Government Contract Types

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					     Government ContraCt typeS:
     the U.S. Government'S USe of Different
     ContraCt vehiCleS to aCqUire
     GooDS, ServiCeS, anD ConStrUCtion
16   Contract Management | December 2010
                                                    BY Bri an a. Darst anD
                                                         Mark k. rO Berts

practical implications of selecting different contract vehicles and an
 examination of the impact these choices have on contract execution.

                                                    Contract Management | December 2010   17
     Government ContraCt types

     feDeral aGenCieS aCqUirinG ServiCeS, SUpplieS, or ConStrUCtion
     have the ability to ChooSe from a variety of ContraCt typeS.
     SeleCtinG the moSt USefUl ContraCt vehiCle for a proCUrement
     iS DetermineD throUGh an alloCation of CoSt anD performanCe
     riSkS aSSUmeD by the ContraCtor anD Government, aS well aS
     the finanCial inCentiveS that the ContraCtor Can aChieve by
     performinG the ServiCeS or DeliverinG the enD item(S).

     The Federal Acquisition Regulation (FAR)        a means to an end. The ultimate goal of          under each contract type to ensure that
     states that the objective of any negotiation    any acquisition must be to achieve the de-       they can complete a project successfully
     of contract type is to choose a contract        sired result and ensure that a useful item       and make a reasonable profit. Choice of the
     vehicle and price or estimated cost and fee     or service is delivered in a timely manner.      wrong contract type can have devastating
     that “will result in a reasonable contractor    Failure to allocate the performance risks        consequences for the contractor. To quote
     risk and provide the contractor with the        and benefits fairly or to provide for ad-        the Court of Appeals for the Federal Circuit’s
     greatest incentive for efficient and economi-   equate payment/financing arrangements            June 2009 decision in the A-12 default termi-
     cal performance.”1                              could result in a contractor’s inability to      nation (one of the longest-running disputes
                                                     complete performance without significant         in government contracts):
     The FAR identifies many different possible      losses, failure to deliver a useful end item
     contracts types, and the success of any         or deliver service without an adequate                We also observe that the CEOs of both
     procurement depends on the negotiation          remedy, or an unwarranted windfall profit.            [appellants], in a letter dated June 27, 1990,
     of the most appropriate vehicle. Indeed,        Contract vehicles that impose too much                stated that “it was a mistake for the U.S.
     as a recent Memorandum for Acquisition          risk on one party or which do not offer               Navy to stipulate this type of contract and
     Professionals issued by Ashton B. Carter,       sufficient incentives to a contractor to              it was a mistake for the contractors to
     Under Secretary of Defense for Acquisition,     complete the project have the potential to            accept it. Both are at fault.” Alas, the law of
     Technology, and Logistics, states, “Choosing    thwart this underlying goal.                          contracts does not allow us to deviate from
     contract type is an important way of align-                                                           established principles of law and equity. We
     ing the incentives of the government and        While it is important for government of-              therefore hold that the default termination
     the contractor. One size does not fit all.”2    ficials to understand the requirements and            of the A-12 contract is justified.3
                                                     flexibilities available to them, it is equally
     However, remember that agreement by             important for contractors to understand          In short, understanding the different
     both parties on the contract vehicle is only    the risks and benefits that they can achieve     contract types available; the flexibilities and

18   Contract Management | December 2010
                                                                                                              Government ContraCt types

limitations that the regulations, statutes,             including the degree of risk assumed by     UnDerStanDinG the
and case law provide; and the resulting                 each; and
                                                                                                    Different ContraCt
implications to both parties is critical to suc-
cessful execution of a project. This article       ƒ   The acquisition history of the product       typeS available; the
will provide an overview of these topics.              or service.4                                 flexibilitieS anD
                                                                                                    limitationS that the
                                                   No single factor is determinative. Instead,
faCtorS affeCtinG ChoiCe                           selecting the most appropriate contract          reGUlationS, StatUteS,
of ContraCt type                                   type requires the exercise of sound business     anD CaSe law proviDe;
Many factors must be considered when ne-           judgment on the part of both parties.            anD the reSUltinG
                                                                                                    impliCationS to both
gotiating the contract type. Some of these
factors are dependent upon the procuring           FAR Part 16, the Defense FAR Supplement
agency’s needs and abilities; some factors         (DFARS) Part 16, and other agency FAR            partieS iS CritiCal to
are dependent upon the prime contractor’s          supplements provide government officials         SUCCeSSfUl exeCUtion of
                                                                                                    a projeCt.
capabilities; and some factors are depen-          with flexibility to acquire a large variety
dent upon the extent to which one or more          and volume of supplies and services while
third parties (including Congress, other           providing some degree of consistency
government officials, or private entities)         among different federal agencies.5 FAR
may impact the agency’s or contractor’s            Subparts 16.2 through 16.66 describe 11          Although the FAR, DFARS, and other agency
performance. These factors include:                different permissible contract vehicles.         FAR supplements give the parties much
                                                   These vehicles can be subdivided into three      needed flexibility in choosing which types of
ƒ    The degree of price competition;              different families:                              contracts to rely upon during an acquisition,
                                                                                                    this flexibility is not without limitations.
ƒ    The degree to which price analysis can        ƒ    Fixed-price contracts,                      Certain types of contracts are prohibited
     be used to provide realistic pricing, in                                                       by statue or regulation. For example, since
     the alternative;                              ƒ    Cost-reimbursement contracts, and           1940, Congress has prohibited the use of
                                                                                                    cost-plus-a-percentage-of-cost contracts at
ƒ    The ability of the government to place        ƒ    Other contract vehicles that can be         both the prime contract and subcontract
     a reasonable degree of contract respon-            used when the quantity of supplies or       levels.7 FAR Part 12 also prohibits the use
     sibility upon the contractor for cost es-          services cannot be determined at the        of any cost-reimbursement contract when
     timates associated with performance;               time of award (i.e., indefinite-delivery,   acquiring commercial items under FAR
                                                        time-and-materials (T&M), labor-hour        Part 12.8 In addition, the FAR imposes other
ƒ    The type and complexity of the govern-             (LH), and level-of-effort contracts) or     limits or preferences on the use of different
     ment’s requirements;                               where it is necessary for the contractor    contract vehicles, depending on the nature
                                                        to begin performance before the terms       of the product or service being acquired or
ƒ    The urgency of the government’s need               and conditions of the contract can be       the maturity of the system/product being
     to fulfill these requirements;                     negotiated (i.e., letter contracts).        acquired. Some of these limitations and
                                                                                                    preferences appear in FAR Part 16. Other
ƒ    The contract’s stated period of perfor-       Contract types discussed in FAR Part 16          preferences and limitations can be found
     mance and economic uncertainties              range from firm-fixed-price contracts, under     in other parts and subparts of the FAR and
     associated with longer production runs        which the contractor bears full responsibil-     DFARS, including:
     or periods of performance;                    ity for the performance costs and result-
                                                   ing profit (or loss), to cost-plus-fixed-fee     ƒ    FAR Part 12 (“Commercial Item
ƒ    The contractor’s technical and financial      contracts, in which the contractor has                Acquisitions”),9
     capabilities;                                 minimal risk for performance costs and the
                                                   negotiated fee is fixed. Between these two       ƒ    FAR Part 34 (“Major System
ƒ    The adequacy of the contractor’s ac-          extremes are various price/cost redeter-              Acquisitions”),10
     counting system;                              minable, economic price adjustment (EPA),
                                                   and incentive fee/award fee contract types       ƒ    FAR Part 35 and DFARS Part 235
ƒ    The existence of concurrent contracts and     in which the contractor’s risks and respon-           (“Research and Development
     their impact on pricing and performance;      sibility for performance costs and any profit
                                                   or fee incentives offered by the government      ƒ    Contracting”),11
ƒ    The extent and nature of the prime            are tailored to the uncertainties involved in
     contractor’s use of subcontractors,           contract performance.                            ƒ    FAR Part 36 (“Construction”),12 and

