Recently two of our clients came to Skyway and asked for help with contracts where the price of the service was less than the cost. In one case, the contract price was underbid by the previous contracts manager to win the contract. In the other case, inflationary pressures have forced the price of the service above the contract price. Now both clients find themselves losing money performing on a firm fixed price contract.
A Firm-Fixed-Price (FFP) contract provides a price not subject to any adjustment based on the contractor’s cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties.
The government does not want companies to lose money, but they do want the service performed. However, the CO has limited authority to change the awarded price. That is why FFP has the most risk for contractors. These situations make it difficult for both parties.
What options do you have?
Of course, a company can choose not to perform and take the risk of having the government either terminate the contract for default or convenience. The choice is the governments to make. Under a default (T4D), a contractor will be liable for re-procurement costs. So the cost of non-performance could be more than continuing performance. A T4D is a time consuming process for the government and usually not the first choice of a CO.
The other choice is to negotiate a termination for convenience (T4C). The government would have to agree to let your company stop its performance without penalty. The timing of such an event is totally at the government’s discretion, and they may only agree to that solution once some replacement solution has been determined.
Neither option is suitable for your company’s past performance history in competing contracts, so you have to weigh the decision not to perform carefully.
These are only some solutions but there may be some middle ground that the CO might be willing to negotiate. For example, the CO may agree not to exercise options with these prices forcing a new competition. If possible, the government may reduce the requirement allowing for a “price adjustment” on the contractor’s part. Be creative!
The lesson in all this is that you, the contractor, must take extreme care in pricing any contract, whether fixed price or cost. Industry did not anticipate the inflationary pressure of the last year because it has been many years since anything like this happened. If you think an FFP contract is too risky during the solicitation phase, suggest to the CO to go cost type. If the government won’t change the contract pricing type, your company must consider the risk associated with that pricing structure. Yes, you can cut to the bare bones and win the contract, but you leave your company in a high-risk position that may affect its long-term financial stability. The government does not want that, so be smart about pricing and don’t try and win at any cost.
