Differents Types of Contracts

Types of Federal Government Contracts range from firm-fixed price to cost-plus-fixed-fee. Using a wide selection of contract types provides a needed flexibility in acquiring the large variety and volume of supplies and services needed by the Military Services.

Contract types are grouped into categories:

  • Fixed-price contracts:
  • Cost-reimbursement contracts
  • Incentive Contracts
  • Indefinite - Delivery Contracts
  • Time - And-Materials Contracts
  • Labor - Hour Contracts
  • Sealed Bidding
  • Negotiation

Fixed Price Contracts

Fixed-price types of contracts provide for a firm price, or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both. Unless otherwise specified in the contract, the ceiling price or target price is subject to adjustment or the revision of the contract price under stated circumstances. The contracting officer shall use firm-fixed-price or fixed-price with economic price adjustment contracts when acquiring commercial items.

A firm-fixed-priced contract provides for a price that is not subject to any adjustment on the basis of the contractor's cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon contracting parties.

Firm - Fixed-Price, Level - Of - Effort Term Contract

The contractor is required to devote a specified level of effort over a stated period of time for a fixed dollar amount. Usually found in the contracts for investigation or study in s specific research and development area.

Firm - Fixed-Price, Materials Reimbursement Type Contract

Used in purchase of repair and overhaul services to provide a firm fixed-price for services with reimbursement for cost of materials used.

Fixed - Price Contract With Economic Price Adjustment

Use is appropriate to protect both the Government and the contractor when there is serious doubt about the stability of labor or material prices during the life of the contract. Price adjustment provisions can provide for both upward and downward adjustments.

Fixed - Price Contracts

There are several types designed to facilitate proper pricing under varying conditions. Provides for a firm price, or under appropriate circumstances may provide for an adjustable price. Places relatively more cost responsibility on the contractor than on the Government, and makes profit a function of the contractor's ability to manage.

Fixed - Price Incentive Contracts

A fixed-price incentive contract is a fixed-price type contract with provisions for adjustment of profit. The final contract price is based on a comparison between the final negotiated total costs and the total target costs.

Fixed - Price Redetermination

If prospective, provides for a firm fixed-price for an initial period of contract performance, and for prospective redetermination, upward or downward, at stated times during the performance of the contract. If retroactive; provides for a ceiling price and retroactive price re-determination after completion of the contract.

Cost Reimbursement Contracts

Cost-reimbursement type of contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. The contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed (except at own risk) without the approval of the contracting officer.

Cost-reimbursement contracts are suitable for use only when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use any type of fixed price contract.

Cost-Plus-A-Fixed-Fee (CPFF) Contract

Contractor's costs responsibility is minimized, Government's cost responsibility is maximized. The contractor is reimbursed for allowable, allocable costs. Contractor's profit is fixed. Price of the contract (total amount paid to the contractor) is not fixed.

Cost-Plus-Award-Fee (CPAF) Contract

A cost reimbursement type contract with special fee provisions. It provides a means of applying incentives in contracts which are not susceptible to finite measurements of performance necessary for structuring incentive contracts. The fee is in two parts: a fixed amount unrelated to performance, and an award amount related to a subjective judgment of the quality of the contractor's performance.

Cost-Reimbursement Type Contract

There are several types. They provide for the payment to the contractor of allowable costs incurred in the performance of the contract to the extent prescribed in the contract.

Incentive Contracts

Incentive contracts are appropriate when a firm-fixed-price contract is not appropriate and the required supplies or services can be acquired at lower costs, and in certain instances, with improved delivery or technical performance, by relating the amount of profit or fee payable under the contract to the contractor's performance. Incentive contracts are designed to obtain specific acquisition objectives by

  • establishing reasonable and attainable targets that are clearly communicated to the contractor, and
  • including appropriate incentive arrangements designed to
  • motivate contractor efforts that might not otherwise be emphasized, and
  • discourage contractor inefficiency and waste.

Cost - Plus - Incentive-Fee (CPIF) Contract

This is a cost-reimbursement type contract with provision for a fee that is adjusted by formula in accordance with the relationship which total allowable costs bear to target cost.