                                                                                                             Contract Management | December 2010    19
     Government ContraCt types

         the moSt Common type
         of ContraCt USeD by the
         Government iS the firm-
         fixeD-priCe ContraCt.

     ƒ    FAR Subpart 37.6 (“Performance-Based       in fixed-price contracts, allowing for an         payment of cost vouchers. The allowability
          Acquisitions”).13                          upward or downward adjustment to the              of the contractor’s costs is governed by
                                                     stated contract price upon the occurrence         the contract cost principles set forth in FAR
                                                     of specified contingencies.16 However, there      Part 31. These contract cost principles are
     the fixeD-priCe ContraCt                        are limitations on the use of any such provi-     applicable to:
     family                                          sions, and procurement agencies rarely rely
     The most common type of contract utilized       on them to acquire goods or services.17           ƒ    The pricing of contracts, subcontracts,
     by the government is the firm-fixed-price                                                              and modifications to contracts and
     contract. According to, in       Firm-fixed-price contracts place the maxi-            subcontracts whenever cost analysis
     fiscal year 2010 alone $226.9 billion worth      mum amount of risk and full responsibility            (as defined in FAR Part 15) is performed;
     of services and supplies were acquired using     for all cost and profit upon the contractor
     firm-fixed-price contracts compared to $57.9     and, thus, provide maximum incentives            ƒ    The determination, negotiation, or
     billion in cost-plus-award-fee contracts and     for the contractor to control its costs and           allowance of costs when required by a
     $48.4 billion in cost-plus-fixed-fee con-        perform efficiently.18 This requires the con-         contract clause;
     tracts.14 This represents approximately 51       tractor to be able to project future costs of
     percent of all federal prime contract dollars    performance accurately when establishing         ƒ    All cost-reimbursement contracts; and
     for fiscal year 2010.                            the fixed price. The contractor’s trade-off
                                                      for assumption of this risk is that firm-        ƒ    Contracts terminated for the conve-
     Firm-fixed-price contracts provide for a         fixed-price contracts impose a minimum                nience of the government.19
     firm price that is not subject to adjustment     administrative burden upon the contractor
     based on the contractor’s cost experi-           and restrict the government’s ability to         Also, a cost is considered allowable only
     ence in performing the work. The FAR             direct performance by the contractor. Any        when the cost complies with all of the fol-
     also permits the parties to agree to price       additional costs or schedule delays caused       lowing requirements:
     redetermination provisions (either upward        by such actions could result in a claim for an
     or downward) where it is not possible to         equitable adjustment under the applicable        ƒ    Reasonableness;
     provide a firm-fixed-price for the entire       “Changes” clause, or other remedy-granting
     period of performance. These fixed-price         provisions in the contract.                      ƒ    Allocability;
     redetermination contracts may be either
     fixed-price contracts with prospective price                                                      ƒ    The Cost Accounting Standards, as
     redeterminations or fixed-ceiling-price         the CoSt-reimbUrSement                                 promulgated by the Cost Accounting
     contracts with retroactive price redeter-       ContraCt family                                        Standards Board, if applicable—other-
     mination after completion of the contract,      By contrast, a cost-reimbursement con-                 wise, generally accepted accounting
     based on actual, audited performance costs      tract provides for reimbursement to the                principles and practices appropriate to
     at the time of price revision.15 In addition,   contractor of its allowable costs incurred             the circumstances;
     FAR Part 16 allows the use of EPA provisions    in performance of the contract through the

