government contract types - National Contract Management

Transcription

Government Contract Types:
the U.S. Government's Use of Different
C o n t r a c t V e h i c l e s t o Ac q u i r e
G o o ds , S e r v i c e s , a n d C o n s t r uc t i o n
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.
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)
states that the objective of any negotiation
of contract type is to choose a contract
vehicle and price or estimated cost and fee
that “will result in a reasonable contractor
risk and provide the contractor with the
greatest incentive for efficient and economical performance.”1
The FAR identifies many different possible
contracts types, and the success of any
procurement depends on the negotiation
of the most appropriate vehicle. Indeed,
as a recent Memorandum for Acquisition
Professionals issued by Ashton B. Carter,
Under Secretary of Defense for Acquisition,
Technology, and Logistics, states, “Choosing
contract type is an important way of aligning the incentives of the government and
the contractor. One size does not fit all.”2
However, remember that agreement by
both parties on the contract vehicle is only
18
a means to an end. The ultimate goal of
any acquisition must be to achieve the desired result and ensure that a useful item
or service is delivered in a timely manner.
Failure to allocate the performance risks
and benefits fairly or to provide for adequate payment/financing arrangements
could result in a contractor’s inability to
complete performance without significant
losses, failure to deliver a useful end item
or deliver service without an adequate
remedy, or an unwarranted windfall profit.
Contract vehicles that impose too much
risk on one party or which do not offer
sufficient incentives to a contractor to
complete the project have the potential to
thwart this underlying goal.
under each contract type to ensure that
they can complete a project successfully
and make a reasonable profit. Choice of the
wrong contract type can have devastating
consequences for the contractor. To quote
the Court of Appeals for the Federal Circuit’s
June 2009 decision in the A-12 default termination (one of the longest-running disputes
in government contracts):
We also observe that the CEOs of both
[appellants], in a letter dated June 27, 1990,
stated that “it was a mistake for the U.S.
Navy to stipulate this type of contract and
it was a mistake for the contractors to
accept it. Both are at fault.” Alas, the law of
contracts does not allow us to deviate from
established principles of law and equity. We
While it is important for government officials to understand the requirements and
flexibilities available to them, it is equally
important for contractors to understand
the risks and benefits that they can achieve
therefore hold that the default termination
of the A-12 contract is justified.3
In short, understanding the different
contract types available; the flexibilities and
limitations that the regulations, statutes,
and case law provide; and the resulting
implications to both parties is critical to successful execution of a project. This article
will provide an overview of these topics.
Factors Affecting Choice
of Contract Type
Many factors must be considered when negotiating the contract type. Some of these
factors are dependent upon the procuring
agency’s needs and abilities; some factors
are dependent upon the prime contractor’s
capabilities; and some factors are dependent upon the extent to which one or more
third parties (including Congress, other
government officials, or private entities)
may impact the agency’s or contractor’s
performance. These factors include:
including the degree of risk assumed by
each; and

The acquisition history of the product
or service.4
No single factor is determinative. Instead,
selecting the most appropriate contract
type requires the exercise of sound business
judgment on the part of both parties.
FAR Part 16, the Defense FAR Supplement
(DFARS) Part 16, and other agency FAR
supplements provide government officials
with flexibility to acquire a large variety
and volume of supplies and services while
providing some degree of consistency
among different federal agencies.5 FAR
Subparts 16.2 through 16.66 describe 11
different permissible contract vehicles.
These vehicles can be subdivided into three
different families:

The degree of price competition;

The degree to which price analysis can
be used to provide realistic pricing, in
the alternative;

Fixed-price contracts,

Cost-reimbursement contracts, and

The ability of the government to place
a reasonable degree of contract responsibility upon the contractor for cost estimates associated with performance;

The type and complexity of the government’s requirements;

The urgency of the government’s need
to fulfill these requirements;
Other contract vehicles that can be
used when the quantity of supplies or
services cannot be determined at the
time of award (i.e., indefinite-delivery,
time-and-materials (T&M), labor-hour
(LH), and level-of-effort contracts) or
where it is necessary for the contractor
to begin performance before the terms
and conditions of the contract can be
negotiated (i.e., letter contracts).

