Evidence of cost growth under cost-plus and fixed-price contracting

As defined by the US Department of Energy (DOE), privatization refers to a shifting of responsibilities for the completion of projects from a cost-plus Management and Operations (M and O) contract, to incentive-based contracts with the private sector. DOE`s new vision is to arrange cleanup work around incentives-based contracts, which are won via competitive bidding. Competition in awarding cleanup contracts can make use of market incentives to lower project costs and reduce slippage time. Fixed-price contracts encourage contractors to minimize schedule delays and cost overruns once the scope of a project has been negotiated. Conversely, cost-plus contracting offers weak incentives for contractors to select cost-minimizing production and management approaches. Because privatization explicitly allocates more risk to the contractor, it forces the government to better define its goals and methods. This study summarizes actual cost experiences with government contracts performed under cost-plus and fixed-price incentive structures at all levels of government. The first section provides some background on the problem of making contractor activity more cost-efficient. Following this are sections on the measurement of performance and the costs of projects, limitations on measurement, and findings of similar studies. The study concludes with appendices discussing the details of the performance measurement methodology and the project data sets used in the study