News Alert – Letter Contracts and Risk involved
Tuesday, January 26th, 2010
During the past year contractors have experienced an increase in the number of letter contracts both from the Government and Prime contractors. Unsuspecting contractors and subcontractors accept “firm fixed price” letter contracts with a price to be negotiated and/or a Not to Exceed price. After the letter contract is signed, the government or the Prime delays definitizing the contract until most or all costs are incurred and then prices the contract at the lower of actual cost or the NTE. And because the costs are known at this point, the risk and profit are lower than what would have otherwise been allowed. Much of the delay is now due to DCAA rejecting proposals as not adequate as a basis for negotiations. The new DCAA initiative to disapprove everything has revived the DCAA estimating concept that budgets and estimates cannot be trusted and the best (maybe only) way to estimate costs is to use history. The only sure cure is to ”Just Say No To Letter Contracts”
