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Comparison of Major Contract Types

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Fixed-Price Economic Price Adjustment (FPEPA). (FAR 16.203)  A FPEPA contract is designed to cope with the economic uncertainties that threaten long-term fixed-price arrangements.

 

The economic price adjustment (EPA) provisions provide for both price increases and decreases to protect the Government and the contractor from the effects of economic changes.  You may use an FPEPA contract in sealed bidding or negotiation when both of the following conditions exist:

 

There is serious doubt concerning the stability of market or labor conditions that will exist during an extended period of contract performance.

 

1. Volatility of the markets for labor and material. The more volatile the market, the greater the benefits that can be derived from FPEPA utilization.

2. Projected contract period. The longer the contract, the greater the contractor's exposure to an uncertain market. FPEPA contracts are normally not used for contracts that will be completed within six months of contract award.

3. The amount of competition expected. If markets are truly volatile, many firms may be unwilling to submit an offer without EPA protection.

4. Dollar value of the contract. The greater the cost risk to the contractor, the greater the benefits that can be derived from an FPEPA contract. In the DoD, adjustments based on actual labor or material cost are generally not used for contracts of $50,000 or less (DFARS 216. 203-4(c)).

5. Contingencies that would otherwise be included in the contract price can be identified and covered separately in the contract.

You must not use an FPEPA contract unless you have determined that it is necessary for one of the following reasons.

· To protect the contractor and the Government against significant fluctuations in labor or material costs.

· To provide for contract price adjustment in the event of changes in the contractor's established prices.

Fixed Price Award Fee (FPAF). (FAR 16.404(a) and DFARS 216.470)  You may use award-fee provisions in fixed-price contracts when the Government wishes to motivate a contractor and other incentives cannot be used because contractor performance cannot be measured objectively. Such contracts must:

· Establish a fixed price (including normal profit) for the effort.  This price will be paid for satisfactory contract performance. Award fee earned (if any) will be paid in addition to that fixed price.

Provide for periodic evaluation of the contractor's performance against an award-fee plan

Do not consider an FPAF unless the following conditions exist:

· The administrative costs of conducting award-fee evaluations are not expected to exceed the expected benefits

· Procedures have been established for conducting the award-fee evaluation

· The award-fee board has been established

· An individual above the level of the contracting officer approved the fixed-price-award-fee incentive

Fixed Price Incentive Fee (FPIF). (FAR 16.403 and 16.403-1(b)) 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.  A FPIF contract is appropriate when:

· A firm fixed-price contract is not suitable

· The nature of the supplies or services being acquired and other circumstances of the acquisition are such that the contractor's assumption of a degree of cost responsibility will provide a positive profit incentive for effective cost control and performance

· The parties can negotiate (at the outset) a firm target cost, target profit, and profit adjustment formula that will provide a fair and reasonable incentive and a ceiling that provides for the contractor to assume an appropriate share of the risk.

If the contract also includes incentives on technical performance and/or delivery, the performance requirements provide a reasonable opportunity for the incentives to have a meaningful impact on the contractor's management of the work.

Do not use an FPIF contract unless:

· The contractor's accounting system is adequate for providing data to support negotiation of final cost and incentive price revision

· Adequate cost or pricing information is available for establishing reasonable firm targets at the time of initial contract negotiation.

Fixed-Price Incentive Successive targets (FPIS).  A more sophisticated and infrequently used FPIS contract means the targets are successive (firmed up later).  The FPIS will not be discussed here.  FPI contracts may be appropriate when other fixed-price type contracts cannot be supported because they place undue risk on the contractor, but where a cost-reimbursement type contract does not provide sufficient incentive for the contractor to control costs. Under an FPI contract, profit is inversely related to cost, so this contracts type provides a positive, calculable incentive to the contractor to control costs. The necessary elements for a FPI contract are:

 

· Target Cost - best estimate of expected cost

· Target Profit - fair profit at target cost

· Share Ratio(s) - to adjust profit after actual costs are documented

· Ceiling Price - to limit the maximum the government may pay

Fixed-Price Redeterminable Pricing Arrangements Contracts. (FAR 16.205 and 16.206)  There are two types of fixed-price contracts that provide for price redetermination without an incentive arrangement, the fixed-price contract with prospective price redetermination (FPRP) and the fixed-ceiling-price contract with retroactive price redetermination (FPRR).

Firm-Fixed-Price, Level-of-Effort (FFPLOE).  A firm-fixed-price, level-of-effort term contract is suitable for investigation or study in a specific research and development area.  The product of the contract is usually a report showing the results achieved through application of the required level of effort.  However, payment is based on the effort expended rather than on the results achieved. This contract type may be used only when—

The work required cannot otherwise be clearly defined;

The required level of effort is identified and agreed upon in advance;

There is reasonable assurance that the intended result cannot be achieved by expending less than the stipulated effort; and

The contract price is $100,000 or less, unless approved by the chief of the contracting office.

Labor-Hour and Time-and-Materials. (FAR Subpart 16.6)  There are two other types of compensation arrangements that do not completely fit the mold of either fixed-price or cost-reimbursement contracts. Labor-hour and time-and-materials contracts both include fixed labor rates but only estimates of the hours required to complete the contract. They are generally considered to most resemble cost-reimbursement contracts because they:

· Do not require the contractor to complete the required contract effort within an agreed-to maximum price; and

Pay the contractor for actual hours worked

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

 

Time and Materials (T&M) Contract.  Contracts are used to acquire supplies or services on the basis of direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, and profit.  Materials are priced at cost, including (if appropriate) material handling costs.  A time and materials contract affords the contractor no positive profit incentive to control material or labor costs effectively.  Yet this contract type is often the only effective one for repair, maintenance, or overhaul work to be performed in emergency situations.  A time and materials contract may be used only after the CCO executes a written determination and finding that no other contract type is suitable.  When the contract includes a ceiling price, its breach is at the contractor's risk.  If the ceiling price is subsequently raised through a contract modification, the contract file documentation must justify the increase.  Although the agreed upon hourly rate per direct labor hour is an important source selection factor, the contractor's technical and managerial skills are more important, to include his reputation for getting the job done.  The contractor will get paid for hours and materials expended.  Therefore, awarding to a marginal producer that charges a cheaper price per hour but expends more hours due to its ineffectiveness may not be the most beneficial solution.

