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Primary Functional Area : Contracting
The contract type defines the expectations, obligations, incentives, and rewards for both Government and contractor during an acquisition. The Government contracting officer selects the contract type based on analysis of the most effective way to satisfy mission requirements. Many contract types are available to Government and contractors to provide them with the flexibility they need to acquire/supply the large variety and volume of supplies and services that the Government requires.
Contract types fall into two general categories: fixed-price contracts and cost-reimbursement contracts. Fixed-price contract types provide for a firm price, or in some 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 revision of the contract price under stated circumstances. Government contracting officers are required to use firm-fixed-price or fixed-price with economic price adjustment contracts when acquiring commercial items or when awarding contracts resulting from seal bidding procedures. Under no circumstances is a cost-plus-percentage-of-cost contract type permitted, as this provides little incentive for the contractor to control contract costs.
Cost-reimbursement contract types 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 his/her own risk) without the approval of the Government 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 a fixed-price contract.
The contract type dictates:
- The degree and timing of the responsibility assumed by the contractor for the costs of performance;
- The amount and nature of the profit incentive offered to the contractor for achieving or exceeding specified standards or goals.
The contract type employed during an acquisition presents different benefits for both Government and contractor. The most advantageous contract type from the Government’s perspective is firm-fixed price, as the contractor has full responsibility for the performance costs and resulting profit (or loss). The most advantageous contract type from the contractor’s perspective is cost-plus-fixed-fee, in which the contractor has minimal responsibility for the performance costs and the negotiated fee (profit) is fixed. Between these two extremes are various incentive contracts in which the contractor's responsibility for the costs of performance and the profit or fee incentives are tailored to the uncertainties involved in contract performance.
Selecting the contract type frequently occurs during contract negotiations. The objective is to negotiate a contract type and price (or estimated cost and fee) that will result in reasonable contractor risk and provide the contractor with the greatest incentive for efficient and economical performance. Factors to be considered when selecting the appropriate contract type include:
- Price competition. Effective price competition promotes realistic pricing; a fixed-price contract is in the Government’s interest.
- Price analysis. The accuracy of the price analysis can provide a basis for selecting the contract type.
- Type and complexity of the requirement. Complex requirements, especially those unique to the Government, usually result in greater risk assumption by the Government.
- Urgency of the requirement. If urgency is a primary factor, the Government may choose to assume a greater proportion of risk or offer incentives to ensure timely contract performance.
- Period of performance. In times of economic uncertainty, contracts extending over a relatively long period may require economic price adjustment terms.
- Contractor’s technical capability and financial responsibility. If the contractor is well-positioned to control technical and financial uncertainties, more contract type risk can be shifted to the contractor.
- Adequacy of the contractor’s accounting system. Before agreeing on a contract type other than firm-fixed-price, the Government contracting officer must 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.
- Concurrent contracts. If performance under the proposed contract involves concurrent operations under other contracts, the impact of those contracts should be considered in the context of cost, schedule, and performance risk.
- Extent and nature of proposed subcontracting. If the contractor proposes extensive subcontracting, a contract type reflecting the subcontracting risks to the prime contractor should be selected.
- Acquisition history. Contractor risk usually decreases as the requirement is repetitively acquired, so more contract type risk can be assumed by the contractor.
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Page Information
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Page Views
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46,440
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Created on
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3/23/2009
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Modified on
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6/2/2015
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Last Reviewed
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6/2/2015
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