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Fixed Price Contracts

Fixed Price Contracts. Professional and conscientious contract management is critical to a successful outcome!. Manage the Contractor. Don’t “marry” the contractor Trust but question Their bottom line is the bottom line Your bottom line is a working system Nothing is ever free

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Fixed Price Contracts

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  1. Fixed Price Contracts

  2. Professional and conscientious contract management is critical to a successful outcome!

  3. Manage the Contractor • Don’t “marry” the contractor • Trust but question • Their bottom line is the bottom line • Your bottom line is a working system • Nothing is ever free • The end product is only as good as your requirements

  4. Project Management Potholes Giving away everything Giving the contractor or developer too much control, responsibility, or authority

  5. Fixed Price Contracts

  6. Firm Fixed Price Description • Price not subject to adjustment • Contractor at maximum risk and full responsibility • For profit • For loss • Minimum administrative burden on parties • Contracts from sealed bidding can be only FFP, FP w/EPA Application “A firm-fixed-price contract is suitable for acquiring commercial items or …other supplies or services on the basis of reasonably definite functional or detailed specifications when the contracting officer can establish fair and reasonable prices at the outset…”

  7. Fixed Price Example A requirement exists for 35 portable water dispensers to be placed at field visitor gates, and other locations . An additional 100 are needed on a one time basis for the Open House.

  8. Beware of scope creep

  9. Fixed Price w/Economic Price Adjustment (EPA) Description • Fixed price contract with upward or downward revisions • Based on specified contingencies (not duplicated in base price) • Three general types of Economic Price Adjustments • Established prices • Actual Costs of Labor or Materials • Cost indexes of Labor or Materials • Commercial Items must be procured using FFP or FP w/ EPA Application “A fixed-price with economic price adjustment may be used when (i) there is serious doubt concerning the stability of market or labor conditions that will exist during an extended period of contract performance, and (ii) contingencies that would otherwise be include in the contract price can be identified and covered separately in the contract.” FAR 16.203

  10. Adjustments under Fixed Price with EPA Material & Labor contingencies should be beyond contractor’s control Restricted to “Industry-Wide Contingencies” 1. 2. Or, PM must provide for price adjustment in case of changes in contractor’s established prices PM must determine its necessary to protect the contractor and government 3. 4.

  11. Fixed Price w/EPA Example A requirement for a follow-on production aircraft component contains nickel as one of the key materials in the manufacture of the items. Contract performance is expected to be for a period of 5 years.

  12. Don’t let this happen to your manager! Be the first to inform management of new issues

  13. Incentive Contracts Description • When Firm Fixed Price is not appropriate • Supplies and services can be acquired at lower costs by relating profit to performance • Delivery and Technical performance can be acquired at lower costs by relating profit to performance Incentives used: 1. Cost Incentives 2. Performance Incentives 3. Delivery Incentives 4. Multiple Incentives

  14. Fixed PriceIncentive (Firm & Successive Target) • Firm Target • Successive Target Specifies -Target Cost -Target Profit -Price Ceiling -Profit Adjustment Formula Upon completion & final cost, final price is determined by formula If final price exceeds Price Ceiling, the contractor suffers loss • Negotiate • -Initial Target Cost • -Initial Target Profit • -Profit Adjustment • Formula (floor/ceiling) • -Production Point • -Price Ceiling • At Production Point, negotiate “firm target” • -Firm Target cost • -Firm Target profit • -May use FFIF or FFP FAR 16.403

  15. Fixed Price Incentive Firm (FPIF) Description • The contractor has an opportunity to make a higher profit by completing the work below the ceiling price and/or meeting OBJECTIVE performance targets • Once price exceeds Fixed Price ceiling, the contractor is responsible for all allowable costs over price ceiling FAR 16.4

  16. FIXED PRICE INCENTIVE FIRM (FPIF) • It’s a Fixed Price Incentive “Firm” because a firm target is established at contract award... • FPIF contracts are designed to attain specific cost, technical, or delivery incentives by rewarding contractor achievements in exceeding stated targets and negatively rewarding contractor’s failures to reach stated targets. • Profits will increase when the contractors incurred cost comes in under target! • Profits will decrease when they go over target

