Fixing Impact: How Fixed Prices Can Scale Results-Based Procurement at USAID
The United States Agency for International Development (USAID) currently uses Cost-Plus-Fixed-Fee (CPFF) as its de facto default funding and contracting model. Unfortunately, this model prioritizes administrative compliance over performance, hindering USAID’s development goals and U.S. efforts to counter renewed Great Power competition with Russia, the People’s Republic of China (PRC), and other competitors. The U.S. foreign aid system is losing strategic influence as developing nations turn to faster and more flexible (albeit riskier) options offered by geopolitical competitors like the PRC.
To respond and maintain U.S. global leadership, USAID should transition to heavily favor a Fixed-Price model – tying payments to specific, measurable objectives rather than incurred costs – to enhance the United States’ ability to compete globally and deliver impact at scale. Moreover, USAID should require written justifications for not choosing a Fixed-Price model, shifting the burden of proof. (We will use “Fixed-Price” to refer to both Firm Fixed Price Contracts and Fixed Amount Award Grants, wherein payments are linked to results or deliverables.)
This shock to the system would encourage broader adoption of Fixed-Price models, reducing administrative burdens, incentivizing implementers (of contracts, cooperative agreements, and grants) to focus on outcomes, and streamlining outdated and inefficient procurement processes. The USAID Bureau for Management’s Office of Acquisition and Assistance (OAA) should lead this transition by developing a framework for greater use of Firm Fixed Price (FFP) contracts and Fixed Amount Award (FAA) grants, establishing criteria for defining milestones and outcomes, retraining staff, and providing continuous support. With strong support from USAID leadership, this shift will reduce administrative burdens within USAID and improve competitiveness by expanding USAID’s partner base and making it easier for smaller organizations to collaborate.
Challenge and Opportunity
Challenge
The U.S. remains the largest donor of foreign assistance around the world, accounting for 29% of total official development assistance from major donor governments in 2023. Its foreign aid programs have paid dividends over the years in American jobs and economic growth, as well as an unprecedented and unrivaled network of alliances and trading partners. Today, however, USAID has become mired once again in procurement inefficiencies, reversing previous trends and efforts at reform and blocking – for years – sensible initiatives such as third country national (TCN) warrants, thereby reducing the impact of foreign aid for those it intends to help and impeding the U.S. Government’s (USG) ability to respond to growing Great Power Competition.
Foreign aid serves as a critical instrument of foreign policy influence, shaping geopolitical landscapes and advancing national interests on the global stage. No actor has demonstrated this more clearly than the PRC, whose rise as a major player in global development adds pressure on the U.S. to maintain its leadership. Notably, China has increased its spending of foreign assistance for economic development by 525% in the last 15 years. Through the Belt & Road Initiative, its Digital Silk Road, alternative development banks, and increasingly sophisticated methods of wielding its soft power, the PRC has built a compelling and attractive foreign assistance model which offers quick, low-cost solutions without the governance “strings” attached to U.S. aid. While it seems to fulfill countries’ needs efficiently, hidden costs include long-term debt, high lifecycle expenses, and potential Chinese ownership upon default.
By contrast, USAID’s Cost-Plus-Fixed-Fee (CPFF) foreign assistance model – in which implementers are guaranteed to recover their costs and earn a profit – mainly prioritizes tracking receipts over achieving results and therefore often fails to achieve intended outcomes, with billions spent on programs that lack measurable impact or fail to meet goals. Implementers are paid for budget compliance, regardless of results, placing all performance risk on the government.
The USG invented CPFF to establish fair prices where no markets existed. However, its use has now extended far beyond this purpose – including for products and services with well-established commercial markets. The compliance infrastructure necessary to administer USAID awards and adhere to the documentation/reporting requirements favors entrenched contractors – as noted by USAID Administrator Samantha Power – stifles innovation, and keeps prices high, thereby encumbering America’s ability to agilely work with local partners and respond to changing conditions. (Note: USAID typically uses “award” to refer to contracts, cooperative agreements, and grants. We use “award” in this same manner to refer to all three procurement mechanisms. We use “Fixed-Price Awards” to refer to fixed-price grants and contracts. “Fixed Amount Awards,” however, specifically refers to a fixed-price grant.)
