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Some Commentaries on
"Cost-Plus-a-Fixed-Fee” Contracts

With Particular Reference to
United States Navy Contracts Under

the Bureau of Yards and Docks


Special Assistant to
the Chief of the Bureau of Yards and Docks

Navy Department

MAY 20, 1940



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Mr. Wm. M. Smith, author of these commentaries, writes with the judgment and knowledge derived from an experience of 48 years of service in the Navy Department. For many years Mr. Smith was in charge of the Maintenance and Operating Division of the Bureau of Yards and Docks. Since September 1, 1938, he has been Special Assistant to the Chief of the Bureau.

Mr. Smith is especially qualified to write on this subject. He is a member of the Bar, has had intimate contact with a great number and variety of governmental legal and administrative problems, and has the gift of thorough and dispassionate analysis, which is readily apparent in these commentaries. Mr. Smith is responsible for the preparation of the fee contracts which, to date, have proven to be so successful in operation and which he describes hereinafter.

The Chief of Bureau commends the reading of these commentaries to all those who have to do with the administration or execution of construction work under the "cost-plus-a-fixed-fee" form of contract.

Rear Admiral (C. E. C.), U. S. N.,

Chief of Bureau. MAY 20, 1940.



Some Commentaries on “Cost-Plus-a-Fixed-Fee” Con.

tracts With Particular Reference to United States Navy Contracts Under the Bureau of Yards and Docks

By Wm. M. SMITH Contracts for construction work known generally as “cost-plus” contracts are extensively used in commercial and private practice and have been used to a comparatively limited extent by the United States Government. During the World War this form of contract was used by various departments of the Government as a means of avoiding excessive costs and of expediting the initiation of work on urgent projects. Excessive costs were anticipated because the unstable prices of labor and materials due to war conditions would force bidders to protect themselves by large contingent items in their proposals and, also, because the natural urge to get wartime profits would impel them to boost their profit item. The procedure preliminary to the execution of such contracts enabled the administrative officers of the Government to select contractors of known responsibility and reputation who possessed the necessary resources and ability to organize their work with experienced men and adequate equipment and thus assure the satisfactory accomplishment of the projects.

The emergency conditions which existed during the war period made this procedure necessary because time could not be taken to prepare the detailed plans and specifications which would have been required for competitive bidding. The results attained vindicated this departure from the established and ordinary procedure for the award of Government contracts.

There are two general classes of "cost-plus" contracts. One class is generally known as “cost-plus-a-percentage” contracts and the other as "cost-plus-a-fixed-fee" contracts. They are materially different. Under those in the first class the fee or profit of the contractor is made dependent on the cost of the work with the idea that the amount of the fee will automatically adjust itself to the variations in the cost of the work resulting from changing conditions and requirements during the life of the job. It is self-evident that under this class of contract it is to the financial interest of the contractor to have the cost of work run high. Under the second class, the fee is not affected by variations in costs, but only by changes in the scope of the work. From this it follows that it is to the advantage of the contractor to accomplish the work at as low costs as possible. First, there is the human factor. The honest and conscientious fixed-fee contractor, and a fixed-fee contract should be given to no other, is personally elated when he succeeds in accomplishing a job for less money than others thought possible. He


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