The contract’s stated period of performance and economic uncertainties
associated with longer production runs
or periods of performance;

The contractor’s technical and financial
capabilities;

The adequacy of the contractor’s accounting system;

The existence of concurrent contracts and
their impact on pricing and performance;

The extent and nature of the prime
contractor’s use of subcontractors,
Contract types discussed in FAR Part 16
range from firm-fixed-price contracts, under
which the contractor bears full responsibility for the performance costs and resulting profit (or loss), to cost-plus-fixed-fee
contracts, in which the contractor has
minimal risk for performance costs and the
negotiated fee is fixed. Between these two
extremes are various price/cost redeterminable, economic price adjustment (EPA),
and incentive fee/award fee contract types
in which the contractor’s risks and responsibility for performance costs and any profit
or fee incentives offered by the government
are tailored to the uncertainties involved in
contract performance.
Understanding the
different contract
types available; the
flexibilities and
limitations that the
regulations, statutes,
and case law provide;
and the resulting
implications to both
parties is critical to
successful execution of
a project.
Although the FAR, DFARS, and other agency
FAR supplements give the parties much
needed flexibility in choosing which types of
contracts to rely upon during an acquisition,
this flexibility is not without limitations.
Certain types of contracts are prohibited
by statue or regulation. For example, since
1940, Congress has prohibited the use of
cost-plus-a-percentage-of-cost contracts at
both the prime contract and subcontract
levels.7 FAR Part 12 also prohibits the use
of any cost-reimbursement contract when
acquiring commercial items under FAR
Part 12.8 In addition, the FAR imposes other
limits or preferences on the use of different
contract vehicles, depending on the nature
of the product or service being acquired or
the maturity of the system/product being
acquired. Some of these limitations and
preferences appear in FAR Part 16. Other
preferences and limitations can be found
in other parts and subparts of the FAR and
DFARS, including:

FAR Part 12 (“Commercial Item
Acquisitions”),9

FAR Part 34 (“Major System
Acquisitions”),10

FAR Part 35 and DFARS Part 235
(“Research and Development

Contracting”),11

FAR Part 36 (“Construction”),12 and
19
The most common type
of contract uSed by the
government is the firmfixed-price contract.

FAR Subpart 37.6 (“Performance-Based
Acquisitions”).13
The Fixed-Price Contract
Family
The most common type of contract utilized
by the government is the firm-fixed-price
contract. According to USAspending.gov, in
fiscal year 2010 alone $226.9 billion worth
of services and supplies were acquired using
firm-fixed-price contracts compared to $57.9
billion in cost-plus-award-fee contracts and
$48.4 billion in cost-plus-fixed-fee contracts.14 This represents approximately 51
percent of all federal prime contract dollars
for fiscal year 2010.
Firm-fixed-price contracts provide for a
firm price that is not subject to adjustment
based on the contractor’s cost experience in performing the work. The FAR
also permits the parties to agree to price
redetermination provisions (either upward
or downward) where it is not possible to
provide a firm-fixed-price for the entire
period of performance. These fixed-price
redetermination contracts may be either
fixed-price contracts with prospective price
redeterminations or fixed-ceiling-price
contracts with retroactive price redetermination after completion of the contract,
based on actual, audited performance costs
at the time of price revision.15 In addition,
FAR Part 16 allows the use of EPA provisions
20
in fixed-price contracts, allowing for an
upward or downward adjustment to the
stated contract price upon the occurrence
of specified contingencies.16 However, there
are limitations on the use of any such provisions, and procurement agencies rarely rely
on them to acquire goods or services.17
Firm-fixed-price contracts place the maximum amount of risk and full responsibility
for all cost and profit upon the contractor
and, thus, provide maximum incentives
for the contractor to control its costs and
perform efficiently.18 This requires the contractor to be able to project future costs of
performance accurately when establishing
the fixed price. The contractor’s trade-off
for assumption of this risk is that firmfixed-price contracts impose a minimum
administrative burden upon the contractor
and restrict the government’s ability to
direct performance by the contractor. Any
additional costs or schedule delays caused
by such actions could result in a claim for an
equitable adjustment under the applicable
“Changes” clause, or other remedy-granting
provisions in the contract.
The Cost-Reimbursement
Contract Family
By contrast, a cost-reimbursement contract provides for reimbursement to the
contractor of its allowable costs incurred
in performance of the contract through the
payment of cost vouchers. The allowability
of the contractor’s costs is governed by
the contract cost principles set forth in FAR
Part 31. These contract cost principles are
applicable to:

