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Contract Types

Contract Types. Forms of Contracts. Completion – A product is delivered Cost or Fixed Price Product must be delivered Contract completed on delivery and acceptance Term – Level of Effort Amount of labor delivered over time Use personnel and facilities as spelled out. General Rules.

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Contract Types

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  1. Contract Types

  2. Forms of Contracts • Completion – A product is delivered • Cost or Fixed Price • Product must be delivered • Contract completed on delivery and acceptance • Term – Level of Effort • Amount of labor delivered over time • Use personnel and facilities as spelled out

  3. General Rules • Fixed Price • Perform work, deliver product, get paid • Contractor is at risk • Cost • Contractor provides “best effort,” works to a percentage of negotiated costs and then notifies the government

  4. Which Type? • Nature and complexity of effort • Urgency • Period of performance • Competition • Difficulty in defining performance • Availability of data

  5. General Budgeting Rule • PMs must budget to the “most likely price” • Most likely price • Varies by contract type

  6. Cost Reimbursement • Establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed except at his own risk • Provide payment of ALLOWABLE incurred costs to the extent provided in the contract

  7. Cost-Plus-Fixed-Fee • Pays all reasonably incurred and allowable costs plus a fixed dollar amount as a fee • Fee based on the estimated cost of the contract and stays “fixed” regardless of actual costs

  8. CPFF • Appropriate when estimates of cost, performance, and schedule are uncertain • Flexibility is needed • Monitoring needs are high • Change is anticipated

  9. CPFF • Contractors recover costs • Provides least incentive to contractor to control costs and be efficient • Incentive to underrun is because the fixed fee becomes a higher percentage • Trade-offs between cost and technical excellence • Budget to expected cost plus fixed fee

  10. Cost-Plus-Award-Fee • Acts like a CPFF except the fixed fee is 0% or some small base fee • Contractor earns more fee through and “Award Fee Plan” • Award is the unilateral right of the government

  11. CPAF • Appropriate when estimates of cost, performance, and schedule are uncertain • More incentive is desired than CPFF • Administrative capability is available • Award is based on judgment of Award Determining Official • Budget to expected costs plus entire available fee

  12. Cost-Plus-Incentive-Fee • Shift cost risk to contractor • Contractor should assume more risk: • More detailed specs • Less uncertainty • Better able to estimate costs • Contractor now shares in overruns and underruns

  13. CPIF • Negotiate certain items • Target cost • Target fee • Max fee • Min fee • Share line • Regardless of cost the fee is never more than the max, nor less than the min

  14. CPIF • Appropriate when uncertainties can be identified and quantified to some degree • Used to incentivize the contractor when uncertainties still preclude Fixed Price • Used in R&D when uncertainties can be resolved by $$

  15. Share Formula • Expressed as a percentage with the government’s share first • Example: • 80/20 share means that the government pays 80% of overruns or keeps 80% of underruns • Contractor’s fee is reduced by 20 cents for every dollar of overrun • Contractor’s fee is increased by 20 cents for every dollar of underrun

  16. CPIF • Budget to expected cost and fee Fee 100/0 Effective range of Incentive 80/20 Max Target 0/100 Min Cost Target

  17. Fixed Price Contracts • Funding of cost overruns is not possible • Contractor obligated to deliver specific product at the price negotiated regardless of cost • Appropriate when cost, performance, and schedule uncertainty is low of manageable

  18. Firm-Fixed-Price • Contractor must manage cost within price • Highest profit potential • More cost means less profit • Completion form • Can have FP elements of a contract • Level of Effort can be at a fixed price • Budget to final negotiated price

  19. Fixed Price Incentive Firm • Uncertainty too great for FFP • Completion form • Contractor must perform • Contractor performs at own expense when costs exceed ceiling price

  20. FPIF • Negotiate • Target Cost • Target Profit • Ceiling Price • Share line • Profit is more than target if final cost is less than target cost and decreased if final cost is more than target cost • Regardless, the ceiling is firm

  21. FPIF Profit Contract price line Based on Share Target Profit Point of Total Assumption Ceiling Price Cost At PTA Target Cost

  22. FPIF • Budget to the target price of the contract • Budgeting to the ceiling price indicates that the government does not believe that the incentives will change contractor performance

  23. FP w/Economic Price Adjustment • Price negotiate on assumptions regarding economic prices of materials or labor • EPA clause kicks in if assumptions fail and some trigger is set-off • Can be pre-negotiated or based on an index • Budged to anticipated price • Does not include EPA • EPA adjustment should be unlikely

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