A recent executive order marks a significant policy shift in federal procurement by directing agencies to default to fixed-price, performance-based contracting. Framed as an effort to promote fiscal discipline, transparency, and accountability, the order reflects concerns about cost overruns and inefficiencies associated with cost-reimbursement models. This post examines the order’s key provisions, its legal and practical implications, and the challenges agencies and contractors may face in implementation.
Link to Background: Fixed-Price vs. Cost-Reimbursement Contracting Background: Fixed-Price vs. Cost-Reimbursement Contracting
Federal procurement has historically relied on a mix of contract types governed by Part 16 of the Federal Acquisition Regulation (FAR). Two dominant models — fixed-price and cost-reimbursement — allocate risk and incentives differently. Fixed-price contracts establish a set price for defined deliverables, placing cost risk on contractors while incentivizing efficiency and performance. Cost-reimbursement contracts allow contractors to recover allowable costs, often with an added fee, shifting financial risk to the government but offering flexibility where requirements are uncertain. The executive order takes aim at the latter, citing approximately $120 billion in obligations for cost-reimbursement consulting contracts in FY 2024 alone, and asserting that such models can encourage cost growth and vague performance outcomes.
Link to Key Provisions of the Executive Order Key Provisions of the Executive Order
- Default to Fixed-Price Contracting
Agencies are directed, “to the maximum extent consistent with law,” to use fixed-price contracts as the default procurement method. The definition is broadened to include contracts with performance-based profit incentives. - Heightened Justification for Non-Fixed-Price Contracts
Any deviation from fixed-price contracting — including cost-reimbursement, time-and-materials, and labor-hour contracts — requires (1) written justification by the contracting officer; and (2) elevated approval thresholds based on contract value and agency. For example, contracts exceeding $100 million (Department of War), $35 million (NASA), $25 million (DHS), or $10 million (other agencies) require agency head approval. - Targeted Review of Existing Contracts
Within 90 days, agencies must review their 10 largest non-fixed-price contracts and attempt to renegotiate them toward fixed-price or performance-based structures, where feasible. - Reporting Requirements
Agencies must submit semi-annual reports to the Office of Management and Budget (OMB) detailing (1) the number and value of non-fixed-price contracts, (2) justifications for their use, and (3) opportunities to transition existing contracts. - Regulatory and Workforce Implementation
The order directs (1) OMB guidance within 45 days; (2) proposed FAR amendments within 120 days; and (3) development of training programs for acquisition personnel.
Link to Legal and Regulatory Implications Legal and Regulatory Implications
The order operates within existing statutory frameworks but signals a strong policy preference that will likely influence future FAR revisions. While agencies retain discretion “consistent with law,” the procedural burdens imposed on non-fixed-price contracting may effectively narrow their use. Importantly, the order includes standard limitations: (1) It does not create enforceable rights; (2) it preserves existing statutory authorities; and (3) it is subject to appropriations and applicable law. Nonetheless, its directives may shape bid protest litigation, particularly where offerors challenge agency decisions to use or avoid certain contract types.
Link to Practical Impacts on Agencies and Contractors Practical Impacts on Agencies and Contractors
- Risk Allocation Shifts
Contractors may bear greater financial risk under fixed-price arrangements, particularly in complex or evolving projects. This could lead to (1) increased pricing buffers, (2) more conservative bidding, or (3) reduced competition in high-uncertainty procurements. - Challenges in Defining Requirements
Fixed-price contracts depend on well-defined scopes. Agencies may struggle where requirements are inherently uncertain, such as (1) research and development (partially exempted), (2) emerging technology projects, or (3) long-term, iterative services. - Contract Renegotiation Complexity
The mandate to revisit existing contracts introduces legal and operational complexities, including (1) bilateral modification negotiations, (2) potential contractor resistance, and (3) questions around equitable adjustments. - Increased Administrative Oversight
The approval and reporting requirements may slow procurement timelines and increase administrative burden, at least in the short term.
Link to Policy Considerations and Open Questions Policy Considerations and Open Questions
While the order promotes efficiency and accountability, several questions remain. Will agencies interpret “maximum extent practicable” broadly or narrowly? How will FAR amendments reconcile this policy with existing statutory allowances for flexible contracting? Could overcorrection toward fixed-price models undermine innovation or program success in certain domains?
Link to Conclusion Conclusion
This executive order represents a decisive push toward performance-based, fixed-price procurement as the federal government’s default posture. Its success will depend not only on regulatory implementation but also on agencies’ ability to define requirements clearly and manage risk effectively. For contractors, the shift underscores the need for robust cost estimation, risk management, and performance delivery capabilities in an increasingly outcome-driven procurement environment.
As implementation unfolds, both agencies and industry stakeholders should monitor forthcoming OMB guidance and FAR amendments closely, as these will determine the practical contours of this policy transformation.
If you have any questions about this noteworthy development or otherwise require assistance, please do not hesitate to contract Aron Beezley or Patrick Quigley.