20   Contract Management | December 2010
     Government ContraCt types

     ƒ    The terms of the contract; and              ƒ    The allocation of cost to final cost        performance are so great that they preclude
                                                           objectives (normally contracts).            the parties from accurately estimating
     ƒ    In the case of contracts with com-                                                           future costs of successful performance.
          mercial (for profit) organizations, any     The CAS may be applicable to other types         As such, they are used frequently when
          limitations set forth in FAR Part 31.2.20   of contracts as well. However, generally         acquiring research and development, the
                                                      they are only applicable to negotiated           principal purpose of which is to advance
     To be considered allowable, and thus, reim-      contracts in excess of $650,000, in which        scientific and technical knowledge and
     bursable, the contractor must be able to         the affected business unit of the contractor     apply that knowledge to achieve agency
     demonstrate that its costs meets all five of     or subcontractor is currently performing         and/or national goals.24 Much like fixed-
     these requirements.                              a CAS-covered contract or subcontract            price contracts, there are different types of
                                                      valued at $7.5 million or more (sometimes        cost-reimbursement contracts, including
     The Cost Accounting Standards (CAS)              referred to as the “trigger contract”).22        cost-sharing contracts, under which the
     referenced above serve as an appendix to         In addition, the regulations set forth a         contractor is reimbursed only for an agreed
     the FAR and are set forth in Title 48 of the     number of exemptions from CAS coverage           upon portion of its allowable costs.
     Code of Federal Regulations at Chapter 99.21     altogether or limit the number of those
     The CAS can be particularly important to         CAS to which the contractor’s accounting         Because the cost estimate or “ceiling” set
     cost reimbursement contracts and subcon-         system must adhere.                              forth in the contract is only an estimate and
     tracts, although some cost reimbursement                                                          the government is obligated to reimburse
     contracts are exempted. The CAS provide          Unlike fixed-price contracts, cost-reimburse-    the contractor its actual, allowable, allo-
     guidance around:                                 ment contracts only establish estimates          cable costs in accordance with the FAR cost
                                                      of the total cost for performance, the           principles and the CAS, cost-reimbursement
     ƒ    The definition of cost,                     purpose of which is for obligating funds and     contracts allow for maximum government
                                                      establishing a ceiling that the contractor       direction and surveillance during contract
     ƒ    The measurement of cost,                    may not exceed without the approval of the       performance. Any contractor performing
                                                      contracting officer, except at its own risk.23   work under a cost-reimbursement contract
     ƒ    The assignment of cost to cost              Cost-reimbursement contracts are particu-        must have an adequate cost accounting sys-
          accounting periods, and                     larly useful when uncertainties involved in      tem to record both direct and indirect costs

22   Contract Management | December 2010
     Government ContraCt types

     associated with the contract and segregate        2) cost-reimbursement incentive type con-           reimbursement effort, but the fee is based
     allowable from unallowable costs.25               tracts. Within these two categories, the FAR        on a combination of: 1) a base amount fixed
                                                       recognizes four types of incentive contracts:       at the inception of the contract; and 2) an
     The trade-off for a contractor performing                                                             award amount that the contractor may earn,
     work under a cost-reimbursement con-              ƒ     Fixed-price incentive contracts (FPI),        in whole or in part, during performance.30
     tract is that unless otherwise specified,                                                             Based on how well a contractor has met or
     cost-reimbursement contract vehicles are          ƒ     Cost-plus-incentive-fee contracts (CPIF),     exceeded the stated goals in the award fee
     only “best efforts” contracts. Specifically,                                                          plan, the contractor is awarded all, a por-
     the “Limitations of Cost” clause (used in         ƒ     Fixed-price contracts with award fees         tion, or none of an award fee pool for the
     fully-funded cost-reimbursement contracts)              (FPAF), and                                   performance period in question. Because
     and “Limitations of Funds” clause (used in                                                            this award fee is not based on a contractual
     incrementally-funded cost-reimbursement           ƒ     Cost-plus-award-fee contracts (CPAF).27       formula, CPAF and FPAF contracts are com-
     contracts) state that the contractor is                                                               monly referred to as “subjective” incentive
     not obligated to continue performance,            There has been a steady increase in the use         type contracts. The contractor has only
     including any actions under the contract’s        of FPAF and CPAF contracts since 1997. Since        limited ability to challenge a fee determina-
     termination clause, or otherwise incur any        2000, the government has awarded $560.8             tion official’s decision as to what portion of
     costs in excess of the estimated costs speci-     billion in CPAF contracts and $21 billion           the award fee the contractor will receive.
     fied unless and until the contracting officer     in FPAF contracts. Indeed, CPAF contracts
     notifies it that the total estimated cost has     have been the second-most widely used                Another important distinction between
     been increased.26 In other words, unless the      contract vehicle each fiscal year during the         fixed-price and cost-reimbursement incen-
     government continues to fund the effort,          last decade representing approximately 13            tive contracts is that, because FPI and
     the government bears the risk that it will        percent of all prime contract dollars spent          FPAF contracts are based on a fixed price, a
     receive nothing for the costs expended to         by the government.28                                 ceiling amount known as the “point of total
     date, except the contractor’s best efforts.                                                            assumption” (PTA) is incorporated. Like any
                                                        The principal difference between these con-         other fixed-price type contract, once the
     The most common type of cost-reimburse-            tracts is that, under incentive-fee contracts,      PTA is reached, the contractor is not entitled
     ment contract is the cost-plus-fixed-fee           the contractor’s profit or fee is adjusted          to any additional compensation. Even if the
     contract, which provides for the payment           upward or downward by application of a for-         contractor’s costs of performance exceed
     of a fixed-fee to the contractor, regardless       mula, based on the relationship of the total        the PTA, the contractor must still complete
     of the allowable or allocable costs incurred       final negotiated cost to the total target cost.     performance and deliver those end item(s)
     by the contractor. The fee is fixed through        That formula is incorporated into the con-          required by the contract. By contrast, the
     negotiation at the inception of the contract.      tract itself. Application of the formula under      cost ceilings set forth in CPIF and CPAF con-
     It includes an allowance for profit, as well as    both the FPI and CPIF contract types is, for        tracts are only estimates and are subject to
     other “unallowable,” albeit legitimate busi-       the most part, a mathematical exercise.             the same “Limitations of Cost” and “Limita-
     ness costs that otherwise cannot be recov-         These contracts are commonly referred to as         tions of Funds” clauses previously discussed.
     ered from the government as an allowable          “objective” incentive type contracts.                CPIF and CPAF contracts, like other cost-
     cost. This fee may only be changed when the                                                            reimbursement contract vehicles, are only
     scope of work under the contract changes or       By contrast, the amount of profit or fee that       “best effort” contracts, and the government
     there is a government termination.                the contractor can earn under FPAF and               must continue to fund the contractor’s ef-
                                                       CPAF contracts is established by a fee deter-        fort if it wants to complete performance.
                                                       mination official within the agency based
     inCentive-type ContraCtS                          on an assessment of how well an agency              Many incentive type contracts are based
     To encourage innovation and efficient effec-      award fee board (which meets at periodic            on the degree of cost savings a contractor
     tive performance, FAR Subpart 16.4 allows         intervals) believes that the contractor has         is able to achieve from those estimated at
     federal agencies to enter into contracts,         achieved or exceeded performance criteria           the time of award. However, it is not un-
     which gives contractors the opportunity           established in an award fee plan. Under a           common for the government to mix and
     to earn monetary or other incentives if the       FPAF contract, a fixed price (which includes        match cost, delivery, and performance
     contractor meets or exceeds certain perfor-       a nominal profit) is established for the            criteria against which a contractor’s
     mance criteria established at the outset of       effort, and this price will be paid for satisfac-   performance will be judged. This is par-
     the contract. These incentives can be based       tory performance. The award fee is earned           ticularly true in the case of FPAF and CPAF
     on cost savings, early deliveries, or en-         if the contractor exceeds the expectations          contracts. The more complex the formula
     hanced performance capabilities. There are        set forth in the award fee plan.29 Under a          or award fee plan is, the more careful
     two basic categories of incentive contracts:      CPAF contract, the contractor is reimbursed         consideration an agency must make of the
     1) fixed-price incentive type contracts and       its allowable costs, as with any other cost-        trade-offs among the different incentive