In light of the growing Great Power Competition with China and Russia – and threats by those who wish to undermine the US-led liberal international order – as well as the possibility of further global shocks like COVID-19 or the war in Ukraine, USAID must consider whether its current toolset can maintain a position of strategic strength in global development. Furthermore, amid declining Official Development Assistance (ODA) – 2% year-over-year – and a global failure to meet the UN Sustainable Development Goals (SDGs), it is critical for USAID to reconcile the gap between its funding and lack of results. Without change, USAID funding will largely continue to fall short of objectives. The time is now for USAID to act.
Opportunity
While USAID cannot have a de jure default procurement mechanism, CPFF has become the de facto default procurement mechanism, but it does not have to be. USAID has other mechanisms to deploy funding at its disposal. In fact, at least two alternative award and contract pricing models exist:
- Time and materials (T&M): The implementer proposes a set of fully loaded (i.e., inclusive of salary, benefits, overhead, plus profit) hourly rates for different labor categories and the USG pays for time incurred – not results delivered.
- Fixed-Price (Firm Fixed Price, FFP, for contracts, or Fixed Amount Award, FAA/Fixed Obligation Grants, FOG, for grants): The implementer proposes a set fee and is paid for milestones or results (not receipts).
While CPFF simply reimburses providers for costs plus profit, the Fixed-Price alternatives tie funding to achieving milestones, promoting efficiency and accountability. The Code of Federal Regulations (§ 200.1) permits using Fixed-Price mechanisms whenever pricing data can establish a reasonable estimate of implementation costs.
USAID has acknowledged the need to adapt funding mechanisms to better support local and impact-driven organizations and enhance cost-effectiveness. USAID has already started supporting these goals by incorporating evidence-based approaches and transitioning to models that emphasize cost-effectiveness and impact. As an example, in the Biden administration, USAID’s Office of the Chief Economist (OCE) issued the Promoting Impact and Learning with Cost-Effectiveness Evidence (PILCEE) award, which aims to enhance USAID’s programmatic effectiveness by promoting the use of cost-effectiveness evidence in strategic planning, policy-making, activity design, and implementation. Progress, though, remains limited. Funding disbursed based on performance milestones has remained unchanged since Fiscal Year (FY) 2016. In FY 2022, Fixed Amount Awards represented only 12.4% of new awards, or 1.4% by value.
An October 2020 Stanford Social Innovation Review article by two USAID officials argued that the Agency could enhance its use of Fixed Amount Awards by promoting “performance over compliance”. Other organizations have already begun to make this shift: the Millennium Challenge Corporation (MCC) and The Global Fund to Fight AIDS, Tuberculosis and Malaria – among others – have invested in increasing results-based approaches and embedding different results-based instruments into their procurement processes for increased aid effectiveness.
To shift USAID into an Agency that invests in impact at scale, we propose going one step further, and making Fixed-Price awards the de facto default procurement mechanism across USAID by requiring procurement officials to provide written justification for choosing CPFF.
This would build on the work completed during the first Trump administration under Administrator Mark Green, including the creation of the first Acquisition and Assistance Strategy, designed to “empower and equip [USAID] partners and staff to produce results-driven solutions” by, inter alia, “increasing usage of awards that pay for results, as opposed to presumptively reimbursing for costs”, and the promotion of the Pay-for-Results approach to development.
Such a change would unlock benefits for both the USG and for global development, including:
- Better alignment of risk and reward by ensuring implementers are paid only when they deliver on pre-agreed milestones. The risk of not achieving impact would no longer be solely borne by the USG, and implementers would be highly incentivized to achieve results.
- Promotion of a results-driven culture by shifting focus from administrative oversight to actual outcomes. By agreeing to milestones at the start of an award, USAID would give implementers flexibility to achieve results and adapt more nimbly to changing circumstances and place the focus on performing and reporting results, rather than administrative reporting.
