Fixed-price contracts in a world of uncertainty

Guest:	Brian Miller
Title:	President of BMNT
Summary:	Fixed‑price contracting is often treated as the answer to cost control in federal acquisition, and it works when requirements are clear and outcomes are known. But as agencies try to apply that model more broadly, they keep running into the reality that many projects don’t start with that kind of certainty.

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Interview transcript

Terry Gerton President Trump’s recent executive order moved fixed price contracting kind of into first place for preferred contracting methods for federal government folks. What is it that people think they’re getting when they say, I really want a fixed price contract?

Brian Miller That’s a great question. I think what you’re getting at is the core misperception perhaps of the different contract types. And I think a core mistake some people are making is treating fixed price as a way to get cost control or certainty, right? It’s really more like an operating model or a discipline. The contract type, whether we’re talking about fixed price or cost plus or time and materials, is really, in my mind, just a memorialization of those concepts. I don’t think the contract type alone creates accountability. There’s a discipline, sort of like the discipline around the problem the government may be trying to solve in letting a contract does. So, someone has to do the work of deciding what outcome is being bought. That’s really a discovery process and something we’ve been doing for many years. I think the predictable failure of a firm-fixed price contract, to your point, is that it may seem perfect on paper, but can quickly revert to a sort of time and materials behavior, in our experience, probably within about a year, if the underlying problem was never really defined or validated in the first place, right? So, you start getting the same failures under a fixed-price contract that historically the government might have gotten under time and materials. So, what people get wrong is that they think the hard part is the pricing. And I think the hard part is really defining done, you know, before a contract is even signed and money starts exchanging hands between the government and its contractors.

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Terry Gerton Tell me more about the description that you used of an operating model. I think of that as repeatable processes that lead to a predictable outcome. What are you talking about with respect to a fixed price contract?

Brian Miller I’m talking about a shift. It moves the — the words I would use would be outcome. It moves the outcome and the cost risk from the government to the vendor. So when a, you know, to speak from personal experience, when the government hires our firm, we take the risk of achieving a defined outcome, not the risk of how many hours it’s going to take to deliver that outcome. And again, sort of related to your first question, this is the part where most people kind of skip. Risk can’t transfer to a vendor, to a contractor, or an outcome that nobody’s defined. So if a statement of work describes like an activity instead of a result, there’s risk to the handover. You know, effectively you’re just buying labor with a fixed price label, right? So the when, you know, speaking of sort of a system or a discipline here, the when matters as much as the who. The real risk decision happens, as I mentioned before, before the contract award at a stage I would generally call problem definition, not in delivery of the contract. So get the problem right up front and the pricing is pretty straightforward. Skip it and you’re probably going to wind up renegotiating or adjusting throughout the life of the contractor, or just accepting risk that wasn’t fully understood.

Terry Gerton Brian Miller is the president of BMNT. Brian, that outcome is easier to define in some business arenas and harder to define in others. Are there types of work for which a fixed price contract is exactly the right mechanism? Where does it work well?

Brian Miller Good question. I think it works when the outcome can be named as a noun, a noun the government can accept or reject. So think of it like an analytical product, an assessment, an exercise or an event run to a defined criteria, a validated transition of a new solution concept or capability to a specific program office. Even advisory work triggered by a specific decision point. So it works when discovery is also part of the deal, so to speak, vendors, contractors only take genuine outcome risk when they’re allowed to go validate the problem first. Speaking from personal experience in our engagements, that often means we talk to dozens of stakeholders upfront. So it kind of turns the aspiration of a challenge space or even a solution concept or just a technology focus area from something like an aspiration into something that the government actually can price and industry can actually respond to with confidence.

Terry Gerton The flip side, of course, is where does it not work well? Is it a new drug to treat a new disease or a new missile system or, you know, where does a fixed price contract not really meet either party’s objectives?

Brian Miller Yeah, it breaks the moment the government is asking the vendor to price ambiguity. So it’s an outcome that no operator, no analysts, no end user even has validated. So the risk is unknowable at that point. I’m simplifying a bit, but if there’s ambiguity, if things are not validated, good vendors may walk away. Or, if they don’t, they probably price that uncertainty into the contract. And, you know, without naming names, of course, you know, poor vendors or contractors are gonna quote anything upfront and they’ll renegotiate later. And either way, I think the American taxpayer loses in those scenarios.

