Fixed-Price Contract Profits: How to Prove Your Cost Baseline to the DoD
On October 27, a policy memorandum signed by John Tenaglia, principal director for Defense Pricing, Contracting and Acquisition Policy, and Jennifer Desautel, director of the Defense Contract Audit Agency, told acquisition officials that profits earned through improved productivity, manufacturing efficiencies, or private investment should not, by themselves, be treated as evidence of waste.¹ Reporting on the memo says officials are directed to let contractors keep profits generated by efficiencies on fixed-price contracts, while accounting for those savings when negotiating future production deals.¹
For fixed-price contractors, that is welcome news. It is also the clearest statement yet of a principle that has been building for more than two months. Read closely, it comes with a condition.
What fixed-price efficiency profit means for defense contractors
In a firm-fixed-price (FFP) contract, the contractor agrees to deliver for a set price and carries the cost risk. If the work costs less than planned, the contractor keeps the difference. If it costs more, the contractor absorbs the overrun. In a cost-type contract, the government reimburses allowable costs, so the cost risk sits with the customer. That difference is why a statement about who keeps the savings carries real financial weight on fixed-price work.
Efficiency profit is the margin a contractor earns when it delivers below its estimated cost through better productivity, manufacturing efficiencies, or private investment in tooling and process. Under the October 27 memo, those gains are not, by themselves, treated as evidence of waste.¹ That matters to pricing teams because a strong margin on a fixed-price program can otherwise raise questions about whether the original price was too high.
What the memo builds on
The September 14 memo, "Fostering One Strong Industrial Base," had already stated that a fixed-price contractor should retain the profits associated with efficiencies on its contracts, which Forvis Mazars calls efficiency assurance.² The August 18 memo, "Supplier Cost and Pricing Transparency," went a step further. It says the Department does not intend to limit profit when a contractor realizes efficiencies after negotiating a fair and reasonable price based on a realistic baseline.³
The last two words matter most.
The condition: a realistic baseline
The same August memo says the Department plans to negotiate aggressively where outcomes are not aligned with sound business deals.³ And the October 27 memo says savings are accounted for in the next negotiation, not the current one.¹ Law firm PilieroMazza describes these as seemingly opposed commitments, and the details will be settled in implementation guidance.³
Put plainly, the arrangement works like this. You keep the efficiency on this contract. The Department prices it in on the next one. Whether the savings were real, and whether the original price was fair, depends on one thing: how your baseline was built.
An efficiency that can be traced to a specific change looks like performance. A margin that appears with no explanation looks like padding. Contractors who cannot tell the two apart will find out in a future negotiation, not a past one.
More visibility, not less
The cost-transparency expectation is not going away. Both the August and September memos call for access to actual cost information at the prime and supplier levels for negotiations valued at $10 million or more, regardless of whether certified cost or pricing data is required.²,³ The August memo also directed the Department to explore automated access to contractor ERP and financial systems through APIs.²,³ A later October 1 memo clarified that any such initiative would go through formal rulemaking and remain voluntary.³
So the compliance picture is more nuanced than "less paperwork." Thresholds and certification requirements are loosening. The expectation that you can show how a price was built, and what the work actually cost, is tightening.
One caution before acting on any of this. These memos are policy direction, not regulation. Each reform still needs action by the CAS Board, FAR or DFARS changes, or contract modifications, and existing contract requirements stay in force until then.² A near-term date to watch: 60 days after the September 14 memo, on November 13, the Department is due to propose to the CAS Board that CAS exemption become the default.³
What you need to be able to show
If efficiency profit is going to be protected, three things need to be on hand, in a form someone outside your pricing team can follow.
First, the baseline: how the original price was built, cost element by cost element, with the assumptions and sources behind each one.
Second, the delta: where actuals came in below the estimate, and which change, in process, design, or supplier, explains it.
Third, the trail: every cost traceable to its source without a reconstruction exercise.