- Diversification of USAID’s partner base by reducing the administrative burden associated with being a USAID implementer. This would allow the Agency to leverage the unique strengths, contextual knowledge, and innovative approaches of a diverse set of development actors. By allowing the Agency to work more nimbly with small businesses and local actors on shared priorities, it would further enhance its ability to counter current Great Power Competition with China and Russia.
- Incentivization of cost efficiency, motivating implementers to reduce expenses if they want to increase their profits, without extra cost to the USG.
- Facilitation of greater progress by USAID and the USG toward the UN’s 2030 Agenda for Sustainable Development, in ways likely to attract more meaningful and substantive private sector partnerships and leverage scarce USG resources.
Plan of Action
Making Fixed-Price the de facto default option for both grants and contracts would provide the U.S. foreign aid procurement process a necessary shock to the system. The success of such a large institutional shift will require effective change management; therefore, it should be accompanied with the necessary training and support for implementing staff. This would entail, inter alia, establishing a dedicated team within OAA specialized in the design and implementation of FFPs and FAAs; and changing the culture of USAID procurement by supporting both contracting and programming staff with a robust change management program, including training and strong messaging from USAID leadership and education for Congressional appropriators.
Recommendation 1. Making Fixed-Price the de facto “default” option for both grants and contracts, and tying payments to results.
Fixed-Price as the default option for both grants and contracts would come at a low additional cost to USAID (assuming staff are able to be redistributed). The Agency’s Senior Procurement Executive, Chief Acquisition Officer (CAO), and Director for OAA should first convene a design working group composed of representatives from program offices, technical offices, OAA, and the General Counsel’s office tasked with reviewing government spending by category to identify sectors exempt from the “Fixed-Price default” mandate, namely for work that lacks deep commercial markets (e.g., humanitarian assistance or disaster relief). This working group would then propose a phased approach for adopting Fixed-Price as the default option across these sectors. After making its recommendations, the working group would be disbanded and a more permanent dedicated team would carry this effort forward (see Recommendation 2).
Once reset, Contract and Agreement Officers would justify any exceptions (i.e., the choice of T&M or CPFF) in an explanatory memo. The CAO could delegate authority to supervising Contracting Officers or other acquisition officials to approve these exceptions. To ensure that the benefits of Fixed-Price results-based contracting reach all levels of awardees, this requirement should become a flow-down clause in all prime awards. This will require additional training for the prime award recipient’s own overseers.
Recommendation 2. Establishing a dedicated team within USAID’s OAA, or the equivalent office in the next administration, specialized in the design and implementation of FFPs and FAAs.
To facilitate a smooth transition, USAID should create a dedicated team within OAA specialized in designing and implementing FFPs and FAAs using existing funds and personnel. This team would have expertise in the choices involved in designing Fixed-Price agreements: results metrics and targets, pricing for results, and optimizing payment structures to incentivize results.
They would have the mandate and resources necessary to support expanding the use of and the amount of funding flowing through high-quality FFPs and FAAs. They would jumpstart the process and support Acquisition and Program Officers by developing guidelines and procedures for Fixed-Price models (along with sector-specific recommendations), overseeing their design and implementation, and evaluating effectiveness. As USAID will learn along the way about how to best implement the Fixed-Price model across sectors, this team will also need to capture lessons learned from the initial experiences to lower the costs and increase the confidence of Acquisition and Assistance Officers using this model going forward.
Recommendation 3. Launching a robust change management program to support USAID acquisition, assistance, program, and legislative and public affairs staff in making the shift to Fixed-Price grant and contract management.
Successfully embedding Fixed-Price as the default option will entail a culture shift within USAID, requiring a multi-faceted approach. This will include the retraining of Contracts and Agreements Officers and their Representatives – who have internalized a culture of administrative compliance and been evaluated primarily on their extensive administrative oversight skills – and promoting a reorganization of the culture of Monitoring, Evaluation and Learning (MEL) and Collaboration, Learning and Adaptation (CLA) to prioritize results over reporting. Setting contracting and agreements staff up for success requires capacity building in the form of training, toolkits, and guidelines on how to implement Fixed-Price models across USAID’s diverse sectors. Other USG agencies make greater use of Fixed-Price awards, and alternative training for both government and prime contractor overseers exists. OAA’s Professional Development and Training unit should adapt existing training from these other agencies, specifically ensuring it addresses how to align payments with results.
