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FY05, the total MFP-11 budget was $6.6 billion, one-third of which was for acquisitionrelated
transactions.
Thus far, we have briefly described a range of transactions within the wide realm of
materiel acquisition—from small, inexpensive items that are commercially available to large,
complex developmental systems that are still beyond the reach of technical maturity and
purchase availability (where much contracting uncertainty lies). We have also noted
common and relative aspects of timeline availability, dollar size, and technical performance,
and how such attributes impact the governance of those transactions.
D) Government Contract Types and Risk
The contracting officer’s primary concern is the overall price the Government
will actually pay. The contracting officer’s objective is to negotiate a contract of a
type and with a price providing the contractor the greatest incentive for efficient and
economical performance. The negotiation of a contract type and a price are
related and should be considered together with the issues of risk and
uncertainty to the contractor and the Government. Therefore, the contracting
officer should not become preoccupied with any single element and should balance
the contract type, cost, and profit or fee negotiated to achieve a total result—a price
that is fair and reasonable to both the Government and the contractor. (FAR, Part
15.405(b))
Among the key events in any government acquisition transaction is the contract
award. The DoD employs contracts as vehicles for the accomplishment of acquisition
objectives. The FAR (and DoD Risk Management literature) state that the three attributes
we have been discussing here: cost, timeliness and technical performance/quality, are also
the primary areas of risk in any transaction (FAR, Part 7.105(a)(7)). The policy dictates that
determination of contract type “should be closely related to the risks involved in timely, costeffective,
and efficient performance” (FAR Part 15.404-4(d)). “Type” of contracts refers to the
contract compensation arrangement for defense contractors. And contract type selection is
the principal method of allocating cost risk between the Government and the contractor.
As discussed earlier, a variety of contract types are available to the DoD and its
contractors to provide flexibility in acquiring the large variety and volume of supplies and
services needed. Selecting the best contract type and price is a matter for negotiation and
requires the exercise of sound judgment by both parties, judgment that this study proposes
can be sharpened through the application of Transaction Cost Economics. Both parties
seek to negotiate the most appropriate contract type for the kind of work to be performed in
order to minimize spending and performance from the government’s perspective and to
maximize profits from the contractor’s perspective.
As seen in the FAR statement above, the government’s objective is to negotiate a
contract type and price (or estimated cost and fee) that will result in reasonable contractor
(profit) risk and provide the contractor with the greatest incentive for efficient and
economical performance. Contracting officers are directed to consider the complexity as
well as commercial availability and urgency of their transactions (FAR Part 5.203(b)). The
larger the scale or more technical complexity of the transaction, the greater the perceived
contract risk.
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