Most contractors can produce a version of this. The question is how long it takes and whether anyone trusts it. When the baseline lives in a spreadsheet, the assumptions live in an estimator's memory, and the actuals live in a separate system, assembling the story means weeks of work after the question is asked.
How to document a realistic baseline in defense pricing
A realistic baseline is a price you can explain line by line. In practice, that means six things on file for every estimate.
Structured cost elements: labor by discipline, materials from the bill of materials, subcontracts, overhead, and risk.
A basis for each number: historical actuals, supplier quotes, parametric models, or engineering judgment, each labeled as such.
Dated assumptions: the rate, scope, and schedule assumptions behind the price, with the date each was set.
A risk and contingency rationale that explains why a reserve is sized the way it is, instead of one blended percentage.
Version history: every revision logged, so a change in price can be traced to a change in scope or assumption.
A link to actuals: a way to compare delivered cost with the original estimate, cost element by cost element, when the work is done.
With those six in place, an efficiency claim becomes a documented comparison instead of an assertion.
Frequently asked questions
Can defense contractors keep profits from fixed-price contract savings?
According to reporting on the October 27 memo, officials are directed to let contractors keep profits generated by efficiencies on fixed-price contracts, while accounting for those savings in future negotiations.¹ The August 18 memo adds that the Department does not intend to limit profit when efficiencies follow a fair and reasonable price based on a realistic baseline.³
What is a realistic baseline in government contract pricing?
It is a price built from structured cost elements with a documented basis for each number, so a reviewer can see how it was derived. The reporting reviewed for this post does not set out a prescriptive checklist, so treat a documented, traceable build-up as the practical test and confirm details against the full memos.
Does the $10 million cost transparency expectation require certified cost or pricing data?
Not according to the memos. Both the August and September memos call for cost transparency on negotiations valued at $10 million or more, regardless of whether certified cost or pricing data is required.²,³ These memos are policy direction, and existing contract requirements stay in force until formally changed.²
What happens to efficiency savings on the next contract?
The October 27 memo says savings are accounted for in future negotiations.¹ Plan for the next price to reflect what the program actually cost to deliver.
How can pricing teams prepare?
Start with the six items above, then test how quickly your team could produce them for a program delivered last year. If the answer is weeks, that is the gap to close.
Where iPE fits
This is the problem iPE was built to solve. Fixed-price work carries risk, and the first questions are how much, and where the biggest exposures sit. iPE helps you assess both. Estimates are built from structured cost elements inside your ERP system, so you can see which elements carry the most risk before you bid, not after delivery reveals it, and the baseline and the actuals sit in the same record. The audit trail is created as the estimate is built, not reconstructed afterward, meaning compliance is automatically built in. When a fixed-price program comes in under the estimate, the contractor can show where, and why. When it comes in over, the team sees the same picture early enough to act. Either way, your margin protection begins at the estimate. The same visibility helps you proactively track more cost reduction opportunities for your business, because every cost is traceable and comparable from one program to the next.
The takeaway
The Pentagon is signaling that it will reward contractors who deliver efficiently on fixed-price work. It is also signaling that it expects those contractors to explain their numbers. The contractors who benefit most will not be the ones with the lowest costs. They will be the ones who can prove how those costs came to be.
You can keep the savings. Make sure you can show the baseline.
Footnotes
¹ Inside Defense, "Pentagon says contractors can keep profits from fixed-price contract savings," October 29, 2026. https://insidedefense.com/daily-news/pentagon-says-contractors-can-keep-profits-fixed-price-contract-savings
² Forvis Mazars, "DoW Acquisition Reform Memos: Five Key Takeaways," October 7, 2026. https://www.forvismazars.us/forsights/2026/10/dow-acquisition-reform-memos-five-key-takeaways
³ PilieroMazza, "DOW's Plan to Reset Cost and Pricing Transparency and Chart a Path from CAS to GAAP," October 13, 2026. https://www.pilieromazza.com/dows-plan-to-reset-cost-and-pricing-transparency-and-chart-a-path-from-cas-to-gaap-warfighting-at-warp-speed-part-6/
