Federal agencies can choose among three main contract types to procure goods and services: fixed-price, time-and-materials, and cost- reimbursement. Each contract type comes with a different level of cost or performance risk for the government, as shown in table 2. Different types of cost-reimbursement contracts can be used, based on whether incentives, award fees, or other arrangements can be used to motivate contractor efforts and discourage contractor inefficiency and waste. Some of these types, and their limitations, follow. Cost-sharing contracts: The contractor receives no fee and is reimbursed only for an agreed-upon portion of its allowable costs. A cost-sharing contract may be used when the contractor agrees to absorb a portion of the costs, in the expectation of substantial compensating benefits. Cost-plus-incentive-fee contracts: An objective relationship can be established between the fee earned and performance results, such as actual costs or delivery dates. This contract type provides for an initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. Cost-plus-award-fee contracts: Objective incentive targets are not feasible and judgmental standards, such as quality and technical ingenuity, can be applied. A potential fee is intended to provide an incentive for excellence in such areas as quality, timeliness, technical ingenuity, and cost effective management; award of the fee is a unilateral decision made solely by the government. We have reported on agencies’ use of cost-plus-award-fee contracts, finding in some cases that award fees had been paid to contractors regardless of acquisition outcomes. Cost-plus-fixed-fee contracts: These contracts provide for payment to the contractor of a negotiated fee that is fixed at contract inception. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed under the contract. This contract type permits contracting for efforts that might otherwise present too great a risk to contractors, but it provides the contractor only a minimum incentive to control costs. Cost-plus-fixed-fee contracts are suitable, for example, when contracting for research or preliminary exploration or study, and the level of effort required is unknown. Cost-reimbursement contracts are suitable only when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use a fixed-price contract. The two major reasons for the inability to accurately estimate costs are (1) the lack of knowledge of the work needed to meet the requirements of the contract, for example, under research contracts, which necessarily involve substantial uncertainties, and (2) the lack of cost experience in performing work, such as the development of a weapon system because manufacturing techniques and specifications are not stable enough to warrant contracting on a fixed-price basis. We have reported that during weapon system development, the Department of Defense (DOD) often asks prime contractors to develop cutting-edge systems and awards cost- reimbursement contracts for the work. Because the government often does not perform the up-front analysis needed to determine whether its needs can be met by the contract requirements, significant cost increases can occur under the contracts as the scope of requirements changes or becomes better understood. As of fiscal year 2007, for example, DOD anticipated reimbursing the prime contractors on the Joint Strike Fighter and Future Combat Systems programs nearly $13 billion more than initially expected. Cost-reimbursement contracts involve significantly more government oversight than do fixed-price contracts, which means the government incurs additional administrative costs on top of what it is paying the contractor. For example, the government must determine that the contractor’s accounting system is adequate for determining costs related to the contract and update this determination periodically. In addition, contractor costs need to be monitored—known as cost surveillance—to provide reasonable assurance that efficient methods and effective cost controls are used. Congress has taken action to increase oversight of these contracts, for DOD specifically as well as governmentwide. The John Warner National Defense Authorization Act for Fiscal Year 2007 called for the Secretary of Defense to modify DOD’s regulations to require at Milestone B (approval for major acquisition programs to enter the engineering and manufacturing development phase) documentation of the basis for the contract type. Before approving the use of a cost-type contract for development, the Milestone Decision Authority must execute a written determination that among other things, the program is so complex and technically challenging that it would not be practicable to reduce program risk to a level that would permit the use of a fixed-price type contract. Further, the conference report accompanying the act stated that DOD should reduce program risk to the point that the use of a fixed-price contract for a major acquisition program may be appropriate. In addition, the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 called for revisions to the FAR, to include guidance on (1) when and under