Contract Types and Recurring

Requirements

Categories of Contract Types

•Fixed-Price contracts

•Cost-Reimbursement contracts

LowRisk

HighRisk

GovernmentGovernmentFFP CPFF

ContractorContractor FFPCPFF

Transition of Contract Types Through the Maturity of a

ProgramCost

Studies/Research/ Concept Refinement

Technology Development

SysDev

SYS Demo

LRIPProductionDeployment

Follow -OnProduction

CPFFCPIF

CPIF/FPIFFPIF/FFP

VERY BROAD REQUIREMENT…………WELL DEFINED REQUIREMENT

The Contracting Officer shall insert FAR 52.216-1, Type of Contract, into the solicitation unless it is for:

•a fixed-price acquisition made under simplified acquisition procedure

• information or planning purposes

"The Government contemplates award of a ___________________ (Contracting Officer insert specific type of contract) contract resulting from this solicitation." (Provision)

The Contracting Process, FFPVs. Cost Reimbursement

FIXED PRICEFIXED PRICE Ktr req’d to deliver Ktr req’d to deliver

product/perform serviceproduct/perform service Provides for a firm price Provides for a firm price

or in some cases an or in some cases an adjustable priceadjustable price

Contract represents full Contract represents full payment for the work; kr payment for the work; kr exceeds at own riskexceeds at own risk

COST REIMBURSEMENTCOST REIMBURSEMENT Ktr req’d to deliver Ktr req’d to deliver

“best effort”“best effort” Reasonable, allowable, Reasonable, allowable,

allocable costs will be allocable costs will be reimbursed reimbursed

Contract amount Contract amount represents an estimate represents an estimate of total cost; cannot be of total cost; cannot be exceeded without CO exceeded without CO approvalapproval

The Contracting Process, Firm Fixed Price Vs. Cost Reimbursement Contract Types

FIXED PRICE Use when technical

and cost uncertainties involved in contract performance can be estimated with sufficient accuracy

Use when work can be clearly defined

COST REIMBURSEMENT Use when

technical/cost uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy

Use only when:

The Contracting Process, Firm Fixed Price Vs. Cost Reimbursement Contract Types

FIXED PRICE Kr bears more

responsibility for performance costs and resulting profit (or loss)

Use FFP or FP/EPA when• acquiring

commercial items• using sealed

bidding, and • negotiated

procurements

COST REIMBURSEMENT• Kr has adequate

accounting system• Govt monitoring

ensures efficient methods and effective cost controls

Kr bears less responsibility

Prohibited for commercial items

Use with negotiated procedures

Contract Types - Characteristics

CostFixed Price

Promise Best Effort Deliverable

Risk to Contractor Low High

Risk to Government High ?

Cash Flow Cost Incurred On Delivery

Progress Payments ---- Yes

Performance Based Payments ----Preferred

Administration High Low

Fee/Profit Periodic On Delivery

Types of Firm Fixed PRICE Contracts

• Firm Fixed Price (FFP)

• Fixed Price with Economic Price Adjustment (FPEPA)

• Firm Fixed Price Incentive Fee (FPIF)

• Firm Fixed Price Award Fee (FPAF)

• Firm Fixed Price Level of Effort (FPLOE)

• Firm Fixed Price Redeterminable (FPR) - Prospective or Retroactive

Features of the FFP Contract•Price not subject to adjustment

regardless of contract performance

•100% of financial risk is on the contractor

•Least amount of administrative burden on the contracting officer

•Preferred over all other contract types

•Used with FAR Parts 13, 14 and 15

•Used in acquiring commercial items

Features of the FP/EPA Contract

•Preferred over cost-reimbursement type contracts

•Reduces contract’s fixed-price risk for government & contractor

•More administrative burden for the contracting officer

•Used with sealed bidding or negotiated procurements

•Used in acquiring commercial items

FIXED-PRICE INCENTIVE (FIRM TARGET)