Furthermore, the broader change management program should seek to create the appropriate internal incentive structure at the Agency for Acquisition and Assistance staff, motivating and engaging them in this significant restructuring of foreign aid. To succeed at this, the mandate for change needs to come from the top, reassuring staff that the Fixed-Price model does not expose individuals, the Agency, or implementers to undue legal or financial liability.
While this change will not require a Congressional Notification, the Office of Legislative & Public Affairs (LPA) should join this effort early on, including as part of the design working group. LPA would also play a guiding role in both internal and external communications, especially in educating members of Congress and their staffs on the importance and value of this change to improve USAID effectiveness and return on taxpayer dollars. Entrenched players with significant investments in existing CPFF systems will resist this effort, including with political lobbying; LPA will play an important role informing Congress and the public.
Conclusion
USAID’s current reliance on CPFF has proven inadequate in driving impact and must evolve to meet the challenges of global development and Great Power Competition. To create more agile, efficient, and results-driven foreign assistance, the Agency should adopt Fixed-Price as the de facto default model for disbursing funds, prioritizing results over administrative reporting. By embracing a results-based model, USAID will enhance its ability to respond to global shocks and geopolitical shifts, better positioning the U.S. to maintain strategic influence and achieve its foreign policy and development objectives while fostering greater accountability and effectiveness in its foreign aid programs. Implementing these changes will require a robust change management program, which would include creating a dedicated team within OAA, retraining staff and creating incentives for them to take on the change, ongoing guidance throughout the award process, and education and communication with Congress, implementing partners, and the public. This transformation is essential to ensure that U.S. foreign aid continues to play a critical role in advancing national interests and addressing global development challenges.
This action-ready policy memo is part of Day One 2025 — our effort to bring forward bold policy ideas, grounded in science and evidence, that can tackle the country’s biggest challenges and bring us closer to the prosperous, equitable and safe future that we all hope for whoever takes office in 2025 and beyond.
The revisions to the Code of Federal Regulations, specifically the Uniform Guidance (2 CFR 200) provision, represent an exciting opportunity for USAID and its partners. These changes, which took effect on October 1, 2024, align with the Office of Management & Budget’s vision for enhanced oversight, transparency, and management of USAID’s foreign assistance. This update opens the door to several significant improvements in key reform areas: simplified requirements for federal assistance; reduced burdens on staff and implementing partners; and the introduction of new tools to support USAID’s localization efforts. The updated regulations will reduce the need for exception requests to OMB, speeding up timelines between planning and budget execution. This regulatory update presents a valuable opportunity for USAID to streamline its aid practices, pave the way for the adoption of the Fixed-Price model, and create a performance-driven culture at USAID. For these changes to come into full effect, USAID will need to ensure the necessary flow-down and enforcement of them through accompanying policies, guidance, and training. USAID will also need to ensure that these changes flow down and are incorporated into both prime and sub-awards.
Wider adoption of Fixed-Price could expand USAID’s pool of qualified local partners, enhancing engagement with diverse implementers and facilitating more sustainable, locally-driven development outcomes. Fixed-Price grants and contracts disburse payments based on achieving pre-agreed milestones rather than on incurred costs, reducing the administrative burden of compliance. This simplified approach enables local organizations –many of which often lack the capacity to manage complex cost-tracking requirements –to be more competitive for USAID programs and to be better prepared to manage USAID awards. By linking payments to results rather than detailed expense documentation, the Fixed-Price model gives local organizations greater flexibility and autonomy in achieving their objectives, empowering them to leverage their contextual knowledge and innovative approaches more effectively. This results in a partnership where local actors can operate independently and adapt quickly to changing circumstances, without the bureaucratic burdens traditionally associated with USAID funding.
