Restructuring US Foreign Assistance: A Contractual Perspective
- Katherine Gentic
- Mar 20
- 4 min read
Looking at the proposed restructuring for foreign assistance (linked at the end of this article), a few items from the contracting side appear to use flawed logic. Or, at the very least, it would seem that nobody with in-depth understanding of contracting and the regs was consulted on these proposals.
First, on page 8, they state that “the US Government would eliminate traditional cost-plus, fixed-fee awards that pay out regardless of performance and replace them with agreements that reward results rather than inputs or activities. Tying payment to outcomes and results rather than inputs would ensure taxpayer dollars deliver maximum impact”. To be clear, while CPFF may “pay out” on a regular basis for costs incurred, CPFF contracts still incentivize performance as contractors don’t earn the full fixed fee if they don’t deliver required results. And the total estimated cost before fee is applied is painstakingly analyzed by contracting officers before they agree to it as a ceiling for incurred costs. As are invoices once in implementation mode. But I suppose the point here is that the administration believes they shouldn’t be making payments for any costs if results aren’t first achieved. Not surprising to read this, and likely this ties into the “reasoning” for withholding payments the last two months. Based on this write-up, we should expect to see a significant shift to Fixed Price or Fixed Price-Incentive contracts. The FAR does imply that fixed price is the government’s preferred mechanism when feasible, and justification for selecting other mechanisms must be documented. Historically, CPFF contracts have made sense for USAID contracts, though, given that they span multiple years and operate in potentially unstable environments. Long periods of performance can lead to shifting program priorities and outdated pricing estimates, and political or economic upheaval in the cooperating country could result in major, unforeseen changes to work plans. So does this mean that under a new structure likely utilizing fixed price mechanisms, there will be a push for programs of shorter duration, in order to mitigate the likelihood of such risks occurring?
Second, on page 9 they mention forging new partnerships, getting away from the “Beltway Bandits” in favor of private sector and non-profit entities with proven track records in innovation, results, and delivering on-time and on-budget. I think we all agree that fresh ideas are sorely needed, and there have been efforts to introduce new partners to the industry for some time. However, the proposed approach to achieve this goal is by de-prioritizing past performance evaluations. This is unlikely to effect significant changes, as past performance is typically lowest priority on technical evaluations and lack of experience is required by the FAR to be awarded a neutral rating rather than a punitive one. So how would this change greatly impact source selection decisions? At the end of the day, technical approach and proposed personnel are what typically win contracts. But perhaps they are incorporating corporate capabilities as part of past performance in their write-up? Whatever the case, deprioritizing corpcaps and PPRs in order to make more awards where “government contracting experience [is] not required” still comes with risks to the responsible stewardship of taxpayer dollars. Technical prowess aside, a company with no government contracting experience is more likely to be non-compliant with the contract terms and regulations, full stop. And while such risks are fewer if there is a shift to FFP, those risks are not removed altogether. Further, should there be any remaining reimbursable mechanisms, the risks of hiring companies with no government contracting experience skyrockets. Such companies will need to start taking steps to get their house in order ASAP as it’s unlikely that (and would be irresponsible if) responsibility determinations are going to be removed as a source selection consideration.
Third, one of their guiding principles (see last paragraph of page 8) would be “maximum accountability, radical transparency, and enhanced efficiency, including through reduced indirect cost rates...” Specifically on the subject of reduced indirect cost rates, this endeavor also comes with a lot of risk for contractors. I have had clients tell me they want their rates to be “more competitive” (i.e. lower), but if that means reducing rates indiscriminately, it’s a recipe for disaster for a company’s long-term financial health. To put it bluntly, a company’s rates are what they are, and are fair and reasonable as long as they are based on reasonable and allowable actual expenses. And for companies that have NICRAs or have undergone third party audits with an eye on SF 1408/GAGAS compliance, their accounting systems have already passed muster and their rates should not be reduced artificially. To do this would mean pulling certain costs from indirect cost pools and shifting them to be billed as prorated direct costs. The net effect is unlikely to result in significant cost savings. I cringe to think of how the administration might attempt to actualize this goal. If they will hold “high rates” against contractors under their cost evaluations, and require that they reduce them, they are putting contractors under financial risk and potentially turning off some excellent sources from bidding. DCAA and the cost principles exist for a reason – to ensure contractors are only billing allowable and prudent costs to the government. Can we let them do their job and leave well enough alone without trying to strangle the government’s partners?
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