24   Contract Management | December 2010
     Government ContraCt types

     factors, consistent with the procuring            ƒ    Clarify that a base fee of greater          may make CPAF and FPAF contracts less
     agency’s overall objectives.31                         than “zero” may be included in CPAF         desirable from the contractors’ perspective
                                                            contracts at the contracting officer’s      and less useful for their government cus-
     Of all the contract types discussed in this            discretion;                                 tomers. At the same time, while FPI and CPIF
     article, incentive type contracts have under-                                                      contracts have been used to a lesser extent,
     gone the most significant changes in recent       ƒ    Prescribe narrative ratings to be used      a September 14, 2010, Memorandum for
     years. As their popularity has increased               in award-fee evaluations;                   Acquisition Profession, issued by the Under
     among government officials and contrac-                                                            Secretary of Defense for Acquisition, Tech-
     tors, these contract types have come under        ƒ    Prohibit the issuance of award fees         nology, and Logistics, encourages contract-
     increasing criticism by Congress and the               for any rating period in which the          ing officers to rely more on FPI contracts
     Government Accountability Office.32 In re-             contractor’s performance is judged to       where a firm-fixed-price or CPAF vehicle was
     sponse, in 2007, the Office of Management              be below satisfactory;                      not appropriate. This memorandum sug-
     and Budget’s Office of Federal Procurement                                                         gests a 50/50 share line and a 120 percent
     Policy and the Department of Defense              ƒ    Conduct risk and cost-benefit analyses      target ceiling as a point of departure for
     issued guidance on structuring and using               in determining whether to use an            negotiating these FPI contract vehicles.36
     award fee contracts and award fee plans.               incentive type contract for a particular
     This guidance was designed to minimize the             acquisition;
     use of rollovers of unused award fee pools                                                         aDDitional ContraCt
     to the next award fee period to achieve           ƒ    Include specific content in award-fee       typeS & aGreementS
     more uniform determinations of the portion             plans; and                                  In some cases, it may not be possible for
     of award fee to which a contractor should                                                          a procuring agency to describe its require-
     be entitled for achieving or exceeding            ƒ    Prohibit the “rolling over” of unearned     ments except in general terms. In these
     stated criteria, and to require agencies to es-        fees to subsequent rating periods.          cases, the contracting parties have the
     tablish more objective/measurable criteria                                                         ability to agree to indefinite-delivery type
     that demonstrate some real benefit to the         The FAR now prescribes the use of Table 16-1     contracts that do not procure or specify
     government.33 More recently, on Septem-           in award fee plans, which sets forth adjec-      a firm quantity of goods or services other
     ber 29, 2010, FAR 16.401 was amended to           tival ratings and associated descriptions, as    than a minimum or maximum quantity, and
     require determinations and findings, signed       well as the award-fee pool earned percent-       which provide for the issuance of orders for
     by the head of the contracting activity, for      ages that may be earned by a contractor          delivery of needed supplies or services dur-
     all incentive-fee and award-fee contracts jus-    that achieve these ratings.35                    ing the period of the contract.37 Supplies or
     tifying that the use of this type of contract                                                      services are purchased through the issuance
     is in the best interest of the government.34      While these new regulations continue to          of delivery orders or task orders as the end
     These new regulations now require that            provide contracting officials some flex-         user’s needs arise.38 Most, although not all,
     agencies:                                         ibility in utilizing incentive type contracts,   indefinite-delivery contracts are based on
                                                       establishing viable award fee plans, and         fixed-unit prices.
     ƒ    Link award fees to acquisition objec-        determining the amount of award fee, if any,
          tives in terms of cost, schedule, and        to which the contractor will be entitled, the    There are three different types of indefinite-
          technical performance;                       new limitations imposed by the October           delivery type contracts:
                                                       2009 and September 2010 amendments