Terry Gerton So if you’re a government contracting officer and you’ve got this guidance on your desk that says, whenever possible, I want you to use a fixed price contract, what are some steps that you could take to improve your odds of success?

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Brian Miller I would go back to a couple of things I said earlier. I think it’s statements of work that name outcomes as nouns, discovery funded as a real phase of the work and not sort of unpaid and hypothetical. Payments tied to outcomes. Some examples off the top of my head and from our experience, like a reduction in detection time for certain sensor networks or faster adjudication of certain questions or validated transition activities, right? From specific points A to point B. There could be short option priced phases of work with real acceptance tests. And it really comes down to like meeting with the contracting professionals on the government side and honestly talking about whether a clearly defined deliverable met a clearly-defined criteria. And that back and forth is really healthy, provided there’s been some upfront validation, some upfront discovery. Again, going back to the simple idea, what’s the problem or problems the contract exists to solve? And does the contractor and the contracting professionals just understand what that criteria is? Again, what done is gonna look like, upfront.

Terry Gerton Let’s say both parties have done their very best homework, they’ve got a contract, they can name an outcome, and in the process of getting underway, there’s some unexpected change in the environment. New technology rolls out the door, something changes that really changes the nature of the agreement. What happens then?

Brian Miller Well, I think those are situations where, again, if there’s some real upfront reflection, there are some obvious reasons not to go with firm fixed price. And there are references to that in the president’s executive order. Just to go through a couple concepts here, let’s talk about cost plus contracts. I think that those are appropriate when the outcome itself can’t be defined yet, right? If the stakeholders have tried and can’t do it, It’s probably, this is the narrowest case, right? Genuine research, early stage development, where the findings that would tell you what done looks like haven’t been made. And then I’d say time and materials is right when the outcome is clear enough, but the amount of work to get there isn’t. You know, this is the kind of work where you’re thinking about in the modern era, like compute of all of these AI first companies, you know, they are presenting this incredibly modern technology, but in order to present and deliver on their value proposition, there may be an incredible compute cost that’s hard for them to estimate today based on adoption tomorrow. So there’s obvious exceptions here. This isn’t a dogmatic endorsement of fixed price for everything, but I think what you’re referring to gets back to one of your first questions about some best practices here are doing that upfront discovery to determine, if it’s gonna be fixed price, how do you define done and what the criteria is? And that upfront reflection to determine in those other cases where fixed price probably isn’t appropriate yet. And you could also sort of stack these contract types where, you know, there’s sort of a first phase that’s not fixed price but over time based on discovery and validation, you can move into a fixed price contract type.

Terry Gerton You sit on the industry side of the table, across from the government contracting offices. What should industry be expecting to hear over the course of the next 12 to 18 months as this EO rolls into practice?

Brian Miller Very good question. I mean, I think there’s some big macro challenges at this point that we haven’t discussed yet, like the sheer capacity of government contracting professionals today and how much work they have on their plate and how few of them there are to do it based on historical numbers. And then you add this executive order on top of it, which again, I thinks is directionally correct. I think a lot of people on both sides of this equation would agree that the intention is sound and the motivation is true, but I think industry is going to see a lot of, a number of things. Sort of like a hurry up and wait kind of situation where contracting officers, which are spread pretty thin, you know, you may not hear from them in this back and forth, this upfront discovery, and then all of a sudden it’s hurry up and meet the mark on some things, which if there’s any recommendation I could present to some industry folks out there is just, you know. Get your ducks in a row early when you’re starting these discussions, whether you’re in an RFI process, an R&D phase, whether it’s pre-RFP or post-RFP, preparation matters quite a bit, understanding your customer and your market matters quite a bit. So when the contracting professionals start reacting to this executive order in meaningful ways, which many of them already have, industry can come to the table with some really confident direction and to be really transparent about where the risk might lie in the work that the government needs them to do.

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