The Perfect Contract

Perfect Contract

Contracting: A new type of contract

Many standard contracting agreements between the military and other entities have been subject to increased scrutiny and criticism, because of concerns about government over-spending and a lack of fiscal oversight. "Noncompetitive contracting, cost-reimbursement contracts, and time-and-materials and labor-hour (T&M/LH) contracts pose special risks of overspending. Non-competitive contracts present a risk because there is not a direct market mechanism for setting the contract price. Cost-reimbursement contracts and T&M/LH contracts pose a risk because they provide no direct incentive to the contractor for cost control" (Orszag 2009:2). With noncompetitive contracts, when the contract is guaranteed, there is little pressure to consistently offer a product or service at a competitive market price. With cost-reimbursement, all input materials costs are compensated, regardless of the ultimate budget of the project, in contrast to fixed costs projects, where the contractor is paid a fixed amount beforehand, regardless of how much the project goes over budget. With T&M/LH, the least favorable contract type from the point-of-view of the military, time and labor is also compensated if the project goes over budget.

However, these contracts do have their place, under certain circumstances: "Cost reimbursement contracts help agencies obtain critical research, leading edge innovation, and other needs where there is considerable uncertainty about the resources that will be necessary to achieve the government's objective. T&M/LH contracts help agencies accomplish tasks for a reasonable cost where the needed amount of labor effort cannot be specified in advance, such as when an information technology office must diagnose the cause of a system failure" (Orszag 2009:2). Such contracts are often instituted when the contracted entity may be unwilling to enter into an arrangement with the government, because of fears that the outcome may result in such prohibitively high costs that the organization will not be able to enjoy a profit. This is typical of research, particularly exploratory research into a new project. Or the military may opt to create the contract because it is necessary to get a 'quick fix' on a problem, and it has little leverage in terms of time to create the contract.

Even when entering into a contract to create an agreement between the government and a retail organization to offer services on a military base abroad, such as Burger King, market uncertainty may cause the entity to place pressure on the government to enter into an exclusive or noncompetitive arrangement for the duration of the agreement. For example, Burger King might state that it will only contract food services if McDonald's are not allowed to exist as competitor organizations on the base. The military might want a fast food outlet to ensure that troops feel 'at home,' have a quick place to eat while training, and can also enjoy such perks as tax-free dining, but be leery of entering into such an arrangement.