Factors in Selecting Contract Types

FAR 16.104

There are many factors that the contracting officer should consider in selecting and negotiating the contract type. They include the following:

  1. Price competition. Normally, effective price competition results in realistic pricing, and a fixed-price contract is ordinarily in the Government's interest.
  2. Price analysis. Price analysis, with or without competition, may provide a basis for selecting the contract type. The degree to which price analysis can provide a realistic pricing standard should be carefully considered. (See 15.404-1(b).)
  3. Cost analysis. In the absence of effective price competition and if price analysis is not sufficient, the cost estimates of the offeror and the Government provide the bases for negotiating contract pricing arrangements. It is essential that the uncertainties involved in performance and their possible impact upon costs be identified and evaluated, so that a contract type that places a reasonable degree of cost responsibility upon the contractor can be negotiated.
  4. Type and complexity of the requirement. Complex requirements, particularly those unique to the Government, usually result in greater risk assumption by the Government. This is especially true for complex research and development contracts, when performance uncertainties or the likelihood of changes makes it difficult to estimate performance costs in advance. As a requirement recurs or as quantity production begins, the cost risk should shift to the contractor, and a fixed-price contract should be considered.
  5. Urgency of the requirement. If urgency is a primary factor, the Government may choose to assume a greater proportion of risk or it may offer incentives to ensure timely contract performance.
  6. Period of performance or length of production run. In times of economic uncertainty, contracts extending over a relatively long period may require economic price adjustment terms.
  7. Contractor's technical capability and financial responsibility.
  8. Adequacy of the contractor's accounting system. Before agreeing on a contract type other than firm-fixed-price, the contracting officer shall ensure that the contractor's accounting system will permit timely development of all necessary cost data in the form required by the proposed contract type. This factor may be critical when the contract type requires price revision while performance is in progress, or when a cost-reimbursement contract is being considered and all current or past experience with the contractor has been on a fixed-price basis.
  9. Concurrent contracts. If performance under the proposed contract involves concurrent operations under other contracts, the impact of those contracts, including their pricing arrangements, should be considered.
  10. Extent and nature of proposed subcontracting. If the contractor proposes extensive subcontracting, a contract type reflecting the actual risks to the prime contractor should be selected.
  11. Acquisition history. Contractor risk usually decreases as the requirement is repetitively acquired. Also, product descriptions or descriptions of services to be performed can be defined more clearly.

Selecting Contract Types

Fixed Price (greater risk on contractor)
 Application and Essential ElementsSuitabilityLimitations
Firm Fixed Price
  • Reasonably definite design or performance specification available
  • Fair and reasonable price can be established at outset.
  • Conditions For Use:
    • Prior purchase experience of the same, or similar, supplies or services under competitive conditions.
    • Valid cost or pricing data.
    • Realistic estimates of proposed cost.
    • Possible uncertainties in performance can be identified and costed.
    • Contractor willing to accept contract at a level which causes them to take all financial risks.
    • Any other reasonable basis for pricing can be used to establish fair and reasonable price.
  • Commercial products and commercial type products, military items for which reasonable prices can be established, and services.
  • Price not subject to adjustment regardless of contractor performance costs.
  • Places 100% of financial risk on contractor.
  • Places least amount of administrative burden on contracting officer.
  • Preferred over all other contract types.
  • Used with advertised or negotiated procurements.
Fixed Price with Economic Adjustment
  • Unstable market or labor conditions during the production period and contingencies which would otherwise be included in the contract price can be identified and made the subject of separate price adjustment clauses.
  • Contingencies must be specifically defined in contract.
  • Provides for upward adjustment (with ceiling) in contract price.
  • May provide for downward adjustment if price of escalated element has potential of falling below the limits established in the contract.
  • Three general types of EPAs:
    • Adjustments based on established prices.
    • Adjustments based on actual costs of labor or material.
    • Adjustments based on cost indexes of labor or material.
  • Price can be adjusted up or down upon action of an industry wide contingency which is beyond contractor's control.
  • Reduces contractors fixed price risk.
  • Fixed price with EPA is preferred over any cost reimbursement type contract.
  • If contingency manifests, the contract administration burden will increase.
  • Used with negotiated procurements and, in limited applications. With formal advertising when determined to be feasible.