– Incentivizes Contractor to Control Costs• Greater Profit when Final Cost is less than

Target• Less Profit when Final Cost is more than Target

– Retains the characteristics of the fixed-price contract in that there is a Ceiling Price

– Mitigates Contractor Risk in that the government assumes a share of the cost risk

– Benefits Government as the Government also shares in cost savings

Y

X

PTA

PT 100

PP 50

1000CT

1500CP

PO 150

800CO

1550KC

When final cost is $800;Final price is $950

When final cost exceeds KC;Final price is KC

FIXED PRICE INCENTIVE (FIRM TARGET)

Optimistic Profit

Target Profit

Pessimistic Profit

OPTIMISTIC TARGET PESSIMISTIC

CEILINGCOSTS:

75/25 - Under Target Share Ratio

90/10 - Over Target Share Ratio

FPPR - Fixed Price w/ Prospective Price Redetermination

• Should be used for acquisitions of quantity production or services where it is possible to negotiate a fair and reasonable FFP for an initial period, but not for subsequent periods of performance

• Contracting officer must determine that a FFP or FPI contract will not satisfy the requirement

• Contractor must have an adequate accounting system

• Price must be redetermined promptly at time(s) specified for subsequent periods of performance

FPRR - Fixed Price Retroactive Price Redetermination• Appropriate for research and development

contracts estimated at $100,000 or less when established at outset that a fair and reasonable FFP cannot be negotiated

• Amount involved and short performance period make the use of any other Fixed Price contract impracticable

• Ceiling price negotiated w/shared risk• Not used unless:

– Ktr's accounting system is adequate– There is reasonable assurance that the price

redetermination will take place promptly at the specified time

– The head of contracting activity (or higher official) approves its use in writing.

FPLOE - Fixed Price Level of Effort• Suitable for investigation or study in a

specific research and development arena

• Has a contract product that is usually a report showing the result(s) achieved by application of the required level of effort

• Payment is based on the negotiated level of effort expended and not on results achieved

• Ktr required specified level of effort, over a stated period of time, on work that can be stated only in general terms

Features of FPLOE Contract• The work required cannot be clearly

defined, otherwise, a FFP contract would be more practical

• The required level of effort is identified and agreed upon in advance of contract award

• There is a reasonable assurance that the intended result cannot be achieved by expending less than the stipulated effort

• Contract Price is $100,000 or less, unless approved by the Chief of the Contracting Office

FPAF - Fixed Price Award Fee

Can evaluate a contractor’s performance in:

•cost (effective needs)

•timeliness

•quality of work

•cooperation

Cost Contract• Cost reimbursement contract in which

the contractor receives no fee

• Normally applies only to nonprofit institutions and organizations willing to perform research for which there is no fee or other tangible benefits

• Most suitable for research and development

• Used only in negotiated procurements

CPFF -Cost Plus Fixed Fee• Cost reimbursement contract that provides

for payment of allowable, allocable, reasonable costs & a negotiated fee that is fixed at inception of the contract. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes to the work to be performed.

• Contractor has minimum incentive to control costs

• It is costly to administer• Contractor must have an adequate

accounting system• Least preferred type of contract because

the contractor assumes no financial risk for the performance of the contract

• Used only with negotiated procurements

COST PLUS FIXED FEE (CONT)

• SUITABLE FOR:– Research or preliminary exploration or

study and the LOE required is unknown– Development and test & using CPIF is not

practical• Normally should not be used

– Development of major systems once preliminary exploration, studies & risk reduction have indicated development is achievable and Government has established reasonably firm performance objectives and schedules

COST-PLUS-INCENTIVE-FEE• Appropriate for services or development and

test programs when:– Cost-reimbursement contract is necessary– Target cost and fee adjustment formula

can be negotiated that are likely to motivate the contractor to manage effectively

• Excellent to "wean" contractor from Cost Plus Fixed Fee Contract

2323

Cost-Plus-Incentive-Fee (CPIF)

