On April 30, President Trump issued an Executive Order (Order) directing federal agencies to make fixed-price contracting the default and preferred procurement method across the federal government. The Order reflects the administration’s view that fixed-price contracts better promote cost predictability, contractor accountability, and performance-based outcomes than cost-reimbursement and other non-fixed-price contract types.

Background

The Order states that federal procurement has too often tolerated “unpredictable costs, bloated overhead, and weak performance incentives.” It contrasts fixed-price contracts, which generally require contractors to deliver defined outcomes for a fixed amount, with cost-reimbursement contracts, under which contractors are reimbursed for allowable incurred costs and may receive additional profit on top of those costs.

According to the Order, a review of Fiscal Year 2024 spending identified approximately $120 billion obligated on cost-reimbursement consulting contracts alone. While the Order acknowledges that cost-reimbursement contracting may remain appropriate in certain circumstances, including research and pre-production development for major systems acquisition, it states that such contracts should be the exception rather than the rule.

What the Executive Order Does

The Order directs executive branch agencies, to the maximum extent consistent with law, to use fixed-price contracts with performance-based considerations in procurement. For purposes of the Order, fixed-price contracts include contracts as defined under Federal Acquisition Regulation (FAR) Part 16, as well as contracts that tie profit to performance-based metrics when appropriate.

It also imposes new justification and approval requirements for non-fixed-price contracts. Contracting officers must justify in writing to the agency head the use of any non-fixed-price contract, including cost-reimbursement, time-and-materials, labor-hour, or other non-fixed-price contracts under FAR Part 16.

Going forward, written approval from the agency head will generally be required for larger non-fixed-price contracts if the value of the non-fixed-price contract, or the non-fixed-price portion of a hybrid contract, exceeds any of the following:

• $100 million for Department of War contracts.
• $35 million for NASA contracts.
• $25 million for Department of Homeland Security contracts.
• $10 million for contracts involving other agencies.

This authority can be delegated to appropriate non-career employees within the agency.

Key Exceptions

Importantly, the approval requirement does not apply to contracts that support an emergency, major disaster, or contingency operation, as those terms are defined in FAR Part 2. Nor does it apply to contracts involving research and development or pre-production development for major systems acquisition under FAR Parts 34 and 35, key exceptions for contractors in the defense, aerospace, technology, and innovation sectors.

Review of Existing Contracts

Within 90 days, each agency head must review the agency’s 10 largest non-fixed-price contracts by dollar value. Agencies must seek, to the maximum extent practicable and consistent with law, to modify, restructure, or renegotiate those contracts to facilitate the use of fixed prices and performance-based incentives. The review does not apply to the same contracts mentioned in the Key Exceptions sections above.

This review requirement could have significant implications for contractors currently performing large cost-reimbursement, time-and-materials, labor-hour, or hybrid contracts. Although the Order does not automatically convert existing contracts into fixed-price agreements, it signals that agencies may begin reassessing pricing structures, deliverables, performance metrics, and risk allocation in major ongoing procurements.

Implementation Timeline

The Order sets several near-term implementation deadlines:

• Within 45 days, the Office of Management and Budget (OMB) must issue guidance to agencies on consistent implementation.
• Within 90 days, agencies must submit their first semiannual report to OMB identifying approved non-fixed-price contracts, written justifications, and additional opportunities to shift current contracts toward fixed-price structures.
• Within 120 days, the administrator for Federal Procurement Policy must propose FAR amendments in coordination with the Federal Acquisition Regulatory Council.
• Within 120 days, the administrator also must develop training for program and contracting officials on the formation, use, negotiation, and management of fixed-price contracts.

Until FAR amendments are completed, the Order directs agencies to use applicable FAR deviations where necessary to comply with the Order.

Contractor Takeaways

Government contractors should closely monitor agency implementation of the Order, especially if they perform or plan to bid on cost-reimbursement, time-and-materials, labor-hour, or hybrid contracts. The Order may affect procurement strategy, pricing, proposal development, and contract administration.

Contractors should consider taking several steps now. First, companies should identify existing contracts that may fall within agency review, particularly large non-fixed-price contracts. Second, contractors should evaluate whether their current statements of work, deliverables, and performance metrics could support a fixed-price or performance-based structure. Third, contractors should assess how a shift to fixed-price contracting could affect risk allocation, cost assumptions, and subcontractor pricing.

The Order also may increase the importance of clear requirements at the solicitation stage. Fixed-price contracts can provide budget certainty, but they can also shift substantial performance and cost risk to contractors when requirements are unclear, evolving, or technically uncertain.

Looking Ahead

The Order represents a significant policy shift toward fixed-price and performance-based contracting. Its practical impact will depend heavily on forthcoming OMB guidance, FAR Council action, agency-level deviations, and how contracting officers apply the Order in specific procurements.

In the near term, contractors should expect increased scrutiny of non-fixed-price contract types and should prepare for agencies to press for more fixed-price structures, more defined deliverables, and stronger performance-based incentives.

Please contact the author if you have any questions.