what circumstances cost-reimbursement contracts are appropriate, (2) the acquisition plan findings necessary to support decisions to use cost-reimbursement contracts, and (3) the acquisition workforce resources necessary to award and manage cost-reimbursement contracts. The FAR revisions were required by July 11, 2009, but as of September 28, 2009, had not been implemented. This act also states that within 1 year after these revisions are promulgated, the inspector general for each executive agency shall review the use of cost-reimbursement contracts by the agency for compliance with these regulations and must include the results of the review in the inspector general’s next semiannual report. Finally, in a March 2009 memorandum on government contracting issued to the heads of departments and agencies, President Obama noted that excessive reliance by the federal government on cost-reimbursement contracts “creates a risk that taxpayer funds will be spent on contracts that are wasteful, inefficient, subject to misuse, or otherwise not well designed to serve the needs of the Federal Government or the interests of the American taxpayer.” The President directed the Office of Management and Budget to develop guidance to assist agencies in “reviewing, and creating a process for ongoing review of, existing contracts in order to identify contracts that are wasteful, inefficient, or not otherwise likely to meet the agency’s needs, and to formulate appropriate corrective action in a timely manner.” In this regard, on July 29, 2009, the Office of Management and Budget sent a memorandum to the heads of departments and agencies requiring agencies to reduce high-risk contracting authorities, such as cost-reimbursement contracts. The memorandum requires agencies to reduce by 10 percent the share of dollars obligated in fiscal year 2010 under new contract actions that are awarded with high- risk contracting authorities. The complete picture of the government’s use of cost-reimbursement contracts is unclear. From fiscal years 2003 through 2008, federal obligations under cost-reimbursement contracts were reported to have increased by $16 billion, from $120 billion to $136 billion. When viewed as a percentage of total reported federal obligations, this represented a decrease over the 6-year period, from 34 percent to 26 percent. However, this decrease is misleading for several reasons, including a significant increase in agencies’ reported obligations under the “combination” contract type, which includes cost-reimbursement obligations, and contradictory guidance in the FPDS-NG user manual, which could result in misreporting of contract type. Further, although contract type is a data element field required in FPDS-NG for all awards, we found billions of dollars reported as missing a contract type (i.e., no specific contract type was indicated) or indicating “other” as the contract type. The contract type field displays the type of contract that applies to the particular procurement. It is incumbent on the contracting officers and agencies to ensure the accuracy of all information submitted. Combination contracts, one of the contract type fields in FPDS-NG, are those where two or more contract types are used, such as in different line items in one contract action. Agencies have recently reported a significant increase in obligations under this contract type, from less than 1 percent ($1.3 billion) of total government obligations in fiscal year 2004 to almost 8 percent ($39 billion) in fiscal year 2008. DOD obligations accounted for $34 billion, or 87 percent, of this amount. Figure 1 depicts the reported trends in the percentage of total obligations under cost-reimbursement contracts and under combination contracts. We analyzed fiscal year 2008 FPDS-NG obligations coded as combination contracts and found that half of the $39 billion was obligated under contracts that had at least some cost-type actions, and about a quarter of this amount ($9 billion) went to contracts that had 50 percent or more cost-type obligations. These obligations were not recorded as cost- reimbursement in FPDS-NG. Further illustrating the potential overlap between combination and cost- reimbursement contract types, we found that contracts coded as combination are used to procure similar items as those coded as cost- reimbursement. Our examination of the 15 categories of items most often procured under both cost-reimbursement and combination contract types over the past several years showed substantial overlap. Table 3 depicts the top 15 categories in both contract types and the 11 categories that are the same, from fiscal year 2005 to July 13, 2009, the most current data available at the time of our analysis. Because many of the combination contracts include cost-type obligations, those contracts coded as cost-reimbursement do not portray the full picture of the government’s use of cost-reimbursement contracting. FPDS- NG does not delineate what contract types comprise those coded as combination, for example, whether they are cost-plus-award-fee and cost- plus-incentive-fee contracts, or a mix of fixed-price and labor-hour line items.