In the same way that Fixed-Price could help USAID diversify its partner base and increase localization, it could also help expand the Agency’s pool of qualified small businesses, enhancing engagement with diverse implementers, and facilitating more sustainable development outcomes while achieving its Congressionally mandated small and disadvantaged business utilization goals. The current extensive use of CPFF favors entrenched implementers who have already paid for the expensive administrative compliance systems it requires. Fixed-Price grants and contracts have fewer administrative burdens enabling new small businesses–many of which often lack the administrative infrastructure necessary to manage complex cost-tracking requirements–to be more competitive for USAID programs and to be better prepared to manage USAID awards.
USAID’s research and development arm, Development Innovation Ventures (DIV), uses fixed-fee awards almost exclusively to fund innovative implementers. Yet proven interventions rarely transition from DIV into mainstream USAID programs. Innovators and impact-first organizations find themselves well suited for USAID’s R&D, but with no path forward due to the use of CPFF at scale.
USAID has historically relied on expensive procedures to ensure implementers are using funding in ways that align with USG policies and procedures. These concerns are reduced, however, when the government pays for outcomes (rather than tracking receipts). For example, the government would no longer need to verify whether the implementer has the proper accounting and reporting systems in place, nor would the government need to spend time negotiating indirect rates nor implementing incurred cost audits. As detailed regulations on the permissibility of specific costs under federal acquisition and assistance don’t apply to Fixed-Price awards and contracts, neither the government nor the implementer needs to spend time examining the allowability of costs. Furthermore, we expect wider use of Fixed-Price models to lead to significantly improved results per dollar spent. This means that, although there would be initial costs associated with strategy implementation, we would expect Fixed-Price to be significantly more cost-effective.
Yes, USAID has made recent efforts to provide more effective aid by incorporating evidence-based approaches and transitioning to models that emphasize cost-effectiveness and impact. In order to do this, during the last Trump administration, USAID elevated the Office of the Chief Economist (OCE) by enlarging its size and mandate. The OCE issued the activity Promoting Impact and Learning with Cost-Effectiveness Evidence (PILCEE), which aims to enhance USAID’s programmatic effectiveness by promoting the use of cost-effectiveness evidence in strategic planning, policy-making, activity design, and implementation. Our approach of establishing a team within OAA would draw on lessons learned from the OCE approach while reducing any associated costs by not establishing an entirely new operating unit.
A Social Science Perspective on International Science Engagement
In the previous issue of the Public Interest Report (Spring 2015), Dr. Charles Ferguson’s President’s Message focused on the importance of empathy in science and security engagements. This was a most welcome surprise, as concepts such as empathy do not typically make it to the pages of technical scientific publications. Yet the social and behavioral sciences play an increasingly critical part in issues as far ranging as arms control negotiations, inspection and verification missions, and cooperative security projects.
The Middle East Scientific Institute for Security (MESIS), the organization that I have headed for five years now, has developed a particular niche in looking at the role of culture in these science and security issues. MESIS works to reduce chemical, biological, radiological and nuclear threats across the region by creating partnerships within the region, and between the region and the international community, with culture as a major component of this work.
As with empathy, culture is often a misunderstood and misappropriated concept for most policymakers. Admittedly, it is not something that is easy to capture, describe, or measure, which may explain why it is not a popular topic. Notwithstanding, there is growing evidence that cultural awareness can make a crucial difference to the prospective success of negotiations, inspections, and cooperative endeavors. The Central Intelligence Agency produced a report in 2006 1 that examined how a lack of cultural awareness among those involved in Iraq’s inspection regime in the mid-1990s resulted in misinterpretation of the behavior of Iraqi officials, leading to an assumption that the exhibited behavior was that of denial and deception. The report relayed a wide range of incidents that were misread by those overseeing the inspection regime. These included: 1) Iraqi scientists’ understanding of the limitations of their weapons programs, combined with their fear to report these limitations to senior leaders, created two accounts about how far advanced these programs were; and 2) Iraqi leaders’ intent on maintaining an illusion of WMD possession to deter Iran regardless of the implications this may have on the inspection regime. The report even cites misinterpretations of customary (read: obligatory) tea served to inspectors at sites under investigation as being a delay tactic. These incidents demonstrate that local cultural factors, on both societal and state levels, were major determinants of nonproliferation performance, but were poorly understood by inspection officials who did not have enough cultural awareness.