  • Commercial products and commercial type products, military items for which reasonable prices can be established at time of award, and services.
    Fixed Price Incentive
    • Cost uncertainties exist but there is potential for cost reduction and/or performance improvement by giving contractor a degree of cost responsibility and a positive profit incentive.
    • Profit is earned, or lost, based upon relationship that contract's final negotiated cost bears to total target cost.
    • Contract must contain: target cost, target profit, ceiling price, and profit sharing formula.
    • There are two forms of this contract: firm target (FPIF) and successive targets (FPIS).
      • FIRM TARGET: firm target cost, target profit, and profit sharing formula are negotiated into basic contract, profit is adjusted upon contract completion.
      • SUCCESSIVE TARGETS: Initial cost and profit targets are negotiated into contract but final cost target (firm) cannot be negotiated until sometime during performance. Contains production point(s) at which either a firm target and final profit formula, or a firm fixed price contract, can be negotiated.
    • Elements which can be incentivised are: costs, performance, delivery, and quality.
    • Development and production.
    • Requires adequate contractor accounting system.
    • Contracting officer must determine that the contract type is least costly and award of any other type would be impractical.
    • Government and contractor administrative effort is more extensive than under other fixed price contract types.
    • Used only with negotiated procurements.
    • Billing prices must be established for interim payment.
    Fixed Price with Redetermination
    • There are two types of this contract:
    • PROSPECTIVE: Used when it is possible to negotiate a fair and reasonable price for an initial period of performance but not for entire contract period. Contract is firm fixed price at the start. At a specific time(s) during performance the contract price is redetermined either up or down. A price ceiling, if appropriate, should be negotiated into the original contract.
    • RETROACTIVE: Used when realistic fixed price cannot be negotiated initially, or when contract amount is so small, or time so short, that any other contract type would be impractical. Realistic ceiling price is negotiated after contract is completed.
    • PROSPECTIVE: Quantity production or services.
    • RETROACTIVE: Research and development of $100,000 or less ONLY.
    • FOR BOTH: Contracting officer must determine that a firm fixed price contract will not satisfy requirement.
    • Contractor's accounting system must be adequate.
    • Prospective period must be made to conform to contractor's accounting period.
    • Price must be redetermined promptly upon contract completion.
    • Must establish ceiling price in the original contract that represents the contractor's assumption of reasonable degree of risk.
    • Requires approval in writing, from the head of contracting activity.
    • Used only with negotiated procurements.
    Cost Reimbursement (greater risk on Government)
     Application and Essential ElementsSuitabilityLimitations
    Cost Plus Award Fee
    • Contract completion is feasible, incentives are desired but performance not susceptible to finite measurement.
    • Provides for SUBJECTIVE evaluation of contractor performance.
    • Contractor is evaluated at stated time(s) during performance period.
    • Contract must contain clear and unambiguous evaluation criteria to determine award fee.
    • Award fee is earned for excellence in performance, quality, timeliness, ingenuity and cost effectiveness and can be earned in whole or in part.
    • Two separate fee pools can be established in contract: a base fee not to exceed 3% of the contract's estimated cost and an award fee.
    • The total award fee plus base fee cannot exceed the statutory limits shown in FAR 15.903: A&E-6%, production and services-10%, and R&D-15% of estimated cost.
    • Award fee earned by contractor is determined by the contracting officer and is often based upon recommendations of an award fee evaluation board.
    • Level of effort services that can only be subjectively measured, and contracts for which work would have been accomplished under another contract type if performance objectives could have been expressed as definite milestones, targets, and goals susceptible of being actually measured.
    • Weighted guidelines will NOT be used to determine either base or award fee.
    • Government's determination of amount of award fee earned by the contractor is NOT subject to disputes clause.
    • CPAF contract cannot be used to avoid either CPIF or CPFF types if either is feasible.
    • Should not be used if the amount of money, period of performance or expected benefits are insufficient to warrant additional administration effort.
    • Very costly to administer. Contractor must have an adequate accounting system.
    • Used only with negotiated procurements.
    • D&F required.
    Cost Plus Incentive Fee
    • Development has a high probability that it is feasible and positive profit incentives for contractor management can be negotiated.
    • Performance incentives must be clearly spelled out and objectively measurable.
