On April 30, 2026, President Trump signed another executive order (“EO”) that may significantly impact how the government buys goods and services. The target: cost-reimbursement contracts, which let contractors bill the government for their “allowable, allocable, and reasonable” costs incurred, plus some pre-established or earnable profit. According to the EO, in Fiscal Year (“FY”) 2024, the government spent roughly $120 billion on cost-reimbursement consulting contracts. The EO seeks to significantly reduce that figure by making fixed-price contracts the default for federal procurement—meaning prices are locked in up front and contractors, not taxpayers, bear the risk of overruns.
What does the executive order require agencies to do?
Agencies that want to use structures other than fixed-price will begin to face real hurdles as agencies implement the EO’s directives. Nearly every exception from the “default” fixed-price model will require the contracting officer to provide written justification not just to someone senior within the contracting authority, but to the head of the relevant agency, and bigger-ticket exceptions—at thresholds of $100 million (Department of Defense (“DoD”)), $35 million (National Aeronautics and Space Administration), $25 million (Department of Homeland Security), and $10 million (everyone else)—need the agency head’s sign-off, not just notification.
The EO also directs each agency to review and try to renegotiate its ten largest non-fixed-price contracts within 90 days. The purpose of these renegotiations is to shift certain elements of the contract to a fixed-price structure where possible, or to add performance-based incentives tying profit to contractor performance.
While many agencies may begin implementing these directives immediately, further information is also forthcoming. The EO directs the Office of Management and Budget (“OMB”) to issue guidance to agencies within 45 days, and the Administrator for Federal Procurement Policy has 120 days to propose rule changes and stand up a training program for contracting staff. Agencies must also report to OMB twice a year on every non-fixed-price contract they approve.
The bottom line: this order is a sharp pivot away from the commonly used cost reimbursement contract structure towards one that puts maximum risk on contractors.
Why target cost-reimbursement contracts now?
The push to move away from cost-reimbursement contracting is not new. In 2009, for example, President Obama issued a memorandum identifying a near-doubling of cost-reimbursement contract obligations—from $71 billion to $135 billion between fiscal years 2000 and 2008—and established a policy preference for fixed-price contracting. DoD launched its Better Buying Power initiative in 2010 to encourage the use of fixed-price incentive (“FPI”) contracts, and the Federal Acquisition Regulation (“FAR”) was amended in 2012 to tighten the standards for when cost-reimbursement contracts are appropriate. Despite these initiatives, the Government Accountability Office (“GAO”) found that the share of new cost-reimbursement contracts actually increased from FY 2009 and FY 2010. And while a 2021 GAO report found that DoD had dramatically increased its use of FPI contracts—with obligations on FPI contracts for major defense acquisition programs rising from $1.3 billion (17 percent) in FY 2010 to $32 billion (49 percent) in FY 2019—DoD has never formally assessed whether that shift actually improved cost and schedule performance outcomes.
In short, the government has been trying to shift away from cost-reimbursement contracting for nearly two decades, but results have been mixed, providing the current administration with a rationale to take renewed action.
What should I do if an agency seeks to convert my cost-type contract to fixed-price?
If your contract is identified as a candidate for conversion to fixed-price:
- Do not agree to such a change until you have carefully considered your ability to estimate costs for the program at issue and how known and unknown risks may impact your costs.
- Develop a new “ground up” pricing model, rather than converting prior cost estimates into fixed prices.
- Seek to define work scopes and deliverables to ensure clarity.
- Carefully review any waiver or release language that is being proposed in conjunction with this change.
- Consider whether some or all of the contract should remain cost-type and advocate for this where appropriate. Where possible, point to language in the FAR to support the position that the contract is appropriately structured as cost-reimbursement. For example, FAR 16.301-2 states that cost reimbursement contracts are to be used when “[u]ncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use any type of fixed-price contract.”
What impact will this have on new procurements?
Contractors considering bidding on fixed-price contracts that might previously have been structured as cost reimbursement contracts should consider a few key early actions:
- First, ensure that the scope of work in the solicitation is clear enough to be priced on a fixed basis. If not, engage to the maximum extent possible with the government during industry days or solicitation questions-and-answers to increase the specificity of the work scope to reduce risk.
- Second, carefully assess any government-provided estimates of the work scope. If estimates are described as notional, obtaining a contract adjustment later for inaccuracies will be more difficult. If an estimate is too low or too high, this will distort the bidding process. Consider requesting that the agency provide actual workload or full-time equivalent data from the predecessor contract where appropriate.
- Third, consider encouraging the agency to include a price realism clause in the solicitation. Unless a solicitation indicates that the government will evaluate offers for price realism (meaning considering whether the proposed price is too low, reflecting a lack of understanding of the requirements), the government is neither required nor permitted to make that assessment. A realism evaluation helps to prevent a situation where well-established contractors with a strong understanding of the work scope and cost of performing it lose out to lower-priced bids by offerors lacking such understanding. While the government may be lured by their lower prices, those contractors may ultimately struggle to perform.
- Fourth, consider requesting that the agency include an Economic Price Adjustment clause to address the unknown impact of inflation—an approach recommended by DoD in 2022 to “equitably balance” the risk of inflation between the Government and the contractor on fixed-price contracts.
