officer to an agency head or a noncareer employee delegated by the agency head for approval.

The order requires that an agency head approve costs of a nonfixed-price contract or nonfixed-price portions of a contract if they exceed certain thresholds ranging from $10 million to $100 million depending on the agency. These thresholds do not apply to contracts that support responses to emergencies, major disasters, or contingency operations; involve research and development; or relate to preproduction for major systems acquisition. Within 90 days of the order, agency heads must review, restructure, and renegotiate their 10 largest nonfixed-price contracts to promote use of fixed prices and performance-based incentives.

Agency heads must report the number, value, and written justifications for nonfixed-price contracts to the Director of the Office of Management and Budget (OMB) in the coming months and semiannually moving forward. While OMB is expected to issue guidance regarding implementation within 45 days of the order, the Administrator for Federal Procurement Policy, in conjunction with the FAR Council, is expected to propose amendments to the FAR within 120 days.

COMMERCIAL AND NONCOMMERCIAL PRODUCTS AND SERVICES

The stipulations outlined in the order encompass most commercial and noncommercial products and services. The condition limiting nonfixed-price contracts to a specified monetary threshold along with the requirement for written justification and subsequent agency head approval is likely to impact the procurement process by requiring additional information and stakeholder review. For instance, we could see the preparation of additional market research and price analyses, additional determinations and findings, multilevel procurement reviews, and extended procurement timelines.

These increased administrative burdens could limit pricing and cost determination flexibility for businesses working with the government and subject contractors to greater scrutiny. For commercial offerings, contractors may face constraints in tailoring prices, discounts, and service options while adhering to the new requirements. For instance, requirements encouraging upfront, per-unit pricing could limit competitive pricing based on volume, subscription, or customizable service levels.

Taken with other executive orders and policies related to the use of commercial goods and services, especially within the Department of Defense (DoD), contractors that can find ways to establish their goods and services as firm-fixed price commercial goods and services may be in a better position to compete for government contracts or potentially protest the conditions of solicitations (more information on that below). For noncommercial offerings, contractors could face limitations on their ability to recover uncertain costs associated with integration complexity, supply-chain volatility, and timeline variance.

PRICE AND EQUITABLE ADJUSTMENTS

Conventionally, fixed-price contracts work best when costs, outcomes, and deliverables are clearly defined, but such contracts may not easily adapt to services or products where requirements are continually developing or outcomes or deliverables vary. To effectively mitigate unknown risks associated with fixed-price contracts, contractors may consider proposing higher prices, the result of which could potentially limit a contractor’s competitiveness by reducing the number of viable bids that fall within the government’s price thresholds for both commercial and noncommercial products and services.

Contractors could potentially pursue relief under an economic price adjustment clause, if there is one in the contract, or request an equitable adjustment. Notably, the DoD has historically viewed requests for equitable adjustment as improper when increased cost does not result from a change directed by a contracting officer, such as a change in economic conditions.

IMPACT ON BID PROTESTS

While the order does not directly alter bid protest law, it can shape the protest landscape by sharpening the issues contractors raise during pre- and post-award protests. For example, an agency’s decision to use a non-fixed price contract may be grounds for a bid protest if the contract type is inconsistent with the solicitation’s risk allocation and market conditions. Contractors should expect some procedural challenges to contract-type determinations, including attacks on inadequate acquisition planning, unsupported market research, and deficient documentation.

Protests may also allege unclear or unrealistic requirements, focus on price-realism analyses versus price reasonableness, and question whether the solicitation and evaluation criteria appropriately address performance risk. There may be potential increases in post-award disputes and claims litigation as contractors navigate evolving risks and performance expectations.

TAKEAWAYS

• Prepare for fixed-price contracting to become the baseline. Government contractors should expect agencies to default to fixed-price structures or performance-based profit incentives unless the agency can justify and obtain elevated approval for a non-fixed-price contract type.
• Assess whether pricing models can withstand greater upfront certainty. Contractors, particularly those offering commercial, subscription-based, customized, or complex services, may need to revisit pricing strategies to account for reduced flexibility, increased cost risk, and more defined deliverables at the solicitation stage. Those facing challenges may consider seeking relief under an economic price adjustment clause if there is one in the contract.
• Monitor solicitations for disconnects between contract type, requirements, and risk. The unjustified use of contracts without fixed-priced elements may create protestable issues where the agency has not adequately supported its contract-type decision, conducted meaningful market research, or aligned evaluation criteria with performance risk.
• Use the implementation period strategically. As agencies review major nonfixed-price contracts and OMB and the FAR Council develop implementing guidance, contractors should evaluate existing portfolios, identify contracts that may be candidates for restructuring or renegotiation, and prepare to engage with agencies on risk allocation and pricing assumptions.

Legal practice assistant Kelly Waldron contributed to this publication.

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