26   Contract Management | December 2010
                                                                                                             Government ContraCt types

ƒ    Definite-quantity contracts,                 to order the stated guaranteed minimum           contracts, payments to contractors are
                                                  set forth in the contract. Indeed, in require-   based on the number of labor hours or days
ƒ    Indefinite delivery/indefinite quantity      ments contracts, there is no need to specify     expended. The unit prices or fixed hourly/
     (IDIQ) contracts, and                        a minimum quantity since those contract          daily rates include wages, overhead, general
                                                  vehicles presume that the government will        and administrative expenses, and profits. As
ƒ    Requirements contracts.                      order all of its requirements for a product or   such, like any other indefinite-delivery con-
                                                  service at stated installations from a single    tract, T&M and LH contracts resemble both
All three types are designed to allow the         contractor. Because fixed unit prices are        fixed-price and cost-reimbursement type
government to maintain its stock of supplies      based upon a combination of direct and in-       procurement vehicles. T&M contracts also
or services at minimum levels and permit          direct costs, including overhead and general     include a reimbursable line item for costs of
direct shipment to the end-users. They            and administrative expenses, contractors         materials, where applicable.
generally promote faster deliveries by avoid-     should not simply rely on the government’s
ing delays and unnecessary administrative         estimated quantity to develop their prices.42    Despite the flexibility afforded by T&M and
costs associated with the negotiation of          It may be necessary to attempt to negoti-        LH contracts, these vehicles are considered
individual purchase orders or contracts.39 A      ate “stepladder” quantities or multiple          high-risk contracts for the government.43
requirements contract obligates the govern-       estimated quantities in which the unit           This is because there is little positive incen-
ment to fill all of its actual requirements       prices for each item of supply or hour of        tive for the contractor to control its costs or
for supplies or services that are specified       service is reduced the more the government       promote labor efficiency. The more time/
in the contract, during the contract period,      orders under the contract. Such negotia-         hours expended in support of a project, the
by purchases from the contract awardee.40         tions may be easier in sole-source settings      more the contractor can bill the govern-
Conversely, while an IDIQ contract provides       than competitive procurements. Nonethe-          ment. While the FAR requires that all T&M
that the government will purchase an              less, vendors must be aware that failure         and LH contracts include ceilings over which
indefinite quantity of supplies or services       to order any quantity beyond a stated            the contractor may not expend effort, like
from a contractor during a fixed period of        minimum guarantee could result in erosion        a cost-reimbursement type contract, almost
time, it requires the government to order         of the contractor’s profit margin and even       all T&M and LH contracts are only “best
only a stated minimum quantity of supplies        result in a loss since indirect costs tend not   effort” contracts. The FAR’s “Payment under
or services.41 That is, under an IDIQ contract,   to fluctuate and must be absorbed by the         Time-and-Materials and Labor-Hour Con-
the government is obligated to purchase the       total quantity of items or services actually     tract” clause clearly states: “the contractor
minimum and only the minimum quantity             ordered by the procuring agency.                 shall not be obligated to continue perfor-
specified.                                                                                         mance if to do so would exceed the ceiling
                                                  T&M and LH contracts are varieties of            price…unless and until the price has been
It is common for government officials to          indefinite-delivery contracts and provide        increased….”44
provide estimates of the agency’s total           procuring agencies with the flexibility to ac-
requirements under an IDIQ or requirements        quire recurring services or when the amount      Because of this, T&M and LH contracts are
contract during the solicitation process to       of effort required to deliver an end-item is     among the least-favored types of contract
allow offerors to develop unit prices for the     uncertain. T&M and LH contracts typically        from the government’s perspective.45
goods or services. One potential pitfall of       cover a broad range of services, including       Both the FAR and DFARS place limitations
which contractors must be aware is that           administrative support, maintenance and re-      on the use of these contract vehicles and
typically, the government is only obligated       pair, and intelligence analysis. Under these     sometimes require approvals before they

the moSt Common type of CoSt-reimbUrSement ContraCt iS
the CoSt-plUS-fixeD-fee ContraCt, whiCh proviDeS for the
payment of a fixeD-fee to the ContraCtor, reGarDleSS of the
allowable or alloCable CoStS inCUrreD by the ContraCtor.

                                                                                                            Contract Management | December 2010      27
     Government ContraCt types

     can be used in both the commercial item          that are not identified in the FAR, DFARS, or   desired goals may have their contracts cut
     acquisition and other more traditional           other agency FAR supplements. One of the        short.52 Another innovative contract vehicle
     procurement approaches.46 Indeed, the FAR        most significant innovations is the “award      is the “no-cost” or concession type contract.
     provides that T&M contracts may only be          term” contract. Award term contracts are a      Under a typical no-cost type contract, a ven-
     used “when it is not possible at the time of     form of incentive contracts, but instead of     dor provides a service that a federal agency
     placing the contract to estimate accurately      providing direct monetary rewards to the        would otherwise perform, but instead of
     the extent or duration of the work or to         contractor through additional profit or fee,    receiving compensation from the procuring
     anticipate costs with any reasonable degree      contractors that meet or exceed specified       agency, the vendor charges third parties or
     of confidence.”47                                performance criteria are rewarded through       end users all or a portion of the fees for the
                                                      an extension of the contract’s period of per-   services or end products.53
     In addition to the foregoing, FAR Subpart        formance. Contractors that fail to achieve
     16.748 sets forth policies and procedures
     for using basic agreements, basic order-
     ing agreements, and basic purchasing
     agreements. These “agreements” are not
     contracts themselves.49 Instead, each order
     or contract issued under the agreement is a
     stand-alone contract that incorporates the
     agreement by reference. The benefit of such
     agreements is that they allow the parties
     to finalize a number of clauses, prices, and
     other terms and conditions in advance of
     execution of a contract—streamlining the
     negotiation process and reducing the time
     needed for recurring purchases.