It has become equally important to consider intercultural awareness when it comes to cooperative endeavors in non-adversarial circumstances. The sustainability of cooperative programmatic efforts, such as capacity building, cannot be achieved without a solid understanding of cultural awareness. Though terms such as “local ownership” and “partnerships” have become commonplace in the world of scientific cooperative engagements, it is rare to see them translated successfully into policy. As a local organization, MESIS cannot compete with any of the large U.S. scientific organizations on a technical level, yet by virtue of its knowledge of the regional context, it has numerous advantages over any other organization from outside the region. Try getting a U.S. expert to discuss the role that cultural fatalism can play in improving chemical safety and security standards among Middle Eastern laboratory personnel and this becomes all the more apparent. For example, a Jordanian expert looking to promote best practices among laboratory personnel once made an excellent argument by referring to a Hadith by the Prophet Mohammad (PBUH) that calls for the need to be safe and reasonable ahead of, and in conjunction with, placing one’s faith in God. There have been several studies about the relationship between the cultural fatalism of Arab and Muslim societies, and their perceptions of safety culture, especially on road safety. Although there is no ethnographic evidence to support the claim that this is applicable to lab safety, an anecdotal assessment would strongly suggest so.
Language is another critical area for cultural awareness, as exemplified by the success of a cooperative endeavor between the Chinese Scientists Group on Arms Control (CSGAC) of the Chinese People’s Association for Peace and Disarmament, and the Committee on International Security and Arms Control (CISAC) of the U.S. National Academy of Sciences. These groups have been meeting for almost 20 years to discuss nuclear arms control, nuclear nonproliferation, nuclear energy, and regional security issues, with the goal of reducing the possibility of nuclear weapons use and reducing nuclear proliferation in the world at large. Throughout the exchanges, it was often evident that beyond the never-simple translation of one language into the other, there was also the difficulty of differing interpretations of terms. Accordingly, a glossary of about 1000 terms was jointly developed by the two sides to ensure that future misunderstandings possibly between new members or non-bilingual speakers could be avoided. 2 In a similar vein, the World Institute for Nuclear Security (WINS) has partnered with MESIS in developing Arabic versions of its Best Practices Guidelines. This is certainly not due to any shortage of Arabic-language translators in Vienna, but rather because they rightly distinguish between translation and indigenization. Typically, a translator with limited understanding of nuclear security is unable to indigenize a text in the way that a local expert can. In the case of the Guidelines, the use of local experts went a long way to ensure that the concepts themselves were understood by Arabic-language speakers (a case not very different from the U.S.-Chinese example).
The sustainability of the international community’s programmatic efforts in the Middle East and elsewhere is strongly tied to this notion of cultural context. MESIS manages the Radiation Cross Calibration Measurement (RMCC) network, which is a project that seeks to raise radiation measurement standards across the Arab world. It has always been a challenge to find funding for this network from funds dedicated to nonproliferation and nuclear security as the project’s relevance or utility is not readily apparent to decision makers. More creative thinking is needed here. A project like RMCC does in fact build the infrastructure and capacity needed for areas such as nuclear forensics and Additional Protocol compliance 3, but it also addresses more local concerns such as environmental monitoring and improved laboratory management. These sorts of win-win endeavors require a strong degree of cultural awareness. If a network of nuclear forensics laboratories had in fact been established, funding would probably be secured with greater ease, while sustainability would certainly be threatened, because ultimately, nuclear forensics is not currently a priority area for the region.
In a period when there is a tremendous amount of skepticism about international science engagement, increased cultural awareness may lead to more meaningful and, in turn, sustainable outcomes. One would expect this to be more readily apparent to members of a scientific community. There may be some merit in taking a page out of the book of another community, the commercial product development one. They are keenly aware of cultural paradigms when developing products for different markets, often leading to better returns.
Nasser Bin Nasser is the Managing Director of the Middle East Scientific Institute for Security (MESIS) based in Amman, Jordan. He is also the Head of the Amman Regional Secretariat under the European Union’s “Centres of Excellence” initiative on CBRN issues.