Reimbursable Costs and Contract Disputes Cost-Reimbursement contract is a contract where a contractor is paid for all of its allowed expenses to a set limit, plus additional payment to allow for a profit. Cost-reimbursement contracts contrast with a fixed-price contract, in which the contractor is paid a negotiated amount regardless of incurred expenses. Federal agencies choose among three contract types to procure goods and services: Fixed-Price, Time-and-Materials and Cost-Reimbursement. Each contract type has a different level of cost or performance risk to the government. They can be used to motivate contractor’s efforts and discourage contractor inefficiency and waste.
The cost-reimbursement contract is considered high risk for the government because of the potential for cost escalation and because the government pays a contractor’s costs of performance regardless of whether the work is completed. The government uses the cost-reimbursement method only when it’s suitable when the cost of the work to be done cannot be estimated with sufficient accuracy to use any type of fixed-price contract.
It appears cost-reimbursement has issues that can be for or against the contractor such as the case with Boeing. Boeing Co is the US Air Forces biggest client. Boeing is suing the US Air Force for $385 million it says the US owes them for the Delta IV Rocket Launch services. Boeing, United Launch Alliance and Lockheed Martin Corp filed a joint compliant in June 2012. They feel they need to preserve their right to recover these costs. They feel these are legitimate allowable costs of the Delta IV program that Boeing incurred prior to the creation of United Launch Alliance. The suit goes back between the 90”s to 2006, when the Pentagon launched Evolved Expendable Launch Vehicle program. Boeing claims the Air Force had agreed to reimburse the costs at issue as part of efforts to win Boeing’s continued participation in the Evolved Expendable Launch Vehicle program after the Air Force wanted to restructure the vehicle.
February 2014, Boeing and the US Air Force were nearing a forced conclusion of their battle over the Delta IV project following the hearings before an arbitration body. Boeing feels a decision by the Armed Services Board of Contract Appeals is expected on whether Boeing will be reimbursed for what they say were three US Air Force missions whose Delta Rockets were badly underpriced.
Boeing and the US Air Force was only one case of using the Cost-Reimbursement contract method in which the contract didn’t work out for one party or another. It would seem that the issues concerning Cost-Reimbursement Contracts were bad enough to have the Inspector General’s Office of the US Department of Defense to audit the Navy and Marine Corp procurement processes for Cost-Reimbursement Issuance and Management.
The object of their audit was to determine if the Navy and Marine Corp were following regulations on the use of Cost-Reimbursement Contracts. The regulation in question is FY 2009 National Defense Authorization Act, section 864 with the Federal Acquisition Regulation. It was the fourth series of reports the Department of Defense reviewed for compliance. The Department of Defense reviewed 170 contracts out of 9973 of Navy and Marine Corps with a value of $32 billion between March 2011 and February 2012.
The Department of Defense’s findings were, out of 170 contracts, contracts valued at $7.7 billion did not comply with the Federal Acquisition Regulations. 134 contracts valued at $7.54 billion did not follow the interim rules. Contracting personnel issued contracts that did not follow the interim rule because they were not clear about the interim rule requirements or were unaware of the interim rule. This perhaps increased the Department of Defense’s contracting risk because the cost-reimbursement contracts provide less incentive for contractors to control cost.
The Inspector General’s Office recommended that the Navy and Marine Corps Headquarters emphasize Federal Acquisition Regulation revisions to contracting personnel, which includes a statement that the representatives acknowledge and include documentation in the contract files discussing and assessment of the contractor’s accounting system. The Navy and Marine Corps Headquarters Command should establish better communication between the requiring component and contracting personnel emphasize the Federal Acquisition Regulations to contracting personnel for the use of cost-reimbursement.