On April 30, 2026, President Trump issued an Executive Order (EO) establishing that the default contracting method for federal agencies is fixed-price contracts with performance-based considerations; and, for certain large contracts, the EO adds a justification and approval requirement for any other contracting method. The EO is the Administration’s most recent effort to overhaul the federal contracting framework and came just two days before the year anniversary of the Federal Acquisition Regulation (FAR) Council’s first round of Revolutionary FAR Overhaul (RFO) model deviation guidance. The Administration’s goal is reflected in the EO’s title: Promoting Efficiency, Accountability, and Performance in Federal Contracting. The EO signals 3 action items for government contractors: (1) reassess pricing models, (2) strengthen cost controls, and (3) sharpen your ability to define and deliver measurable outcomes.
What Does the EO Require?
The EO mandates agencies to use fixed-price contracts, or contracts that tie profit to performance-based metrics, to the maximum extent consistent with law. The preference for fixed-price contracts is not new. The FAR currently requires contracting officers to document the rationale behind choosing a contracting method other than fixed-price.[1] However, the EO goes a step further, requiring such justification to be submitted to the agency head and for contracts over certain thresholds, that agency head must approve the use of any other contracting method in writing. Those thresholds are $100 Million for Department of War contracts, $35 Million for National Aeronautics and Space Administration, $25 Million for the Department of Homeland Security, and $10 Million for all other contracts. The EO exempts emergency, major disaster, or contingency operation contracts and any contracts that involve research and development or pre‑production development for major systems acquisitions.
Anticipated Outcomes vs. Reality
The EO calls out cost reimbursable contracts as frequently allowing for poorly defined product or service deliverables and exposing the government to overspending by providing little incentive to contractors to control costs. In contrast, the President praises fixed-price contracts as providing clearly defined outcomes and deliverables on predictable timelines for fixed prices and rewarding work that exceeds expectations and penalizing subpar performance. The Administration expects that a greater use of fixed-price contracts will “protect taxpayer dollars, hold contractors accountable, and achieve demonstrable returns on investment.”
However, pushing all requirements into fixed-price contracts may not produce those anticipated results. The current federal contracting framework provides multiple contracting methods, each providing unique benefits to contractors and the government. Even with the FAR’s preference for fixed-price contracts, contracting officers have the flexibility to determine which contracting method is suited for each requirement. This flexibility permits the government and contractor to share the risk and reward on different contracts. For example, with cost reimbursable contracts, the government gains the benefit of cost underruns but bears the risk of overruns. In contrast, on fixed-priced contracts, the contractor takes on the risk of any cost overruns, while it can benefit from reduced costs to take home more profits.
Under the new EO, contracting officers may be likely to choose fixed-price contracts rather than performing the appropriate analysis for each requirement solely to avoid the administrative hassle of a justification, and potentially, required approval. In such cases, a contract may actually cost the government more money. Contractors may submit inflated proposals to adjust for the additional risk of a fixed-price framework, a risk typically much lower in cost-reimbursable contracts. Alternatively, other contractors may underprice proposals and be unable to perform the contract appropriately due to cost restrictions. Requiring fixed-price contracts in most instances and creating additional barriers to disincentivize any other contracting method is counter to a flexible and expeditious system.
Fixed-Price Red Flags for Contractors
Certain contractors might think they prefer fixed-price contracts. In theory, if you have a solid grasp of the requirement and the experience to price the work accurately, it could be beneficial to know exactly how much money you will receive at the end of the contract. However, reality is rarely that simple, despite the EO’s attempt to simplify fixed-price contracting. The government has a long history of adding price-reduction clauses to fixed-price contracts. A practice PilieroMazza highlighted in the blog “The Firm Fixed Price Profits Reduction Clause: Government Takes All the Benefits and None of the Risk?” published in 2016. In that blog, we emphasized how important it is for small business contractors to understand the full scope of what a fixed-price contract could entail.
Through what we have called “FFP Profit Reduction Clauses,” the government can establish certain restrictions on when and how a contractor can be paid for work completed under a fixed-price contract. As a specific example, we have seen the government utilize a provision that prevents payment for any hours not worked or for hours where an employee may be on jury duty or military leave. This specific clause applies even if the work is covered by other personnel or by the owner themself, and even if the deliverable is provided to the government on time and with glowing reviews for the work performed.
Relatedly, in fixed-price service contracts, the government can ask for a discount where a contractor has not provided the full hours, or full-time employees required under the contract. This is so even if the contractor has successfully provided services that the government is happy with. That is, there is no incentive for a contractor to complete performance quicker or more efficiently, even if it has the capability to do so.
These clauses punish small businesses for hiring National Guard and U.S. Military Reserve service members, for their employees taking time off for jury duty, and for providing services quicker than anticipated, even when the government receives a stellar deliverable on time, and at the cost agreed to in the proposal. Contractors must pay attention to the clauses contained in their fixed-price contracts and any future contract modifications.
What’s Next?
The EO instructs each agency to review its top ten (10) costliest non-fixed-price contracts before July 29, 2026. Each agency must renegotiate each contract “to facilitate use of fixed prices and performance-based incentives for contract deliverables to the maximum extent practicable.”
The Office of Management and Budget (OMB) was instructed to issue guidance on the EO to agencies by June 14, 2026, and to propose amendments to the FAR by August 28, 2026.
Takeaways
- New Administrative Burden. While the preference for fixed-price contracts is not new, it’s likely contracting officers will choose to use them more often moving forward to avoid the new administrative burden associated with non-fixed-price contracting methods.
- Risk on Contractors. A higher number of fixed-price contracts means more risk on contractors. It will be important for contractors to understand these risks to accurately price proposals and remain competitive for future bids.
- Renegotiations Coming. If you currently hold a large contract, expect to hear from the agency soon. If you are a subcontractor to a prime contractor who holds one of these contracts, your prime may attempt to modify your subcontract. Whether such modification is permitted will depend on the specific language of each subcontract. PilieroMazza is here to assist in navigating these renegotiations.
- RFO Updates. The EO requires OMB to issue proposed amendments to the FAR to implement the EO by August 28, 2026.
If you have questions about the President’s most recent Executive Order, the Revolutionary FAR Overhaul, or how any of these recent changes may affect your contracts, please contact Cy Alba, Krissy Crallé, or another member of PilieroMazza’s Government Contracts Group.
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[1] Both the “old” FAR and the RFO model deviation text contain this language. See FAR 16.103(d)(1)(iv); RFO 16.103(a)(4).