The pricing of contracts, subcontracts,
and modifications to contracts and
subcontracts whenever cost analysis
(as defined in FAR Part 15) is performed;

The determination, negotiation, or
allowance of costs when required by a
contract clause;

All cost-reimbursement contracts; and

Contracts terminated for the convenience of the government.19
Also, a cost is considered allowable only
when the cost complies with all of the following requirements:

Reasonableness;

Allocability;

The Cost Accounting Standards, as
promulgated by the Cost Accounting
Standards Board, if applicable—otherwise, generally accepted accounting
principles and practices appropriate to
the circumstances;

The terms of the contract; and

In the case of contracts with commercial (for profit) organizations, any
limitations set forth in FAR Part 31.2.20
To be considered allowable, and thus, reimbursable, the contractor must be able to
demonstrate that its costs meets all five of
these requirements.
The Cost Accounting Standards (CAS)
referenced above serve as an appendix to
the FAR and are set forth in Title 48 of the
Code of Federal Regulations at Chapter 99.21
The CAS can be particularly important to
cost reimbursement contracts and subcontracts, although some cost reimbursement
contracts are exempted. The CAS provide
guidance around:
22

The definition of cost,

The measurement of cost,

The assignment of cost to cost
accounting periods, and

The allocation of cost to final cost
objectives (normally contracts).
The CAS may be applicable to other types
of contracts as well. However, generally
they are only applicable to negotiated
contracts in excess of $650,000, in which
the affected business unit of the contractor
or subcontractor is currently performing
a CAS-covered contract or subcontract
valued at $7.5 million or more (sometimes
referred to as the “trigger contract”).22
In addition, the regulations set forth a
number of exemptions from CAS coverage
altogether or limit the number of those
CAS to which the contractor’s accounting
system must adhere.
Unlike fixed-price contracts, cost-reimbursement contracts only establish estimates
of the total cost for performance, the
purpose of which is for obligating funds and
establishing a ceiling that the contractor
may not exceed without the approval of the
contracting officer, except at its own risk.23
Cost-reimbursement contracts are particularly useful when uncertainties involved in
performance are so great that they preclude
the parties from accurately estimating
future costs of successful performance.
As such, they are used frequently when
acquiring research and development, the
principal purpose of which is to advance
scientific and technical knowledge and
apply that knowledge to achieve agency
and/or national goals.24 Much like fixedprice contracts, there are different types of
cost-reimbursement contracts, including
cost-sharing contracts, under which the
contractor is reimbursed only for an agreed
upon portion of its allowable costs.
Because the cost estimate or “ceiling” set
forth in the contract is only an estimate and
the government is obligated to reimburse
the contractor its actual, allowable, allocable costs in accordance with the FAR cost
principles and the CAS, cost-reimbursement
contracts allow for maximum government
direction and surveillance during contract
performance. Any contractor performing
work under a cost-reimbursement contract
must have an adequate cost accounting system to record both direct and indirect costs
associated with the contract and segregate
allowable from unallowable costs.25
The trade-off for a contractor performing
work under a cost-reimbursement contract is that unless otherwise specified,
cost-reimbursement contract vehicles are
only “best efforts” contracts. Specifically,
the “Limitations of Cost” clause (used in
fully-funded cost-reimbursement contracts)
and “Limitations of Funds” clause (used in
incrementally-funded cost-reimbursement
contracts) state that the contractor is
not obligated to continue performance,
including any actions under the contract’s
termination clause, or otherwise incur any
costs in excess of the estimated costs specified unless and until the contracting officer
notifies it that the total estimated cost has
been increased.26 In other words, unless the
government continues to fund the effort,
the government bears the risk that it will
receive nothing for the costs expended to
date, except the contractor’s best efforts.
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. The fee is fixed through
negotiation at the inception of the contract.
It includes an allowance for profit, as well as
other “unallowable,” albeit legitimate business costs that otherwise cannot be recovered from the government as an allowable
cost. This fee may only be changed when the
scope of work under the contract changes or
there is a government termination.
Incentive-Type Contracts
To encourage innovation and efficient effective performance, FAR Subpart 16.4 allows
federal agencies to enter into contracts,
which gives contractors the opportunity
to earn monetary or other incentives if the
contractor meets or exceeds certain performance criteria established at the outset of
the contract. These incentives can be based
on cost savings, early deliveries, or enhanced performance capabilities. There are
two basic categories of incentive contracts:
1) fixed-price incentive type contracts and
24
2) cost-reimbursement incentive type contracts. Within these two categories, the FAR
recognizes four types of incentive contracts:

