Contract Types and Recurring Requirements

1. Contract Types and Recurring Requirements

2. Categories of Contract Types • Fixed-Price contracts • Cost-Reimbursement contracts Government FFP CPFF Low Risk High Risk Contractor CPFF FFP

3. Transition of Contract Types Through the Maturity of a Program Cost CPFF CPIF CPIF/FPIF FPIF/FFP Studies/ Research/ Concept Refinement LRIP Production Deployment Technology Development Sys Dev Follow -On Production SYS Demo VERY BROAD REQUIREMENT…………WELL DEFINED REQUIREMENT

4. 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)

5. The Contracting Process, FFP Vs. Cost Reimbursement • FIXED PRICE • Ktr req’d to deliver product/perform service • Provides for a firm price or in some cases an adjustable price • Contract represents full payment for the work; kr exceeds at own risk • COST REIMBURSEMENT • Ktr req’d to deliver “best effort” • Reasonable, allowable, allocable costs will be reimbursed • Contract amount represents an estimate of total cost; cannot be exceeded without CO approval

6. The Contracting Process, Firm Fixed Price Vs. Cost Reimbursement Contract Types • COST REIMBURSEMENT • Use when technical/cost uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy • Use only when: • 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

7. 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

8. Contract Types - Characteristics • Cost Fixed 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

9. 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

10. 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

11. 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

12. 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

13. Y PO 150 PT 100 PTA PP 50 1000 CT 800 CO 1500 CP 1550 KC X When final cost is $800; Final price is $950 When final cost exceeds KC; Final price is KC Optimistic Profit 75/25 - Under Target Share Ratio 90/10 - Over Target Share Ratio Target Profit Pessimistic Profit COSTS: OPTIMISTIC TARGET PESSIMISTIC CEILING FIXED PRICE INCENTIVE (FIRM TARGET)

14. 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

15. 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.

16. 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

17. 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

18. FPAF - Fixed Price Award Fee Can evaluate a contractor’s performance in: • cost (effective needs) • timeliness • quality of work • cooperation

19. 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

20. 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

21. 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

22. 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

23. Range of Incentive Effectiveness (RIE) $120 Max Fee at Optimistic Cost Max 75/25 Target Fee at Target Cost $70 87.5/12.5 $20 Min Min Fee at Pessimistic Cost $0 800 1,100 900 1,000 1,400 COST ($) Cost-Plus-Incentive-Fee(CPIF) • FEE • • Optimistic Cost Target Cost Pessimistic Cost COST

24. Indefinite Delivery Contracts • Ordering Vehicles • Flexibility • Quantity • Times • Places • Benefits • Types • Definite Quantity • Requirements • Indefinite Delivery

25. 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

26. 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

27. 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

28. Definite Delivery Contracts • Definite Quantity Contract • Exact quantity known • Exact times/places unknown • Funds obligated on contract at time of award

29. 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

30. Types of Agreements • NOT A CONTRACT • Types of Agreements • Basic Agreement • Basic Ordering Agreement • Blanket Purchase Agreement

31. Basic Ordering Agreement The 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

32. Blanket Purchase Agreements • Simplified method of filling anticipated repetitive needs for supplies or services by establishing "charge accounts" with qualified sources of supply. (FAR 13.303) • Establishing BPAs • Usually a local supplier • Place calls for supplies • Pay monthly • Establish more than one BPA to maintain competitive prices unless: 7-21/22

33. 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

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

35. 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

36. 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

37. 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