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Introduction
Unlike commercial contracts, governed by the Uniform Commercial Code and the common law, several statutes and regulations govern the Federal government. The role of the Federal Acquisition Regulations System is codification and publication of standardized policies and measures for procurement by all agencies. The Federal Acquisition Regulation (FAR) outlines various contract types and their general applicability based on the procurement situation and complexity of the supplies or services. They range from Firm-Fixed-Price, which places the greatest cost risk on the contractor, to Cost-Plus Fixed-Fee, which places the greatest risk on the Government.
Fixed-price contracts
Fixed price contracts depend on the supply and acceptance of a product or service. Normally, they have a firm price but, at times, the price can be adjusted. With an adjustable price, the fixed price contract could include a target price, a ceiling price, or both (Office of the Secretary of Defense, 2004). Unless specified in the contract, the ceiling price or target price is subject to adjustment only by operation of clauses in the contract providing for revision or adjustment of the contract price under circumstances stated (Office of the Secretary of Defense, 2004). A fixed-price contract is preferable when acquiring goods and services of a reasonable, definite and detailed specification and when the contracting officer ascertains reasonable prices at the outset (Office of the Secretary of Defense 2004).
Cost reimbursement contracts
This contract provides for compensation of acceptable incurred costs, to the degree set in the contract. Research and development work get such contracts. If the work is not satisfactory, termination of the contract takes place. Risks involving banks are usually negligible. There are three types of cost-reimbursable contracts.
- Cost plus award fee: This contract provides the Government with a method of incorporating incentives into contracts for goods or services characterized by subjective performance criteria. No measurements are necessary for structuring incentive contracts.
- Cost plus fixed fee: In this contract, the fee negotiation happens at the start of the contract. The fixed fee does not differ from the actual cost, but it can be amended in case of changes in the contracted work. This contract allows contracting for efforts that could have presented a significant risk to contractors, but provides the contractor only a minimum incentive to control costs (Office of the Secretary of Defense 2004).
- Cost plus incentive fee: Incorporates a fee that can be adjusted through a formula based on the relationship between total allowable cost and target cost. It is similar to the FPI contract but, since it is cost reimbursable, there is no price ceiling. The intention of the CPIF contract is to offer an incentive to the contractor to manage contract costs effectively and thereby achieve the maximum allowable fee. The CPIF contract applies to research and development contracts where cost unknowns are common (Feldman, 2007).
Time and Materials Contracts
The contractor’s payment is on the basis of
- The actual cost of labor. It is usually at specified hourly rates,
- Actual cost of materials and equipment used in the contracted work and
- Fixed add-on agreed on to cover the contractor’s overheads and profit.
These contracts apply to services such as developing systems or managing facilities and combine elements of cost-reimbursable and fixed-price contracts.
Importance of Contract Choice in Acquisition Planning
Choosing the appropriate contract is one of the most crucial decisions a contracting officer must make, to ensure that the Government obtains the desired end item at a reasonable cost. If chosen correctly, the contract type can also motivate the contractor to perform as desired, specifically influencing cost control, delivery, and quality of the end item (Tomanelli, 2012). The contracting officer must determine which contract type will best serve the Government’s interest, and also make available incentives for the contractor to perform in an acceptable manner. The FAR provides the contracting officer with several points to consider when making this choice.
- Price Competition. Whenever possible, procurement actions should have competed. Competition normally facilitates the achievement of reasonable prices, especially if a fixed-price contract can be used.
- Price Analysis. Price analysis is the process by which the contracting officer analyzes proposed prices to determine whether the price offered is reasonable. It includes comparing proposed prices with such things as historical prices, market prices, and other competitive quotes.
- Cost Analysis. Cost analysis involves the evaluation of the cost of an offer or pricing data. The data require an analysis to determine the allowance and allocation of costs and the basis of the cost estimates.
- Type and Complexity of the Requirement. Here, the contracting officer assesses the degree of risk assumed by both parties. The more complex and uncertain the requirement, the greater the risk that will probably be accepted by the Government.
- Urgency of the Requirement. If the item or service has an accelerated basis, the Government may need to give the contractor incentives to meet the desired delivery schedule or assume a greater portion of the cost risk of the contract.
- Period of Performance or Length of Production Run. The contracting officer should consider economic conditions, possibly allowing for periodic reviews, to assess possible economic fluctuations during contract performance.
- Contractor’s Technical Capability and Financial Responsibility. The technical performance capability and financial health of the organizations competing for the contract must be established by the contracting officer before the contract award.
- Concurrent Contracts. If the contractor holds other Government contracts, the contracting officer must determine what impact these contracts will have on the proposed contract.
References
Feldman, S. W. (2007) Government Contract Guidebook, 4th Edition. Minnesota: Thomson Reuters. WestLaw.
Office of the Secretary of Defense. (2004). Defense federal acquisition regulation supplement (DFARS): Agency acquisition regulations. Web.
Tomanelli, N. S. (2012). Federal Acquisition Regulation Desk Reference. Minnesota: Thomson Reuters. WestLaw.
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