Trump's Executive Order Boosts Fixed-Price Contracts in Federal Agencies

The federal government spends billions annually on contracts to support its operations, but the way these contracts are structured can significantly affect costs and accountability. On Thursday, President Donald Trump signed an executive order aimed at increasing the use of fixed-price contracts across federal agencies. This move intends to control spending and improve efficiency by shifting more risk to contractors. The order sets new rules for renegotiating existing contracts and introduces stricter oversight for large non-fixed-price agreements.

Federal building with contract papers on desk

What the Executive Order Requires

The executive order gives federal agencies 90 days to renegotiate their current contracts to favor fixed-price terms. This means agencies must work quickly to adjust agreements that currently reimburse contractors based on costs incurred, which can lead to budget overruns.

While the Federal Acquisition Regulatory Council works on updating procurement regulations, agencies are encouraged to use "deviations"—exceptions that allow more flexibility in contract terms. This temporary measure helps agencies adapt without waiting for formal rule changes.

New Approval Thresholds for Large Contracts

The order introduces new approval requirements for contracts that do not use fixed pricing, especially those with high dollar values. Political leadership must sign off on these contracts once they exceed certain thresholds:

• $10 million for most federal departments

• $25 million for the Department of Homeland Security

• $35 million for NASA

• $100 million for the Department of Defense

  
  

These thresholds aim to increase accountability for large spending decisions and ensure that non-fixed-price contracts receive higher scrutiny.

Exceptions for Emergencies and Research

The order recognizes that some contracts cannot fit into a fixed-price model. It allows exceptions for:

• Emergency and disaster response contracts

• Research and development projects

• Pre-production development for major systems acquisition, such as weapons programs

  
  

These exceptions acknowledge the unpredictable nature of certain government needs where fixed pricing could be impractical or risky.

Why Fixed-Price Contracts Matter

Fixed-price contracts set a firm price for the work or goods provided, regardless of the contractor’s actual costs. This structure encourages contractors to control expenses and deliver on time, as they bear the risk of cost overruns.

In contrast, cost-reimbursement contracts pay contractors for allowable expenses plus a fee, which can lead to less incentive to manage costs tightly. The government obligated about $120 billion on cost-reimbursement contracts for consulting alone in fiscal year 2024, highlighting the scale of spending that could be affected by this order.

Potential Benefits and Challenges

Benefits:

• Cost control: Fixed-price contracts can help prevent budget overruns by setting clear spending limits.

• Increased accountability: Contractors have more incentive to manage resources efficiently.

• Simplified oversight: Agencies can more easily track contract performance against fixed budgets.

  
  

Challenges:

• Risk transfer: Contractors may increase prices to cover potential risks, leading to higher upfront costs.

• Complex projects: Some government work, especially research or disaster response, may not fit fixed-price models well.

• Negotiation burden: Agencies must spend time renegotiating existing contracts within a tight 90-day window.

  
  

What This Means for Federal Agencies and Contractors

Agencies will need to review their current contracts and identify which can be converted to fixed-price terms. This process requires legal, financial, and program staff to collaborate closely. Contractors may face pressure to offer more competitive fixed prices or risk losing business.

The new approval thresholds mean that political leaders will have more say in large contract decisions, potentially slowing down some procurements but increasing oversight.

Looking Ahead

The executive order signals a clear shift toward controlling federal spending through contract reform. As the Federal Acquisition Regulatory Council updates procurement rules, agencies and contractors should prepare for lasting changes in how government contracts are structured.

For contractors, understanding the implications of fixed-price contracts and adjusting pricing strategies will be essential. For agencies, balancing cost control with flexibility will remain a key challenge.

This order highlights the government's ongoing effort to improve procurement efficiency and accountability, with the goal of better serving taxpayers and ensuring responsible use of public funds.