    • Fee range should be negotiated to give the contractor an incentive over various ranges of cost performance.
    • Fee is adjusted by a formula negotiated into the contract in accordance with the relationship that total allowable cost bears to target cost.
    • Total fee cannot exceed the statutory limits shown in FAR 15.903: production and services 10% and R&D 15% of estimated cost.
    • Contract must contain: target cost, target fee, minimum and maximum fees, and fee adjustment formula.
    • Fee adjustment is made upon completion of contract.
    • Major systems development and other development programs where it has been determined that this contract type is desirable and administratively practical.
    • Difficult to negotiate range between the maximum and minimum fees so as to provide an incentive over entire range.
    • Performance must be objectively measurable.
    • Costly to administer, contractor must have adequate accounting system.
    • Used only with negotiated procurements.
    • Appropriate Government surveillance during performance to ensure effective methods and efficient cost controls are used.
    Cost Plus Fixed Fee
    • Level of effort is unknown, and contractor's performance cannot be subjectively evaluated.
    • Provides for payment of a fixed fee. Contractor receives fixed fee regardless of the actual costs they incur during performance.
    • Can be constructed two ways:
      • COMPLETION FORM: clearly defined task with a definite goal and specific end product. Government can order more work without an increase in fee providing the contract estimated cost is increased.
      • TERM FORM: scope of work described in general terms. Contractor obligated only for a specific level of effort for stated period of time.
    • Completion form is preferred over term form.
    • Fee is expressed as percentage of estimated cost at time contract is awarded.
    • Maximum fee limits are provided in FAR 15.903. They are A&E 6%, production and services 10%, and R&D 15%. These limitations are the same for all cost reimbursement type contracts.
    • COMPLETION FORM: research or other development effort when the task can be clearly defined, a definite goal or target is expressed, and a specific end product is required.
    • TERM FORM: research, preliminary exploration or a study when the level of effort is initially unknown can be used for development and test when a CPIF is determined to be impractical.
    • Contract has minimum incentive to control costs.
    • Normally not used for development of major weapon systems once initial exploration contract has determined project feasibility.
    • Costly to administer.
    • Contractor must have an adequate accounting system.
    • Least preferred type because contractor assumes no financial risk.
    • Used only with negotiated procurements.
    Cost and Cost Sharing
    • COST: typically for R&D with nonprofit organizations, educational institutions, and facilities contracts.
    • COST SHARING: development or research projects jointly sponsored by Government and contractor where contractor contemplates a commercial benefit which they accept in lieu of fee.
    • Government pays cost in accordance with cost accounting standards and FAR 31.201. No fee is paid.
    • Must present evidence that there is a high probability that the contractor will receive substantial present or future commercial benefit.
    • Research and development.
    • Facilities (cost type only).
    • Uncertainties in performance.
    • Impossible to estimate firm cost.
    • Used only with negotiated procurements.
    Other Contractual Devices
     Application and Essential ElementsSuitabilityLimitations
    Time and Material
    • Not possible at time of placing contract to estimate extent or duration of the work, or anticipated cost, with any degree of confidence.
    • Calls for provision of direct labor hours at specified hourly rate and material at cost (or some other basis specified in contract).
    • Ceiling price established at time of award.
    • Engineering and design services in conjunction with the production of supplies, engineering design and manufacture of dies, jigs, fixture, gauges, and special machine tools; repair, maintenance and overhaul work to be performed in emergencies.
    • Used only after determination that no other type will serve purpose.
    • Does not encourage effective cost control.
    • Requires almost constant surveillance by Government to insure effective contractor management.
    • Used only with negotiated procurements.
    • Ceiling price required in contract.
    Labor Hours
    • A variant of time and materials contract differing only in that materials are not furnished by contractor.
    • Often used in conjunction with other contract types.
    • Used only for services.
    • Same as time and materials.
    Letter Contract
    • Interest of national defense demands that contractor be given binding commitment so that work can commence immediately and not possible to negotiate definitive contract in sufficient time.
    • Contract includes dates by which parties expect definitized contract to be negotiated. Schedule states that definitization will take place within 180 days of signing of letter contract or prior to the expiration of 40% of production of supplies or performance of work, whichever comes first (in extreme cases additional time may be authorized).
