Comparison of Major Contract Types

 



Firm Fixed-Price (FFP)

Fixed-Price Economic Price Adjustment (FPEPA)


Fixed-Price Incentive Firm
(FPIF)


Fixed-Price Award-fee
(FPAF)

Fixed-Price
Prospective Redetermination (FPRP)

Principal Risk to be Mitigated

None. Thus, the contractor assumes all cost risk.

Unstable market prices for labor or material over the life of the contract.

Moderately uncertain

contract labor or material requirements.

Risk that the user will not be fully satisfied because of judgmental acceptance criteria.

Costs of performance after the first year because they cannot be estimated with
confidence.

Use When..

· The requirement is well-defined.

· Contractors are experienced in meeting it.

· Market conditions are stable.

· Financial risks are otherwise insignificant.

The market prices at risk are severable and significant. The risk stems from industry-wide contingencies beyond the contractor's control. The dollars at risk outweigh the administrative burdens of an FPEPA.

A ceiling price can be established that covers the most probable risks inherent in the nature of the work. The proposed profit sharing formula would motivate the contractor to control costs to and meet other objectives.

Judgmental standards can be fairly applied by an Award-fee panel. The potential fee is large enough to both:

· Provide a meaningful incentive.

· Justify related administrative burdens.

The Government needs a firm commitment from the contractor to deliver the supplies or services during subsequent years. The dollars at risk outweigh the administrative burdens of an FPRP.

Elements

A firm fixed-price for each line item or one or more groupings of line items.

A fixed-price, ceiling on upward
adjustment, and a formula for adjusting the price up or down based on:

· Established prices.

· Actual labor or material costs.

· Labor or material indices.

· A ceiling price

· Target cost

· Target profit

· Delivery, quality, and/or other performance targets (optional)

· Profit sharing formula

· A firm fixed-price.

· Standards for evaluating performance.

· Procedures for calculating a fee based on performance against the standards

· Fixed-price for the first period.

· Proposed subsequent periods (at least 12 months apart).

· Timetable for pricing the next period(s).

Contractor is Obliged to:

Provide an acceptable deliverable at the time, place and price specified in the contract.

Provide an acceptable deliverable at the time and place specified in the contract at the adjusted price.

Provide an acceptable deliverable at the time and place specified in the contract at or below the ceiling price.

Perform at the time, place, and the price fixed in the contract.

Provide acceptable deliverables at the time and place specified in the contract at the price established for each period.

Contractor Incentive (other than maximizing goodwill) 1

Generally realizes an additional dollar of profit for every dollar that costs are reduced.

Generally realizes an additional dollar of profit for every dollar that costs are reduced.

Realizes a higher profit by completing the work below the ceiling price and/or by meeting objective performance targets.

Generally realizes an additional dollar of profit for every dollar that costs are reduced; earns an additional fee for satisfying the performance standards.

For the period of performance, realizes an additional dollar of profit for every dollar that costs are reduced.

Typical Application

Commercial supplies and services.

Long-term contracts for commercial supplies during a period of high
inflation

Production of a major system based on a prototype

Perfromance-based service contracts.

Long-term production of spare parts for a major system.

Principal Limitations in FAR Parts 16, 32, 35, and 52

Generally NOT appropriate for R&D.

Must be justified.

Must be justified. Must be negotiated. Contractor must have an adequate
accounting system. Cost data must support targets.

Must be negotiated.

MUST be negotiated. Contractor must have an adequate accounting system that supports the pricing periods. Prompt redeterminations.

Variants

Firm Fixed-price Level of Effort.

 

Successive Targets

 

Retroactive Redetermination

Comparison of Major Contract Types

 

Cost-Plus Incentive-Fee (CPIF)

Cost-Plus
Award-Fee
(CPAF)

Cost-Plus
Fixed-Fee
(CPFF)

Cost or
Cost- Sharing
(C or CS)


Time & Materials (T&M)

Principal Risk to be Mitigated

Highly uncertain and speculative labor hours, labor mix, and/or material requirements (and other things) necessary to perform the contract. The Government assumes the risks inherent in the contract -benefiting if the actual cost is lower than the expected cost-losing if the work cannot be completed within the expected cost of performance.

Use When..

An objective relationship can be established between the fee and such measures of performance as actual costs, delivery dates, performance benchmarks, and the like.

Objective incentive targets are not feasible for critical aspects of performance. Judgmental standards can be fairly applied.1 Potential fee would provide a meaningful incentive.

Relating fee to performance (e.g., to actual costs) would be unworkable or of marginal utility.

· The contractor expects substantial compensating benefits for absorbing part of the costs and/or foregoing fee or

· The vendor is a non-profit entity

No other type of contract is suitable (e.g., because costs are too low to justify an audit of the contractor's indirect expenses).

Elements

· Target cost

· Performance targets (optional)

· A minimum, maximum, and target fee

· A formula for adjusting fee based on actual costs and/or performance

· Target cost

· Standards for evaluating performance

· A base and maximum fee

· Procedures for adjusting fee, based on performance against the standards

· Target cost

· Fixed fee

· Target cost

· If CS, an agreement on the Government's share of the cost.

· No fee

· A ceiling price

· A per-hour labor rate that also covers overhead and profit

· Provisions for reimbursing direct material costs

Contractor is Obliged to:

Make a good faith effort to meet the Government's needs within the estimated cost in the Schedule.

Make a good faith effort to meet the Government's needs within the ceiling price.

Contractor Incentive (other than maximizing goodwill)1

Realizes a higher fee by completing the work at a lower cost and/or by meeting other objective performance targets.

Realizes a higher fee by meeting judgmental performance standards.

Realizes a higher rate of return (i.e., fee divided by total cost) as total cost decreases.

If CS, shares in the cost of providing a deliverable of mutual benefit

 

Typical Application

Research and development of the prototype for a major system.

Large scale research study.

Research study

Joint research with educational institutions.

Emergency repairs to heating plants and aircraft engines.

 

Principal Limitations in FAR Parts 16, 32, 35, and 52

The contractor must have an adequate accounting system. The Government must exercise surveillance during performance to ensure use of efficient methods and cost controls. Must be negotiated. Must be justified. Statutory and regulatory limits on the fees that may be negotiated. Must include the applicable Limitation of Cost clause at FAR 52.232-20 through 23.

Labor rates must be negotiated. MUST be justified. The Government MUST exercise appropriate surveillance to ensure efficient performance.

Variants

 

 

Completion or Term.

 

Labor Hour (LH)