Indefinite - Delivery Contracts

There are three types of indefinite - delivery contracts: definite-quantity contracts, requirements contracts, and indefinite-quantity contracts. The appropriate type of indefinite-delivery contract may be used to acquire supplies and/or services when the exact times and/or exact quantities of future deliveries are not known at the time of contract award. These are also called delivery order contracts or task order contracts.

Indefinite - Delivery Type Contract

There are several types designed for use when the exact time of delivery is not known.

Indefinite - Quantity Contract

Provides for furnishing of an indefinite quantity, within stated limits, of specified supplies or services, during a specified contract period, with deliveries to be scheduled by the timely placement of orders upon the contractor.

Requirements Contract

An indefinite-delivery type contract that provides for filling all actual purchase requirements of specific supplies or services of designated activities during a specified contract period with deliveries to be scheduled by the timely placement of orders upon the contractor.

Time - And-Materials Contracts

A time-and-materials contract may be used only when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence.

This type of contract provides no positive profit incentive to the contractor for the cost control or labor efficiency.

Therefore, appropriate Government surveillance of contractor performance is required to give reasonable assurance that efficient methods and effective cost controls are being used.

Labor - Hour Contracts

A labor-hour contract is a variation of the time-and-materials contract, differing only in that materials are not supplied by the contractor.

Negotiated Contracts

By definition, a negotiated procurement is any not sealed bidding procurement that is above the simplified acquisition threshold. Negotiated procurement policies and procedures are found at FAR Part 15.

If one of the four conditions for use of sealed bidding is not present, the Contracting Officer will award the contract using competitive negotiation. Contracting by negotiation allows more flexibility in awarding the contract. Unlike sealed bidding, the Contracting Officer (CO) may engage in discussions with offeror's and, in evaluating proposals, he or she may also consider non-cost factors (such as managerial experience, technical approach, and/or past performance).

The negotiating process begins when the Contracting Officer issues a Request for Proposals (RFP).

As in sealed bidding, if the procurement is over $25,000, the Contracting Officer will synopsizes a notice of the proposed contract action in the CBD.

A Request for Proposal must, at a minimum, state the agency's need, anticipated terms and conditions of the contract, information the contractor must include in the proposal, and factors and significant sub-factors that the agency will consider in evaluating the proposals and awarding the contract. All interested parties may then submit proposals.

Evaluation of the proposals includes an assessment of the proposals' relative qualities, based upon the factors and sub-factors specified in the solicitation.

Typically, the Contracting Officer (CO) will evaluate

(a) the offeror's cost or price proposal;
(b) the offeror's past performance on government and commercial contracts;
(c) the offeror's technical approach; and (d) any other identified factors for award. FAR 15.305. During the evaluation period, the CO and source selection team may communicate with the offerors to clarify ambiguous proposed terms. FAR 15.306.

The Contracting Officer may award a negotiated contract without any further negotiations, called "discussions.

However, if the Contracting Officer intends to conduct discussions, he or she will preliminarily identify the offerors that fall within the "competitive range."

The competitive range is comprised of all the most highly rated proposals. FAR 15.306 (c).

To assist in determining the competitive range, the Contracting Officer may engage in limited communications with all offerors. After establishing the competitive range, the Contracting Officer will notify each excluded offeror and proceed to conduct "discussions" with the remaining offerors.

According to the FAR, the "primary objective" of discussions is to maximize the agency's ability "to obtain best value, based on the requirement and the evaluation factors set forth in the evaluation." FAR 15.306(d)(2).

During the discussions, the Contracting Officer must indicate to each offeror the significant weaknesses, deficiencies or other aspects of the proposal that could be altered to enhance the proposal's potential for award. FAR 15.306(d)(3).

The Contracting Officer must not

(1) engage in conduct that favors one offeror over another;
(2) reveal an offeror's technical solution;
(3) reveal an offeror's price without permission;
(4) disclose the names of persons providing information about the offeror's past performance; or
(5) furnish sensitive source selection information. FAR 15.306(e)

After discussions begin, the Contracting Officer may eliminate from consideration any offeror originally in the competitive range but no longer considered among the most highly rated offerors.

Further, the Contracting Officer may request that offerors revise their proposals to clarify any compromises reached during negotiation.

At the conclusion of the discussions, the Contracting Officer will request a final proposal revision from each offeror still in the competitive range.