     aDDitional flexibilitieS
     anD innovationS
     FAR Part 16’s contract types and agree-
     ments are not the only permissible types
     of procurement vehicles available to the
     U.S. government and its prime contractors.
     The FAR encourages the use of innovating
     contracting methods by providing that,
     when exercising initiative, members of
     the government’s acquisition team may
     assume that, if a specific strategy, practice,
     policy, or procedure is in the best interests
     of the government and is not addressed
     in the FAR or prohibited by statute or case                  of all the ContraCt
     law, Executive Order, or other regulation,
     that the acquisition strategy is a permis-                    typeS DiSCUSSeD in
     sible exercise of the acquisition team’s
     authority.50 This discretion is not without              thiS artiCle, inCentive
     its limits. FAR 16.102(b) goes on to state
     that contract types not described in this                    type ContraCtS have
     regulation may not be used, unless the
     contracting agency obtains a deviation                        UnDerGone the moSt
     under FAR Subpart 1.4.51
                                                               SiGnifiCant ChanGeS in
     Despite this, there has been a growing
     trend to develop new contract vehicles in
                                                                        reCent yearS.
     recent years, such as new contract vehicles

28   Contract Management | December 2010
     Government ContraCt types

                                                       Pittleman, PC, where he specializes in assist-          8.     Ibid., at §§12.207 and 16.301-3(b).
     In addition, procuring agencies and contrac-
                                                       ing clients with legal issues arising in con-           9.     Ibid., at §12.207 (encouraging the use of firm-
     tors frequently rely on the use of “hybrid”                                                                      fixed-price contracts or fixed-price contracts
                                                       nection with the award and performance of
     contracts, which mix and match different                                                                         with economic price adjustments when acquir-
                                                       their government contracts and subcontracts.
     contract types into a single instrument.54 For                                                                   ing commercial items and requiring certain
                                                       His practice includes bid protests, protest                    determinations and findings before using indef-
     example, under a hybrid contract, certain                                                                        inite-delivery, T&M, or LH contracts). See also
                                                       defenses, claims, internal investigations, mat-
     line items may be priced on a fixed-price                                                                        75 Fed. Reg. 59,195 (Sept. 27, 2010) (proposing
                                                       ters affecting small business contracts, and
     basis, other line items may allow the contrac-                                                                   revisions to 48 C.F.R. Subparts 8.4, 12.2, and
                                                       ethics and regulatory compliance at both the                   16.6. These newly proposed FAR rules are
     tor to invoice the government on a cost-                                                                         intended to implement recommendations in
                                                       prime contract and subcontract levels.
     reimbursement basis, and other line items                                                                        GAO Report No. 09–579 (June 2009), titled
     for provisioning, spare parts, or services may                                                                  ‘‘Minimal Compliance with New Safeguards for
                                                       MARK K. ROBERTS is a partner with the                          Time-and-Materials Contracts for Commercial
     be based on an indefinite-delivery type basis.                                                                   Services and Safeguards Have Not Been
                                                       accounting firm of Argy, Wiltse and Robinson,
     Combining these different contract types          PC, where he specializes in providing consult-
                                                                                                                      Applied to GSA Schedules Program.’’
     into a single instrument can avoid unneces-       ing and litigation support services involving
                                                                                                               10.   48 C.F.R. §§34.005-3 through 34.005-6 (setting
     sary delays and costs associated with issuing                                                                   forth policies on the use of different contract
                                                       regulatory issues relating to contract pricing,               types and pricing approaches during concept
     separate contracts, while taking into account     cost accounting, profitability, and administra-               exploration, demonstration, full-scale develop-
     varying degrees of risk and incentives for dif-   tion. He also assists contractors in assessing
                                                                                                                     ment, and full production phases of major sys-
     ferent phases of the program.                                                                                   tems); Ibid., at §234.004 (regarding the
                                                       the adequacy of their accounting, estimating,                 determination of contract type for develop-
                                                       billing, and purchasing systems.                              ment programs under Department of Defense
     ConClUSion                                        Brian A. Darst and Mark K. Roberts are co-              11.    Ibid., at §§35.006 and 235.006 (discussing the
     Over time, refinements and sophistication         instructors for Federal Publications Seminars.
                                                                                                                      use of cost-reimbursement and fixed-price con-
                                                                                                                      tracts in research and development efforts, as
     of the government’s procurement system            They conduct various classes on government                     well as determination and approval require-
     has led to the development of many differ-        contracts –related topics for federal officials                ments for each). Ibid., at §35.015(b) (encourag-
     ent types of fixed-price and cost-reimburse-                                                                     ing the use of basic agreements with
                                                       and contractor personnel. See www.fedpub-                      educational institutions and nonprofit organi-
     ment contracts. Selecting the most appro-, “Types of Government Con-                        zations conducting research and development
     priate vehicle to acquire goods and services      tracts,” a comprehensive two-day course on                     on behalf of the government).
     is a matter of negotiation and requires the       the practical, legal, accounting, and manage-           12.    Ibid., at §36.207 (establishing a preference for
     exercise of sound business judgment.              ment systems implications in the use of vari-
                                                                                                                     “lump-sum” or fixed-price contracts when
                                                                                                                      acquiring construction) and §36.208 (requiring
                                                       ous contract vehicles, which is among the                      prior approval when using cost-plus-fixed-fee,
     As stated in American Tel. & Tel. Co, v.          seminars that Darst and Roberts teach on                       price-incentive, or other contract types with
     Untied States,55 “the regulations entrust         behalf of Federal Publications Seminars.
                                                                                                                      cost variation or adjustment feature when
                                                                                                                      other contractors are performing at the same
     the contracting officer with especially great
                                                                                                                      work site on a firm-fixed-price, lump sum, or
     discretion, extending even to [his or her]        Send comments about this article to                            unit price basis); ibid., at §216.306(c) (which
     application of procurement regulations.”                                                 restricts the use of cost-plus-fixed-fee con-
                                                                                                                      tracts by the Department of Defense for con-
     The key to negotiating the most appropriate
                                                                                                                      struction funded by annual military
     contract type must take into account sched-                                                                      construction appropriations acts).
     ule, cost, and performance risks that the                                                                 13.    Ibid., at §37.601(b)(3) (encouraging the use of
     contractor or government bears; the incen-        endnotes                                                       incentive type contracts where appropriate).
     tives that can be achieved by efficient and       1.   48 C.F.R. §16.103(a) (2009).
                                                                                                               14.   See (based on
     economical performance; and the degree of                                                                       data reported to by agencies
                                                       2.    Memorandum for Acquisition Professionals re:            as of November 3, 2010).
     oversight needed by the procuring agency               “Better Buying Power: Guidance for Obtaining             provides statistics showing the amount of fed-
     to ensure delivery of a useful product, ser-            Greater Efficiency and Productivity in Defense          eral dollars obligated using different types of
                                                             Spending” (September 14, 2010): 6.                      contracts since fiscal year 2001.
     vice, or building to the end user. A thorough
     understanding of the uses of these vehicles       3.    McDonnell Douglas Corp. v. United States, 567     15.    FAR 16.205 and 16.206.
                                                             F.3d 1340 (Fed. Cir. 2009).
     and limitations—set forth in the FAR, DFARS,                                                              16.    Ibid., at 16.203.
                                                       4.   48 C.F.R. §16.104.
     or other agency FAR supplements—is essen-                                                                 17.   Ibid., at 16.203-3, 16.205-3, and 16.206-3. See
                                                       5.   Note that a number of agency FAR supplements             also DFARS 216.203-4 (limiting the use of EPA
     tial to accomplish this objective. CM
                                                            include additional guidance and limitations on           provisions in Department of Defense contracts
                                                            the use of different contract types that may be          to those acquisitions exceeding the simplified
                                                            used by agency officials to acquire goods, ser-          acquisition threshold and will not be com-
                                                            vices, and construction.                                 pleted within six months after contract award).
     About the Authors                                 6.   48 C.F.R. §§16.201 through 16.603-4.

