According to FAR Part 16, the Federal Government uses fixed-price contracts when it wants to place most of the risk and responsibility for performance on the contractor. This means that fixed-price contracts are generally not subject to being adjusted as a result of the contractor’s costs or profits increasing or decreasing in performance. As a result, when performing a fixed-price contract, the contractor has incentive to control the costs and to perform efficiently.
But, what if the cost of performance ends up being a lot less than the budget submitted with the proposal? In other words, will the government contractor run afoul of the law if it makes a profit above and beyond its budgeted or proposed profit? Does the contractor have to tell the government about the increased profit?
Generally, the FAR and the courts don’t give much leeway to the government to pursue a contractor for making more profit on a fixed price contract.
First, the FAR itself states that fixed-price contracts provide for a price that will not be adjusted just because the contractor’s costs in performance are more or less than detailed in the proposal. This is what the FAR means when it says that fixed-price contracts place the risk and responsibility for all costs and any resulting profit or loss on the contractor.
Second, generally, the government has a hard time making a case against contractors for violating the False Claims Act when the contractor makes more profit than budgeted or proposed on a fixed price contract and does not inform the government.
Courts have generally rejected the government’s False Claims Act accusations against contractors when the government claims the contractor acted falsely because the contractor did not tell the government that it performed the fixed-price contract for less cost than anticipated – even if substantially less cost. That is, simply performing a fixed price contract less expensively than anticipated – does not mean the contractor violated the False Claims Act.
In some circumstances, the courts have even said that when a contractor increases profit and decreases costs by reducing headcount, as long as performance was not impacted, the government is still required to pay the fixed amount it had agreed to.
However, this all depends on the facts of why the contractor made more profit.
In some situations where contractors performed the contract for less cost and therefore had a higher profit, courts have determined that the contractor may have violated the False Claims Act if the contractor made statements about pricing, costs, or performance during the bidding, contracting or invoicing processes that were “false”.
And…. on that term “false” – remember the law says that any statement or document to the government that may be inaccurate, mistaken, or outdated even if not intentional, may be a “false” statement to the government. Changing the quality of deliverables, ignoring facts that should be discovered or omitting facts – may be considered a “false” statement to the government.
So, although making more profit on a fixed price contract may be a contractor’s reward for operating efficiently, if the increased profit occurred because of some false or inaccurate or incomplete statement to the government, the government may consider it foul play.