Finally, the Contracting Officer will undertake a comparative analysis of the final offers in accordance with the evaluation procedures set forth in the RFP, and select the offeror whose proposal is most advantageous to the Government.

The documented award decision should contain an analysis of the trade-offs accomplished by negotiations and the reasons why the awardee's proposal represents the best value to the agency.

The Contracting Officer always has the discretion not to award any contract if he or she deems that course to be in the Government's best interests.

If requested by an unsuccessful offeror, the Contracting Officer will conduct a post-award debriefing during which the bases for the selection decision will be explained.

Sealed Bidding

Sealed bidding is characterized by a rigid adherence to formal procedures. Those procedures aim to provide all bidders an opportunity to compete for the contract on an equal footing. In a sealed bidding acquisition, the agency must award to the responsible bidder who submits the lowest responsive bid (price).

In contrast, competitive negotiation is a more flexible process that enables the agency to conduct discussions, evaluate offers, and award the contract using price and other factors.

Once a federal agency identifies a need, and decides to proceed with an acquisition, it must solicit sealed bids if:

(1) time permits the solicitation, submission and evaluation of sealed bids;
(2) the award will be made on the basis of price and other price-related factors;
(3) it is not necessary to conduct discussions with the responding offerors about their bids;
(4) and there is a reasonable expectation of receiving more than one sealed bid. FAR 6.401

The agency's Contracting Officer (CO) initiates a sealed bidding acquisition by issuance of an Invitation for Bids (IFB). The IFB must describe the Government's requirements clearly, accurately and completely. The FAR and case law prohibit the use of unnecessarily restrictive specifications that might unduly limit the number of bidders.

The agency publicizes the IFB through display in a public place, announcement in newspapers or trade journals, publication in the federal government's Commerce Business Daily (CBD), and by mailing the IFB to those commercial organizations (contractors) on the agency's solicitation mailing list. FAR 14.204; FAR 14.205.

It is critical that contractors submit their bids by the deadline stated in the IFB. A late bid will not be considered for award except where:

(1) the bid was sent to the CO by registered or certified mail at least five days before the bid receipt date;
(2) the Government mishandled the bid after receipt;
(3) the bid was sent to the CO by "Postal Service Next Day Service" two days prior to the bid receipt date; or
(4) the bid was transmitted electronically and received by 5:00 p.m. one working day prior to the bid receipt date. FAR 14.304-1 (a).

All bids received by the time and at the place set for opening are publicly opened and read aloud by the CO. The bids are then recorded on an "Abstract of Offers" (Standard Form 1049) and examined for mistakes. If no mistakes are found, after certain other administrative steps, the CO awards the contract to that responsible bidder who submitted the lowest responsive bid.

A responsive bid is one that contains a definite, unqualified offer to meet the material terms of the IFB. FAR 14.301(a). Conditions, informalities, or defects in the bid that affect the price, quantity, quality, or delivery of the items being acquired by the agency will result in rejection of the bid.

The FAR also requires an affirmative finding of responsibility prior to awarding the contract to the lowest bidder. FAR 14.408-2. To be determined responsible, the prospective awardee must have the ability and capacity to perform the contract. More specifically, the FAR requires a prospective contractor to (1) have adequate financial resources to perform the contract; (2) be able to comply with the required or proposed delivery or performance schedule; (3) have a satisfactory performance record; (4) have a satisfactory record of integrity and business ethics; (5) have the necessary organization, experience, accounting and operational controls, and technical skills; (6) have the necessary production, construction and technical equipment and facilities; and (7) be otherwise qualified and eligible to receive an award under applicable laws and regulations. FAR 9.104-1.

Beyond responsiveness and responsibility, the CO may only consider price and price related factors during evaluation of the bids. FAR 14.201-8; FAR 14.408-1.

Price-related factors include costs or delays to the Government resulting from differences in inspection, locations of supplies, and transportation; taxes; and changes made or requested by a bidder in any provision of the IFB.

After evaluating price and price-related factors, the CO awards the contract to the responsible bidder whose bid is most advantageous to the Government -- i.e ., lowest price. FAR 14.408-1. Award is made by furnishing a properly executed award document to the successful bidder.

Under sealed bidding procedures, only two types of contract price methods may be used:

(a) firm-fixed-price or
(b) fixed price with economic price adjustment.

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