In this video, I will be discussing seven different types of contracts used in government contracting. I will also be providing the Federal Acquisition Regulation (FAR) reference for your information. Now, if you are new to the government contracting world, then you need to know that the FAR is the primary regulation used by executive agencies for the acquisition of supplies and services.
The most common type of contract is a Firm-Fixed Price (FFP) contract. When using an FFP contract, the price cannot change at all based upon the contractor’s cost experience. As a result, the contractor has the maximum risk and full responsibility for all costs and resulting profit or loss. Also, it encourages the contractor to control costs and perform the contract effectively. As far as an administrative burden, firm-fixed-price contracts have a low administrative obligation for the contractor and the government.
Award Fee Incentive
A contracting officer may use a firm-fixed-price contract in conjunction with an Award-Fee Incentive (FAR Subpart 16.404) and performance or delivery incentives when the award fee or incentive-based factors cost. The agreement will remain a firm-fixed-price contract even when the contracting officer elects to use the award fee or incentive.
When Is an FFP Contract Used?
The Government uses a firm fixed price contract for purchasing commercial items or for getting other supplies or services. Because the contracting officer can reasonably detail the specifications, he or she can establish fair and reasonable prices. The contracting officer will look at the following to make their decision:
- Adequate price competition;
- Reasonable price comparisons with prior purchases of the same or similar supplies or services made on a competitive basis or supported by valid costs or pricing data;
- Available cost or pricing information that provides realistic estimates of the probable costs of performance or performance uncertainties.
- The contractor must identify these costs and have reasonable estimates of their impact on the job. Also, the contractor is willing to accept a firm-fixed-price contract based upon the risks involved.
FAR Subpart 16.2 – “Fixed-Price Contracts”
DFARS 216.2 – “Fixed-Price Contracts”
With cost-reimbursement contracts allows for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of the total cost for the purpose of obligating funds and establishing a ceiling that the contractor cannot exceed without the approval of the contracting officer.
Cost Plus incentive Fee Contracts (CPIF)
A cost-plus incentive fee contract is a cost-reimbursement contract that provides an initially negotiated fee that maybe adjusted later by a formula based on the relationship between total allowable costs and total target costs.
FAR Subpart 16.301-3 for limitations
Cost plus Award Fee Contracts (CPAF)
A cost-plus award fee contract is another cost-reimbursement contract that provides for a fee consisting of two parts. The first part is a base amount (which may be zero) fixed at the inception of the contract and the second part an award amount, based upon a critical evaluation by the Government. This evaluation motivates excellence in contract performance.
FAR Subpart 16.4 “Incentive Contracts”
FAR Subpart 16.301-3 and 16.401(e)(5) for Limitations.
Cost Plus Fixed Fee Contracts (CPFF)
The cost-plus-fixed-fee contract provides payment to the contractor of a negotiated fee set at the beginning of the contract. The fixed price does not vary based on actual cost but adjusted due to changes in the work performed under the contract. This contract type permits contracting for efforts that might otherwise present too significant a risk to contractors, but it provides the contractor only a minimum incentive to control costs.
FAR 16.3 “Cost-Reimbursement Contracts”
Time and Materials Contracts
Time and Materials Contracts are a mixture of fixed-price and cost-reimbursement contracts. They are rate because they shift a lot of the risk onto the side of the government. However, as of late, I have seen a number of these contracts issued.
Time and Material Contracts allows the government to purchase supplies or service on a basis of:
- Direct Labor Hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses and profit; plus
- Actual cost for materials
A Contracting Officer can use a time and materials contract when they prepares a determination and findings that no other contract type is suitable. Now the determination and finding shall be:
- Signed by the contracting officer prior to the execution of the base period or any option periods of the contracts; and
- Approved by the head of the contracting activity prior to the execution of the base period when the base period plus any option period exceeds three years; and
Can a Contractor Exceed the Ceiling Price?
The contract includes a ceiling price that the contractor may exceed at his own risk. The contracting officer must document the contract file to justify the reasons for and amount of any subsequent change in the ceiling price.
Reference: FAR Subpart 16.6 “Time and Materials”
Indefinite Delivery/Indefinite Quantity Contracts
An Indefinite Delivery/Indefinite Quantity Contracts (IDIQ) is one of the most versable contracts. It provides various possible combinations of indefinite elements that give the desired flexibility to meet the Government’s needs best. The Government uses IDIQ contracts for acquiring supplies or services when they do not know the exact time or quantities needed at the time of the contract award.
FAR Part 16.5 for more information.
The Government uses an incentive contract used when a Firm-Fixed-Price deal is not appropriate. The required supplies or services can be obtained at lower costs and relating the amount of profit or fee payable under the contract to the contractor’s performance. These contracts meet specific acquisition objectives by:
- The Government communicates to the contractor reasonable and attainable targets; including the appropriate incentive arrangements are designed to motivate the contractor; discourage contractor inefficiency and waste.
Now, these are the majority of contract types used in government contracting. However, it does not contain all of them. To find out which contract types are used in your industry it is best to use USASpending.gov or fpds.gov. These websites will allow you to run reports for your location and industry. It will also provide you with a list of companies that have won these contracts in the past.
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