     BRIAN A. DARST is of counsel to the Fair-         7.    Ibid., at §16.102(c) (citing 10 U.S.C. §2306(a)
                                                             and 41 U.S.C. §254(b)).
     fax, Virginia, law firm of Odin, Feldman &

30   Contract Management | December 2010
                                                                                                                                   Government ContraCt types

18.    Ibid., at 16.202-1; Southern Dredging Co., Inc.,    28.   See (based on             42.   See, e.g., Travel Centre v. Barram, 236 F.3d 1316
       ENG BCA No. 5843, 92-2 BCA §24,886 (denying               data reported to by agencies               (Fed. Cir. 2001) (finding no fault in the govern-
       a request for equitable adjustment due to a 50            as of November 3, 2010).                                   ment’s “less than ideal contracting tactics”
       percent increase in the price of oil following                                                                       when soliciting for an IDIQ contract with a min-
                                                           29.   48 C.F.R. §16.404.
       the invasion of Kuwait, on the basis that the                                                                        imum purchase threshold of $100, had figures
       contractor assumed the risk of fluctuations in      30.    Ibid., at §16.405-2.                                      estimating $2.5 million per year profit from
       the cost of necessary materials and supplies).      31.    Ibid., at §16.402-4.                                      contract, and then the government stopped
                                                                                                                            using the contractor after $500,000 of gross
19.   See, generally, 48 C.F.R. §§31.100 through           32.   See, e.g., GAO, “Guidance on Award Fees Has                sales); IMS Eng’rs-Architects, P.C .v. United
      31.108.                                                    Led To Better Practices but Is Not Consistently            States, 87 Fed. Cl. 541 (2009) (in which the
20.    Ibid., at §31.201-2(a). Office of Management              Applied” (Washington, DC, 2009); GAO, “Use of              court held that a contractor had no termina-
       and Budget Circular No. A-87, titled “Cost Prin-          Award Fees for Achieving Program Outcomes                  tion for convenience claims under its IDIQ con-
       ciples for State and Local Governments,                   Should Be Improved” (Washington, DC, 2007);                tracts since the government had ordered more
       Revised,” sets forth the principles for determin-         GAO, “Minimal Compliance with New Safe-                    than the minimum quantities under those
       ing the allowable costs of contracts and sub-             guards for Time-and-Materials Contracts for                contracts).
       contracts with state, local, and federally                Commercial Services and Safeguards Have Not
                                                                 Been Applied to GSA Schedules Program”               43.   Memorandum for Acquisition Professionals, see
       recognized Indian tribal governments. See 48
                                                                 (Washington, DC, 2009).                                    note 2, at 12 (T&M contracts “are the least
       C.F.R. §31.602 and 2 C.F.R. §§225.5 through
                                                                                                                            preferred contract type for understanding
       225.55 (2010). OMB Circular No. A-21, titled        33.    See OMB Memorandum For Chief Acquisition                  costs”).
      “Cost Principles for Educational Institutions,              Officers, Senior Procurement Executives re:
       Revised,” provides principles for determining             “Appropriate Use of Incentive Contracts”             44.   FAR 52.232-7(d) and 52.212-4(i)(3) (ALT I).
       the costs applicable to research and develop-              (December 4, 2007); Memorandum for Secre-           45.   GAO, “Improved Insight and Controls Needed
       ment, training, and other work performed by                taries of the Military Departments (Attn: Acqui-          over Time-and-Materials Contracts” (Washing-
       educational institutions under contracts with              sition Executives) Directors of Defense Agencies          ton, DC, 2007).
       the government. Finally, OMB Circular No.                  re: “Proper Use of Award Fee Contracts and
       A-122, titled “Cost Principles for Nonprofit                                                                   46.   48 C.F.R. §§12.207(b) and 216.601; see also
                                                                  Award Fee Provisions” (April 24, 2007); Memo-
       Organizations,” sets forth principles for deter-                                                                     Memorandum for Commander, United States
                                                                  randum for Secretaries of the Military Depart-
       mining the costs applicable to work performed                                                                        Special Operations Command, et al. re: “Proper
                                                                  ments (Attn: Acquisition Executives) Directors
       by nonprofit organizations under contracts, as                                                                       Use of Time-and-Materials Contract Types”
                                                                  of Defense Agencies re: “Award Fee Contracts
       well as grants and other agreements, with the                                                                        (March 20, 2008) and 75 Fed. Reg. 59,195 (Sep-
                                                                  (FAR 16, DFARS 215, DFARS 216)” (March 29,
       government. See 48 C.F.R. §31.702 and 2 C.F.R.                                                                       tember 27, 2010).