Fixed-price incentive contracts (FPI),

Cost-plus-incentive-fee contracts (CPIF),

Fixed-price contracts with award fees
(FPAF), and

Cost-plus-award-fee contracts (CPAF).27
There has been a steady increase in the use
of FPAF and CPAF contracts since 1997. Since
2000, the government has awarded $560.8
billion in CPAF contracts and $21 billion
in FPAF contracts. Indeed, CPAF contracts
have been the second-most widely used
contract vehicle each fiscal year during the
last decade representing approximately 13
percent of all prime contract dollars spent
by the government.28
The principal difference between these contracts is that, under incentive-fee contracts,
the contractor’s profit or fee is adjusted
upward or downward by application of a formula, based on the relationship of the total
final negotiated cost to the total target cost.
That formula is incorporated into the contract itself. Application of the formula under
both the FPI and CPIF contract types is, for
the most part, a mathematical exercise.
These contracts are commonly referred to as
“objective” incentive type contracts.
By contrast, the amount of profit or fee that
the contractor can earn under FPAF and
CPAF contracts is established by a fee determination official within the agency based
on an assessment of how well an agency
award fee board (which meets at periodic
intervals) believes that the contractor has
achieved or exceeded performance criteria
established in an award fee plan. Under a
FPAF contract, a fixed price (which includes
a nominal profit) is established for the
effort, and this price will be paid for satisfactory performance. The award fee is earned
if the contractor exceeds the expectations
set forth in the award fee plan.29 Under a
CPAF contract, the contractor is reimbursed
its allowable costs, as with any other cost-
reimbursement effort, but the fee is based
on a combination of: 1) a base amount fixed
at the inception of the contract; and 2) an
award amount that the contractor may earn,
in whole or in part, during performance.30
Based on how well a contractor has met or
exceeded the stated goals in the award fee
plan, the contractor is awarded all, a portion, or none of an award fee pool for the
performance period in question. Because
this award fee is not based on a contractual
formula, CPAF and FPAF contracts are commonly referred to as “subjective” incentive
type contracts. The contractor has only
limited ability to challenge a fee determination official’s decision as to what portion of
the award fee the contractor will receive.
Another important distinction between
fixed-price and cost-reimbursement incentive contracts is that, because FPI and
FPAF contracts are based on a fixed price, a
ceiling amount known as the “point of total
assumption” (PTA) is incorporated. Like any
other fixed-price type contract, once the
PTA is reached, the contractor is not entitled
to any additional compensation. Even if the
contractor’s costs of performance exceed
the PTA, the contractor must still complete
performance and deliver those end item(s)
required by the contract. By contrast, the
cost ceilings set forth in CPIF and CPAF contracts are only estimates and are subject to
the same “Limitations of Cost” and “Limitations of Funds” clauses previously discussed.
CPIF and CPAF contracts, like other costreimbursement contract vehicles, are only
“best effort” contracts, and the government
must continue to fund the contractor’s effort if it wants to complete performance.
Many incentive type contracts are based
on the degree of cost savings a contractor
is able to achieve from those estimated at
the time of award. However, it is not uncommon for the government to mix and
match cost, delivery, and performance
criteria against which a contractor’s
performance will be judged. This is particularly true in the case of FPAF and CPAF
contracts. The more complex the formula
or award fee plan is, the more careful
consideration an agency must make of the
trade-offs among the different incentive
factors, consistent with the procuring
agency’s overall objectives.31
Of all the contract types discussed in this
article, incentive type contracts have undergone the most significant changes in recent
years. As their popularity has increased
among government officials and contractors, these contract types have come under
increasing criticism by Congress and the
Government Accountability Office.32 In response, in 2007, the Office of Management
and Budget’s Office of Federal Procurement
Policy and the Department of Defense
issued guidance on structuring and using
award fee contracts and award fee plans.
This guidance was designed to minimize the
use of rollovers of unused award fee pools
to the next award fee period to achieve
more uniform determinations of the portion
of award fee to which a contractor should
be entitled for achieving or exceeding
stated criteria, and to require agencies to establish more objective/measurable criteria
that demonstrate some real benefit to the
government.33 More recently, on September 29, 2010, FAR 16.401 was amended to
require determinations and findings, signed
by the head of the contracting activity, for
all incentive-fee and award-fee contracts justifying that the use of this type of contract
is in the best interest of the government.34
These new regulations now require that
agencies:

