Unintended Consequences of Advocating Use of Fixed-Price Contracts in Defense Acquisition Practice

Abstract

Frequent and substantial cost overruns in Major Defense Acquisition Programs (MDAP) have been criticized by the administration, lawmakers, and taxpayers. Critics often blame the dominant use of cost-plus contracts in the defense procurement system as the root cause of the inefficiency. In turn, a strong preference for fixed-price contracts as opposed to cost-plus contracts has been expressed on multiple occasions. In this research, we highlight the possible unintended consequences of advocating wider use of fixed-price contracts in Department of Defense (DoD) acquisitions. The implication of this study is that the mindset that fixed-price contracts are better than cost-plus contracts is misleading and can potentially do more harm than good in DoD major weapon system acquisition.