 

Cost-Reimbursement Contracts. (FAR 16.302)  Cost-reimbursement contracts are generally labor intensive and require additional scrutiny in regards to the contractor’s cost accounting system.  As such, these types of contracts are generally large dollar, external support type contracts.  Generally the CCO will not be involved in cost-type efforts; unless deployed as an ACO with DCMA or deployed into security, sustainment, transition, and reconstruction (SSTR) activities.  Under a cost-reimbursement contract, the contractor agrees to provide its best effort to complete the required contract effort.  Cost-reimbursement contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract.  These contracts include an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor cannot exceed (except at its own risk) without the approval of the contracting officer.  Contract types in this category include:

· Cost (CR)

· Cost-sharing (CS)

· Cost-plus-fixed-fee (CPFF)

· Cost-plus-award-fee (CPAF) ( See Incentive Type Contracts Below)

 

Cost-plus-incentive-fee (CPIF) ( See Incentive Type Contracts Below)

 

Cost contracts (CR).  A cost contract is a cost-reimbursement contract in which the contractor receives no fee.  A cost contract may be appropriate for research and development work, particularly with nonprofit educational institutions or other nonprofit organizations, and for facilities contracts.

Cost-sharing contracts (CS).  A cost-sharing contract is a cost-reimbursement contract in which the contractor receives no fee and is reimbursed only for an agreed-upon portion of its allowable costs.  A cost-sharing contract may be used when the contractor agrees to absorb a portion of the costs, in the expectation of substantial compensating benefits.

Cost-Plus-A-Fixed-Fee (CPFF).  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.

Incentive Type Contracts. (FAR Subpart 16.4)  There are three types of incentive contracts that provide for changes in profit/fee following an agreed-to formula-type incentive arrangement: the fixed-price incentive firm target (FPIF) and fixed-price incentive successive targets (FPIS) addressed above under Fixed Price Contract Types; and cost-plus-incentive-fee (CPIF).  There are also two other incentive contracts described in the FAR -- the cost-plus-award-fee (CPAF), addressed below and the fixed-price contract with award fee (FPAF), also addressed above under Fixed Price Contract Types.

 

Incentive contracts are designed to attain specific acquisition objectives by positively rewarding identified contractor achievements exceeding stated target(s) and negatively rewarding contractor failures to attain stated targets. Profit/fee will increase when target(s) are surpassed. They will decline when target(s) are not achieved. Changes in profit/fee will follow an agreed-to formula-type incentive arrangement.

Contracts may include:

· Cost Incentives. Most incentive contracts include only an incentive for controlling cost. You cannot provide for other incentives without also providing a cost incentive or constraint.

· Performance Incentives. Consider technical performance incentives in connection with specific product characteristics or other specific elements of contract performance. When a variety of specific characteristics contribute to the overall contract performance, you must balance the incentives so that no one of them is exaggerated to the detriment of overall contract performance.

Delivery Incentives. Consider delivery incentives when improvement from a required delivery schedule is a significant Government objective. Delivery incentives should specify the application of the incentive structure in the event of delays beyond the control and without the fault or negligence of the contractor or subcontractor.

If you use multiple incentives, structure them in a manner that compels trade-off decisions among the incentive areas. Be careful to avoid using too many incentives. If there are too many incentives, it may be impossible for the contractor to logically consider the trade-offs available and determine the effect on profit/fee.

 

CPIF Contract. (FAR 16.405-1(b)  A cost-plus-incentive-fee contract is appropriate for noncommercial service or development and test programs when:

· A cost-reimbursement contract is necessary; The parties can negotiate a target cost and a fee adjustment formula that are likely to motivate the contractor to manage effectively.

The fee adjustment formula should provide an incentive that will be effective over the full range of reasonably foreseeable variations from target cost.

If a high maximum fee is negotiated, the contract shall also provide for a low minimum fee that may be a zero fee or, in rare cases, a negative fee

The contract may include technical performance incentives when it is highly probable that the required development of a major system is feasible and the Government has established its performance objectives, at least in general terms.  Do not use a CPIF contract unless:

 

The contractor's accounting system is adequate for determining costs applicable to the contract; and Appropriate Government surveillance during performance will provide reasonable assurance that efficient methods and effective cost controls are used. The differences between the CPIF and FPIF pricing arrangements occur when contract costs are substantially above or below target cost. The CPIF contract pricing arrangement must include a minimum fee and a maximum fee that define the contract range of incentive effectiveness (RIE). When costs are above or below the RIE, the Government assumes full cost risk for each additional dollar spent within the funding or cost limits established in the contract. Consider the following final steps when developing a CPIF pricing arrangement.

 

Award-Fee Contract. (FAR 16.405-2(a) An award-fee contract is a form of incentive contract. Unlike the FPIF or CPIF contract, the award-fee contract does not include predetermined targets and automatic fee adjustment formulas. Contractor performance is motivated by fee adjustments based on a subjective evaluation of contractor performance in areas such as quality, timeliness, technical ingenuity, and cost-effective management.

Cost-Plus-Award-Fee (CPAF). (FAR 16.405-2(a)  The most common award-fee contract is the CPAF contract which is 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.