26
Link award fees to acquisition objectives in terms of cost, schedule, and
technical performance;

Clarify that a base fee of greater
than “zero” may be included in CPAF
contracts at the contracting officer’s
discretion;

Prescribe narrative ratings to be used
in award-fee evaluations;

Prohibit the issuance of award fees
for any rating period in which the
contractor’s performance is judged to
be below satisfactory;

Conduct risk and cost-benefit analyses
in determining whether to use an
incentive type contract for a particular
acquisition;

Include specific content in award-fee
plans; and

Prohibit the “rolling over” of unearned
fees to subsequent rating periods.
The FAR now prescribes the use of Table 16-1
in award fee plans, which sets forth adjectival ratings and associated descriptions, as
well as the award-fee pool earned percentages that may be earned by a contractor
that achieve these ratings.35
While these new regulations continue to
provide contracting officials some flexibility in utilizing incentive type contracts,
establishing viable award fee plans, and
determining the amount of award fee, if any,
to which the contractor will be entitled, the
new limitations imposed by the October
2009 and September 2010 amendments
may make CPAF and FPAF contracts less
desirable from the contractors’ perspective
and less useful for their government customers. At the same time, while FPI and CPIF
contracts have been used to a lesser extent,
a September 14, 2010, Memorandum for
Acquisition Profession, issued by the Under
Secretary of Defense for Acquisition, Technology, and Logistics, encourages contracting officers to rely more on FPI contracts
where a firm-fixed-price or CPAF vehicle was
not appropriate. This memorandum suggests a 50/50 share line and a 120 percent
target ceiling as a point of departure for
negotiating these FPI contract vehicles.36
Additional Contract
Types & Agreements
In some cases, it may not be possible for
a procuring agency to describe its requirements except in general terms. In these
cases, the contracting parties have the
ability to agree to indefinite-delivery type
contracts that do not procure or specify
a firm quantity of goods or services other
than a minimum or maximum quantity, and
which provide for the issuance of orders for
delivery of needed supplies or services during the period of the contract.37 Supplies or
services are purchased through the issuance
of delivery orders or task orders as the end
user’s needs arise.38 Most, although not all,
indefinite-delivery contracts are based on
fixed-unit prices.
There are three different types of indefinitedelivery type contracts:

