Government Contracts – Contract Types and Clauses

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Types of Government Contracts

Today, we will be talking about “Contract Types and Contract Clauses.”   When preparing to respond to government contracting bids, you need to be sure that the requirement fits your business model.  There is no point in spending resources working on a proposal when your chances of winning are slim.

Today, we will be talking about “Contract Types and Contract Clauses.”   When preparing to respond to government contracting bids, you need to be sure that the requirement fits your business model.  There is no point in spending resources working on a proposal when your chances of winning are slim.

This is going to be a multipart series, so make sure that you subscribe. When you subscribe to our channel, you will be automatically notified when we release new episodes.

The first step in the process is to review the solicitation and see if it is one that aligns with your business.  Next, we are going to download the solicitation package.

Download the Contract Solicitation Package

If you found the solicitation from one of the Government’s websites (i.e., FBO.GOV), the next step is to download the solicitation with all supporting documents.  You will be downing the solicitation package or bid package. Make sure that you double check the solicitation number before you start downloading the package from the website.  It is straightforward to select the wrong solicitation number to download.  This is especially true when reviewing the Federal Business Opportunities website (

If you cannot download the solicitation package, then you will need to contact the government and request a copy of the package.  You will find the Government representative contact information such as name, address, phone number, and email address listed on the notice. Please make sure that when you ask for the solicitation (bid) package along with any amendments and supporting documents that were issued.  You will need a complete package before you can start writing your proposal.

Types of Contracts

When requesting or downloading the solicitation package you need to be familiar with the kind of contracts that the government uses when buying a product or service.  Why is this important?  Well, the acquisition method used determines the type of contract and the amount of risk the government wishes to accept.  More importantly, the contract type will have an impact on the way you price out your proposal.  These contracts reflect the risk involved in contract performance,

So, what are the three basic categories of contracts?  Well, they are

  • Fixed-price
  • Cost-reimbursement
  • Special situation

Fixed-Price Contracts

The majority of small businesses compete on fixed-price contracts.  Final contract pricing must be fi. There are a variety of fixed-price contracts.  Let’s discuss those next.

  • Firm Fixed-price: Firm-Fixed-Price contracts will not allow for any price adjustments.  The contractor must perform the deal at the awarded price and accepts 100% of the profit or loss from performing this contract. (FAR 16.202)
  • Fixed-price with economic price adjustment: On Firm-Fixed price with economic price adjustment contracts, the price can go up or down based on the occurrence of contractually specified economic contingencies that are clearly outside of the contractor’s control.  (FAR 16.203)
  • Fixed-price incentive: Allows for the adjustment of profit, based on a formula to adjust the final price based on the relationship of the final negotiated cost to the target cost. (FAR 16.204)
  • Firm-Fixed-Price, Level of effort: A fixed price is for a specified level of effort over a stated time frame. If the level varies beyond the specified thresholds, then price may be adjusted. (FAR 16.207)

Cost-Reimbursement Contracts

Cost-reimbursement contracts allow for the pricing to be finalized after project completion or at specified interim points during the performance of the contract. On this type of arrangement, a contractor can legally stop work when all contract funds have been depleted.  This type of contract transfers the cost risk to the government.  Like firm-fixed-price contracts, there are a variety of types of cost-reimbursement contracts.

  • Cost: Under this type of contract the reimbursement consists of allowable costs; there is not a fee provision. (FAR 16.302)
  • Cost-sharing: On Cost-sharing contracts, the government will reimburse the agreed on allowable cost. (FAR 16.303)
  • Cost Plus Fixed Fee: On this type of contract you will be reimbursed for costs incurred and a fee adjusted by a formula based on the allowable cost to the target cost. (FAR 16.304)
  • Cost Plus Award Fee: You will be reimbursed for allowable costs incurred and a two-part fee- a fixed amount and an award amount based on an evaluation of the quality of contract performance (FAR 16.305)

Special Situation Contracts

Lastly, we will talk about special situation contracts.  They include:

  • Time and Material: You receive reimbursement for direct labor hours, expended at a fixed hourly rate.  Direct labor hours generally include direct labor costs, indirect expenses, and profit. Material costs consist of actual cost plus a handling charge (FAR 16.801)
  • Labor Hour: Consists of direct labor hours expended at a fixed hourly rate. Usually, the labor hour rate will include cost and profit. (FAR 16.602)
  • Definite-quantity: The contract will specify the quantity needed but the delivery schedule is flexible.  Payment is made on some form of fixed-price basis. (FAR 16.502)
  • Requirements: Actual delivery schedules and quantities are flexible during the contract period.  Your payment is based on a predetermined fixed-price basis. (FAR 16.503)

Special Bidding Techniques

There are two new bidding processes that the government is using that all small businesses need to be aware of:

  • Auction – This technique is where the bidding continues until no competitor is willing to submit a lower bid. This method is also referred to as “reverse auction” because the government is looking for the lowest price, not the highest price.
  • Bundling – This technique is where the government consolidates two or more requirements that were normally bought separately into a single contract. The support contracts of many military bases, which require a variety of work disciplines to keep the base operating are bid this way.

Both techniques can cause problems for small businesses.

If you elect to compete for a bid using the auction method, you need to spend time researching and preparing so that you are sure that you can perform the contract at the price you offered.  Many DLA supply contracts use this technique.  Don’t let the auction habit of bidding too low, then receiving the contract and are unable to perform the contract.

Take special care when reviewing bundling contracts.  There may be requirements included in the solicitation that cover items that a small business may not be able to perform or manage.

It is wise to be very cautious if you elect to participate in these bidding techniques.  Remember to be cautious when participating in either auction or bundling techniques.  It is an easy way to get over your head.  Next is the conclusion.


Well, this is the end of this episode.  Next time we are going to talk about Understanding Government Terminology.  Remember to subscribe, click the notification bell so that you are notified when we release new content. Also, do me a favor and leave a comment. Click here for more articles.

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