•

•

•

$70

800 900 1,000 1,100 1,400

Target Fee at Target CostTarget Fee at Target Cost

COST ($)

Min

Max

$0

Min Fee atMin Fee atPessimistic CostPessimistic Cost

Max Fee at Optimistic CostMax Fee at Optimistic Cost

Range of Incentive Effectiveness (RIE)

$120

$20

75/2575/25

87.5/12.587.5/12.5

FEE

Optimistic Cost

Target Cost Pessimistic Cost COST

Indefinite Delivery Contracts

Ordering Vehicles• Flexibility

Quantity Times Places

Benefits Types

• Definite Quantity• Requirements• Indefinite Delivery

Benefits of Indefinite-delivery Contracts

• Government stocks can be maintained at minimum levels

• Direct shipment to users• Flexibility in both quantities and

delivery scheduling• Allows ordering of supplies or

services after minimum quantity specified in the contract

• Faster deliveries

Indefinite Delivery Contract

Indefinite Quantity Contract• Exact quantity unknown above the

minimum• Times/places unknown• Guaranteed minimum• Funds for min obligated on contract;

above min obligated on delivery order Multiple award preference

• Multiple award contracts

Requirements Contract

• Exact quantity unknown/realistic estimate• Exact times/places unknown• No guarantee/but promises to buy from

awardee• Funds obligated by each delivery order

Definite Delivery Contracts

Definite Quantity Contract• Exact quantity known• Exact times/places unknown• Funds obligated on contract at

time of award

Time and Materials Contracts

Provide for contracting for supplies or services on the basis of:

• direct labor hours at specified fixed hourly rates

• material at cost, which may include a material handling cost as part of the material cost

NOT A CONTRACTNOT A CONTRACT Types of AgreementsTypes of Agreements

• Basic AgreementBasic Agreement• Basic Ordering AgreementBasic Ordering Agreement• Blanket Purchase AgreementBlanket Purchase Agreement

Types of Agreements

Basic Ordering AgreementThe agreement contains:

• terms and clauses applying to future contracts between the parties during its term

• a description, as specific as practicable, of supplies or services to be provided

• methods for pricing, issuing, and delivering future orders under the basic ordering agreement

Simplified method of filling anticipated Simplified method of filling anticipated

repetitive needs for supplies or services repetitive needs for supplies or services by establishing "charge accounts" with by establishing "charge accounts" with qualified sources of supply. (FAR 13.303)qualified sources of supply. (FAR 13.303)

Establishing BPAsEstablishing BPAs• Usually a local supplierUsually a local supplier• Place calls for suppliesPlace calls for supplies• Pay monthlyPay monthly• Establish more than one BPA to maintain Establish more than one BPA to maintain

competitive prices unless:competitive prices unless:

Blanket Purchase Agreements

7-21/22

Multiple Awards should not be made when:

• Only one contractor is capable of providing performance at the level of quality required

• Based on the contracting officer’s knowledge of the market, more favorable terms and conditions, including pricing, will be provided if a single award is made

• Administrative costs outweigh any potential benefits

• Tasks are so integrally related that only a single contractor can reasonably perform the work

• The total estimated value of the contract is less than the simplified acquisition threshold

• The contracting officer determines that multiple awards would not be in the best interest of the Government

Multiple Awards should not be made when (Cont’d):

Market Conditions for Using Options

• likely to be stable enough to preclude putting the contractor at undue risk

•not likely to change substantially during the option period

Use of Multiyear Contracts

• No-year or multiyear funds are available

• Funds are likely to be available throughout the contract period at levels above the cancellation ceiling

• You expect no substantial change in the minimum need during the contemplated contract period

• You plan to award a FFP, FP/EPA or FPIF contract

• A multiyear contract would probably cost less than a string of 1-year contracts

SUMMARY

•There are two major categories of contract types: Fixed-Price and Cost Reimbursement

•To choose the appropriate contract type, the contracting officer must consider: – performance risk– market risk