    • Government's maximum liability is no more that 50% of total estimated cost of procurement.
    • Contract price contains ceiling price.
    • Requires competition prior to award when such competition is practical.
    • Manufacture of supplies and performance of services to include preproduction planning and procurement of necessary materials.
    • Gets contractor going quickly.
    • Must have written determination that no other contract type is suitable.
    • Must be superseded by definitized contract at earliest possible date.
    • Maximum government liability until definitization.
    • Used only with negotiated procurements.
    Indefinite Delivery
    • The exact time of delivery is unknown at time of award and a known performance period.
    • There are three types of indefinite delivery contracts:
      • DEFINITE QUANTITY: definite quantity of specified supplies or services for a fixed period of time. Deliveries or performance at designated locations, upon order. Supplies regularly available, or after short lead time.
      • REQUIREMENTS: fills all actual Government requirements of specified supplies or services, of designated activities during specified contract period contract contains estimated total quantity, maximum limit of contractor's liability, and a limit to the government's ordering obligation. Funds are obligated by each order and NOT by the contract.
      • INDEFINITE QUANTITY: contractor provides within stated limits, specified supplies or services, during specified contract period. Contract contains a minimum Government obligation and a stated maximum order quantity and thereafter by each order. Used when it is impossible to determine precise need and Government does not wish to commit itself for more than minimum quantity.
    • Commercial or modified commercial supplies or services when the need is recurring.
    • REQUIREMENTS: flexibility in quantity and delivery schedule. Orders placed only after need materializes.
    • INDEFINITE QUANTITY: flexible quantity and delivery schedule. Orders placed only after need materializes. Limits Government obligation. Minimum stockage levels maintained. Direct shipment to users.
    • Catalog or market prices are used.
    • Used only with fixed price type contracts.
    Blanket Purchase Agreements (BPAs)
    • A BPA is a simplified method of filling anticipated repetitive needs for supplies or services by establishing "charge accounts" with qualified sources of supply. The general scope of the BPA must be consistent with the contractors status under the Walsh-Healey Public Contracts Act as a manufacturer or regular dealer in the type of supplies identified. BPAs eliminate the necessity of issuing individual purchase orders by providing a method in which purchases are made by placing oral calls, or by informal memoranda when more convenient.
    • BPAs should contain the following information:
      • Description of agreement
      • Extent of the obligation
      • Listing of individuals authorized to purchase under the BPA
      • Information to be included on the delivery ticket
      • Invoice requirements
      • Statement that all other terms and conditions are contained in the Federal Supply Schedule contract
    • Information Technology, Engineering Services
    • Maximum use of BPAs is encouraged and recommended when appropriate (i.e. usually over $3,000.00 when the credit card is an option for those purchases or up to $150,000.00 with a 60 day delivery time frame from date of purchase).
    Small Business Innovation Research
    • The Small Business Innovation Research (SBIR) program is a highly competitive program that encourages small business to explore their technological potential and provides the incentive to profit from its commercialization. By including qualified small businesses in the nation's R&D arena, hi-tech innovation is stimulated and the United States gains the entrepreneurial spirit as it meets its specificresearch and development needs.
    • Small businesses must meet certain eligibility criteria to participate in the SBIR program.
      • American-owned and independently operated
      • For-profit
      • Principal researcher employed by business
      • Company size limited to 500 employees
    • Following submission of proposals, agencies make SBIR awards based on small business qualification, degree of innovation, technical merit, and future market potential. Small businesses that receive awards or grants then begin a three-phase program.
      • Phase I is the start-up phase. Awards of up to $80k for approximately 6 months support with an option of up to $70k for an addtional 6 months. This phase is for the exploration of the technical merit or feasibility of an idea or technology.
      • Phase II awards of up to $750,000, for as many as 2 years, expand Phase I results. During this time, the R&D work is performed and the developer evaluates commercialization potential. Only Phase I award winners are considered for Phase II.
      • Phase III is the period during which Phase II innovation moves from the laboratory into the marketplace. No SBIR funds support this phase. The small business must find funding in the private sector or other non-SBIR federal agency funding.
    Non -FAR Contracts/Non-Contractual Mechanisms
    See the Partnerhip page for a list of these types of mechanisms
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