  17. BASIC ELEMENTS • Target Cost • Target Profit • Profit Adjustment Formula(s) • Ceiling Price • Point of Total Assumption

  18. Steps to Set-Up FPIF Contracts Step 1 - Develop a target cost objective Step 2 - Develop a target profit objective Step 3 - Develop a pessimistic cost Step 4 - Develop profit at pessimistic cost Step 5 - Set ceiling price Step 6 - Develop optimistic cost Step 7 - Develop profit at optimistic cost Step 8 - Calculate under target share ratio Step 9 - Calculate over target share ratio

  19. POINT OF TOTAL ASSUMPTION (PTA) • Cost at which the contractor assumes total responsibility for each additional dollar of contract cost • PTA is equal to the pessimistic cost estimate • PTA formula can be used to calculate pessimistic cost if unknown • Once PTA is approached, surveillance must be increased to ensure completion of contract and quality of remaining items due • At PTA, the contract is now just like a FFP contract! Share ratios are immaterial. • PTA=((Ceiling Price – Target Price)/Buyer’s share ratio) + Target Cost

  20. FPIF Formulas

  21. Fixed Price Incentive Firm (FPIF) Example

  22. Steps to plot: • Solve to get PTA. • Take cost on x-axis • Take profit on y-axis. • Plot price ceiling first (on x-axis). • Plot Target value. • Plot PTA. • Join price ceiling with PTA. • PTA with Target value.

  23. Fixed Price Incentive Firm (FPIF) Profit (Dollars) 70/30 Share Line $1,200,000 $850,000 0/100 Share Line PTA Target $400,000 Price Ceiling Profit $0 Loss $8 M $9 M $10 M $11 M $12 M Cost (Dollars)

  24. Fixed Price Incentive Firm Example A requirement exists for a new grounds maintenance contract. Two of the items included in the requirement are snow removal during the winter months and debris collection in the summer months when the area is subject to a lot of high wind storms. You want to include a pricing arrangement that will motivate the contractor to respond quickly to clear snowdrifts and remove limbs in the street.

  25. Fixed Price w/Award Fees (FPAF) Description • Establish a fixed price (including normal profit) • Provide periodic evaluation of contractor performance against award fee plan • Issue solicitation only when • Expected benefits exceed administrative costs • Established award-fee evaluation procedures/board • Approval at the appropriate level is required Application “Award-fee provisions may be used in fixed-price contracts when the Government wishes to motivate a contractor and other incentives cannot be used because contractor performance cannot be measuredobjectively.”

  26. Fixed Price Award Fee (FPAF) ELEMENTS Base Fee = not allowed in FPAF Award Fee = Extra earned for performance of evaluation factors Award Fee Plan = “Living Document” Award Fee Board = Management team which evaluates factors, prepares report Fee Determining Official = Final Decision

  27. Fixed Price w/Award Fee Example A requirement is being worked for a copier maintenance contract. The requirements are pretty cut and dry but in the past end users have not been particularly happy with the service they’ve received. The contractor always leaves a mess when they are finished and seem to show up to perform maintenance when demand for the copier is greatest, creating a backlog of copying. You think potential awardees would be more responsive to more money for better service.

  28. Fixed Price w/(Prospective/Retroactive) Price Re-determination • Prospective (Future) • Retroactive (Past) • Fixed Ceiling price • Award after fair billable rate is negotiated • Price re-determined within ceiling after completion of contract • Useful for R&D >$100K • Price Ceiling established to allow contractor to share risk • FFP for initial delivery period can be established • Re-determine price at every 12 months (or more) during future performance • Price Ceiling may be established to allow contractor so share risk

  29. Firm Fixed Price, Level of Effort Description • Contractor provides a specified “level of effort” • Over a stated period of time • Work required can only be stated in general terms • Contract amount less than $100K (unless higher approved) • Agreed that result cannot be achieved with less effort • Level of Effort agreed upon in advance Application “A firm-fixed price, level-of-effort term contract is suitable for investigation or study of a specific research and development area. The product of the contract is usually a report showing the results achieved through the application of the required level of effort. However, payment is based on the effort expended rather than on the results achieved.” FAR 16.207

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