Will the DOGE Reinforce the Ongoing Shift to Firm Fixed Price Contracting?

Last week’s post cited comments concerning outsourcing that Sen. Rand Paul made on Laura Ingraham’s Fox News program. Readers who’d like to read that post, can find it here. Sen. Paul made the comment in response to a question Ingraham asked him concerning the Senate’s cooperation with the incoming administration’s “Department of Government Efficiency” or DOGE.  Both the Senate and House of Representatives are establishing committees to coordinate action on cost cutting efforts proposed by the DOGE.

In addition to mentioning outsourcing as a way the DOGE can cut federal spending, Sen. Paul also cited using firm fixed price (FFP) contracts instead of cost-plus agreements. Leveraging FFP contracts is not a new idea. The Budget Control Act (BCA) of 2011, which set budget caps for the period from FY 2012 to FY 2021, urged agencies to control costs and reduce risk by leveraging fixed price contracts to the furthest extent possible. As a result of this pressure, 66.7% of the contracts agencies awarded in FY 2023, two years after the formal end of the BCA caps, were FFP in nature. This was up from 63% of contracts awarded as FFP in FY 2015.

Assuming Elon Musk and Vivek Ramaswamy take the advice offered by Sen. Paul, the DOGE could recommend that agencies redouble their efforts to award FFP contracts for an even wider variety of work than they do now. Should they do this, I would expect that contractors working in information technology (IT) will feel the impact of this policy. This suggests that if your company works in IT, it would be wise to begin developing a strategy for mitigating the impact on margins that a further shift to FFP contracting could have.

The danger in all of this is, of course, that charting a course deeper into the seas of FFP contracting will also result in rising use of the dreaded Lowest Price, Technically Acceptable (LPTA) competition procedures. Guardrails established around LPTA currently discourage its use for

• Cybersecurity services
• Systems engineering and technical assistance services
• Advanced electronic testing
• Other knowledge-based professional services
• Personal protective equipment
• Knowledge-based training or logistics services in contingency or outside of the continental U.S. operations
• Engineering and manufacturing development for a major defense acquisition program

I think it is wise, however, not to assume these norms will remain intact once the DOGE is up and running. Musk, Ramaswamy, and others involved in advising them, including Marc Andreesen, all come from the technology industry. They understand which types of services can be commoditized. This includes cloud computing infrastructure services, which are becoming increasingly consolidated into a small handful of large providers. Software-as-a-Service providers are particularly subject to LPTA pressure. Does your company offer a capability via third-party resellers? Government will pressure them to deliver your capability at the lowest price. Will it be your company or the reseller that has control over the price?

These are questions IT contractors should be asking themselves as January 20, 2025, looms. Exceptional growth in the use of FFP contracting, with all of the attending ramifications, could be right around the corner.

As this is my last post of 2024, I’d like to thank all of you who read my articles. I hope they’ve been helpful and wish everyone a very happy holiday season.