       §§230.5 through 230.50 (2010). In many                                                                         47.   48 C.F.R. §16.601(c).
       respects, the cost allowability provisions of       34.   48 C.F.R. §16.401(d). This rule was first intro-
       these OMB Circulars are similar to the require-           duced in October 2009 as an interim revision to      48.   Ibid., at §16.701-703; see also ibid., at §216.703
       ments in FAR Subpart 31.2, but differ some-               the FAR. See 74 Fed. Reg. 52,856 (October 14,              (governing the placement of basic ordering
       what due to the unique nature of these                    2009). The final rule was published on Septem-             agreements and the issuance of orders by the
       contracting parties’ accounting systems.                  ber 29, 2010. 75 Fed. Reg. 60,248, 60,261-                 Department of Defense).
                                                                 60,263 (September 29, 2010). This final rule
21.   48 C.F.R. §§9903.101 through 9903.307.                                                                          49.   Ibid., at §16.702(a).
                                                                 made only minor changes to the interim rule.
22.    Ibid., at §9903.201-1.                                                                                         50.   Ibid., at §1.102(d).
                                                           35.   48 C.F.R. §16.401-1(e).
23.   Tital Corp. v. West, 129 F.3d 1479 (Fed. Cir.                                                                   51.   Ibid., at §16.102(b).
                                                           36.   Memorandum for Acquisition Professionals, see
      1997); 48 C.F.R. §16.301-1. There are some                 note 2, at 6–7. This memorandum also sug-            52.   See generally HQ AFMC Directorate of Contract-
      exceptions to this rule, including cases where             gests that defense agencies limit the use of               ing, AFMC Award-Fee & Award–Term Guide
      the cost overrun is unforeseeable (RMI, Inc. v.            T&M and CPAF contracts when acquiring ser-                 (December 2002), available at
      United States, 800 F.2d 246 (Fed. Cir. 1986)),             vices, and that “when robust competition”        ; NASA Pro-
      the government induces the contractor to con-              exists or there is recent competitive pricing his-         curement Information Circular No. 06-02
      tinue working even though funding was not                  tory, agencies acquiring services rely more on             (January 25, 2006), titled “Use of Award Term
      available (American Elec. Labs., Inc. v. United            the use of firm-fixed-price contracts. Ibid., at           Incentive,” available at
      States, 774 F.2d 1110 (Fed. Cir. 1985)), and the           12–13.                                                     office/procurement/regs/pic06-02.html.
      government orders out-of-scope work causing
      the contractor to overrun its ceiling (DSS Serv.,    37.   48 C.F.R. 16.501-2.                                  53.   See, e.g., GAO, “No-Cost Contracts for Event
      Inc. v. General Serv. Admin., CBCA No. 1093                                                                           Planning Services,” B-308968 (November 27,
                                                           38.   See Stratos Mobile Networks U.S.A. v. United
      (April 16, 2009)). Nevertheless, the general                                                                          2007), Public Comm’s Servs., Inc., B-400058;
                                                                 States, 213 F.3d 1375, 1380 (Fed. Cir. 2000). All
      rule is that the contractor may not recover                                                                           B-400058.3 (July 18, 2009).
                                                                 General Services Administration Federal Supply
      costs above the ceiling unless and until the               Schedule contracts, as well as many agency-          54.   48 C.F.R. §16.102(b) states that “[c]ontracts
      contracting officer authorizes the contractor to           issued multiple award contracts, are indefinite-           negotiated under part 15 may be of any type or
      exceed that amount. See also, Advanced Mate-               delivery contracts. Another, more limited type             combination of types that will promote the
      rials, Inc., ASBCA No. 47014, 96-1 BCA ¶28, 002.           of contract that can be used to deal with                  government’s interest, except as restricted in
24.   48 C.F.R. §§35.003 and 35.005.                             uncertainties associated with the quantity of              this part.” See also 10 U.S.C. §2306(a) and 41
                                                                 effort required are the fixed-price and cost-              U.S.C. §254(a)).
25.   CrystaComm, Inc., ASBCA No. 37177, 90-2 BCA                reimbursement level of effort term contracts.
      ¶ 22,692; see also 48 C.F.R. §16.301-3.                                                                         55.   307 F.3d 1374, 1379 (Fed. Cir. 2002).
                                                                 See 48 C.F.R. §16.207-1.
26.   48 C.F.R. §§52.232-20(d)(2) and 52.232-22(f)(2).     39.   48 C.F.R. §16.501-2.
27.    FAR 16.403, 16.404, 16.405-1, and 16.405-2.         40.   Ibid., at §16.503(a); see also Medart, Inc. v.
       The FAR also recognizes two different types of            Austin, 967 F.2d 579, 581 (Fed. Cir. 1992).
       FPI contracts: 1) fixed-price-incentive (firm
       target) contracts and 2) fixed-price-incentive      41.   48 C.F.R. §16.504(a); see also Dot Sys., Inc. v.
       (successive targets) contracts.                           United States, 231 Ct. Cl. 765 (1982).

                                                                                                                                 Contract Management | December 2010             31

Description: Government Contract Types document sample