Trump executive order pushes fixed-price contracting, but implementation questions loom

President Trump’s new executive order on government acquisition is pushing agencies to use more fixed-price contracts as a way of establishing more procurements that reward outcomes and performance.

The Promoting Efficiency, Accountability, and Performance in Federal Contracting executive order was signed Thursday and wants to move the government away from a “cost-reimbursement” model.

The order claims that a review of fiscal year 2024 contracts identified $120 billion in cost-reimbursement consulting contracts alone. Consulting firms have been a frequent target of the second Trump administration.

The order acknowledges that there are times when cost-reimbursement contracting is appropriate, especially with the research-and-development and pre-production development phases of major systems.

But “it should be the exception, granted only in limited circumstances and with appropriate senior-level accountability at the agency,” the order states.

To make this a reality, the order requires that contracting officers make a written justification to the agency head when using something other than a fixed-price contract. The agency head can designate another political appointee, not a career acquisition official, to approve the exemption.

At the Defense Department, the requirement kicks in when a contract is valued at more than $100 million.

NASA's threshold is $35 million, while the Homeland Security Department's is $25 million. The figure drops to $10 million for other agencies.

Contracts that support an “emergency, major disaster, or contingency operation” are exempt. Contracts involving R&D or the pre-production development of major systems also are exempt.

But one requirement may prove to be the most controversial and challenging: agencies have 90 days to renegotiate their 10 largest non-fixed-price contracts. That timeline is already drawing skepticism from legal practitioners.

“The reality is the government can't unilaterally restructure a contract like that,” said Stephen Bacon, an attorney at law firm Rogers Joseph O’Donnell. “They're going to have to get the contractor to negotiate.”

The contractor will have to develop a proposal that transitions the contract from cost-reimbursement to fixed-price. Requirements will need to be reworked as well.

“Cost-reimbursement contracts are typically used when the agency can’t sufficiently define their requirements,” Bacon said. “There’s just too many unknowns and too much risk for the contractor to price it.”

Bacon said that if agencies push to renegotiate, prices will likely go up because the contractors will need to factor in the risk of poorly-defined requirements and the unknowns.

That dynamic could undermine the order's cost-cutting intent because the government may end up paying more under fixed-price contracts than it would have under cost-reimbursement.

"If a contractor is suddenly tasked with having to bid a fixed price for something that has a lot of unknowns baked into it, the contractor may be willing to submit a fixed price proposal, but it's going to be significantly above what the government's already paying on cost plus,” Bacon said.

Contractors can refuse to negotiate, but Bacon said they could potentially face a termination for convenience or options that are not exercised,.

A second aspect of the order worth watching is the requirement for sign-off by a political appointee.

Fixed-price have always been a preferred contract type under the Federal Acquisition Regulation. Contracting officers had to write a justification for their file when they did not use fixed-price.

“What’s different here is the requirement to route those justifications up to a politically appointed agency head,” Bacon said.

Contracting officers will likely be reluctant to pass on those justifications.

“We’re probably going to have more fixed price contracts even in situations where they may not be appropriate,” he said.

Bacon said he can see increased use of fixed-price, level-of-effort contracts where the government commits to buying a certain number of hours for a set price.

“It’s not really that different from a T&M contract, but its firm-fixed price in name so it complies with the order on paper,” he said. “Maybe we’ll see more contracting officers use them as a way to get around the order.”

Bacon said he also can see more pre-award bid protests if agencies cannot define requirements and outcomes more precisely.

“We’ll see protests to try to get more definition in what the work really is so that you can scope it and price it,” he said.