Definite-quantity contracts,

Indefinite delivery/indefinite quantity
(IDIQ) contracts, and

Requirements contracts.
All three types are designed to allow the
government to maintain its stock of supplies
or services at minimum levels and permit
direct shipment to the end-users. They
generally promote faster deliveries by avoiding delays and unnecessary administrative
costs associated with the negotiation of
individual purchase orders or contracts.39 A
requirements contract obligates the government to fill all of its actual requirements
for supplies or services that are specified
in the contract, during the contract period,
by purchases from the contract awardee.40
Conversely, while an IDIQ contract provides
that the government will purchase an
indefinite quantity of supplies or services
from a contractor during a fixed period of
time, it requires the government to order
only a stated minimum quantity of supplies
or services.41 That is, under an IDIQ contract,
the government is obligated to purchase the
minimum and only the minimum quantity
specified.
It is common for government officials to
provide estimates of the agency’s total
requirements under an IDIQ or requirements
contract during the solicitation process to
allow offerors to develop unit prices for the
goods or services. One potential pitfall of
which contractors must be aware is that
typically, the government is only obligated
to order the stated guaranteed minimum
set forth in the contract. Indeed, in requirements contracts, there is no need to specify
a minimum quantity since those contract
vehicles presume that the government will
order all of its requirements for a product or
service at stated installations from a single
contractor. Because fixed unit prices are
based upon a combination of direct and indirect costs, including overhead and general
and administrative expenses, contractors
should not simply rely on the government’s
estimated quantity to develop their prices.42
It may be necessary to attempt to negotiate “stepladder” quantities or multiple
estimated quantities in which the unit
prices for each item of supply or hour of
service is reduced the more the government
orders under the contract. Such negotiations may be easier in sole-source settings
than competitive procurements. Nonetheless, vendors must be aware that failure
to order any quantity beyond a stated
minimum guarantee could result in erosion
of the contractor’s profit margin and even
result in a loss since indirect costs tend not
to fluctuate and must be absorbed by the
total quantity of items or services actually
ordered by the procuring agency.
T&M and LH contracts are varieties of
indefinite-delivery contracts and provide
procuring agencies with the flexibility to acquire recurring services or when the amount
of effort required to deliver an end-item is
uncertain. T&M and LH contracts typically
cover a broad range of services, including
administrative support, maintenance and repair, and intelligence analysis. Under these
contracts, payments to contractors are
based on the number of labor hours or days
expended. The unit prices or fixed hourly/
daily rates include wages, overhead, general
and administrative expenses, and profits. As
such, like any other indefinite-delivery contract, T&M and LH contracts resemble both
fixed-price and cost-reimbursement type
procurement vehicles. T&M contracts also
include a reimbursable line item for costs of
materials, where applicable.
Despite the flexibility afforded by T&M and
LH contracts, these vehicles are considered
high-risk contracts for the government.43
This is because there is little positive incentive for the contractor to control its costs or
promote labor efficiency. The more time/
hours expended in support of a project, the
more the contractor can bill the government. While the FAR requires that all T&M
and LH contracts include ceilings over which
the contractor may not expend effort, like
a cost-reimbursement type contract, almost
all T&M and LH contracts are only “best
effort” contracts. The FAR’s “Payment under
Time-and-Materials and Labor-Hour Contract” clause clearly states: “the contractor
shall not be obligated to continue performance if to do so would exceed the ceiling
price…unless and until the price has been
increased….”44
Because of this, T&M and LH contracts are
among the least-favored types of contract
from the government’s perspective.45
Both the FAR and DFARS place limitations
on the use of these contract vehicles and
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.
27
can be used in both the commercial item
acquisition and other more traditional
procurement approaches.46 Indeed, the FAR
provides that T&M contracts may only be
used “when it is not possible at the time of
placing the contract to estimate accurately
the extent or duration of the work or to
anticipate costs with any reasonable degree
of confidence.”47
In addition to the foregoing, FAR Subpart
16.748 sets forth policies and procedures
for using basic agreements, basic ordering 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.
that are not identified in the FAR, DFARS, or
other agency FAR supplements. One of the
most significant innovations is the “award
term” contract. Award term contracts are a
form of incentive contracts, but instead of
providing direct monetary rewards to the
contractor through additional profit or fee,
contractors that meet or exceed specified
performance criteria are rewarded through
an extension of the contract’s period of performance. Contractors that fail to achieve
desired goals may have their contracts cut
short.52 Another innovative contract vehicle
is the “no-cost” or concession type contract.
Under a typical no-cost type contract, a vendor provides a service that a federal agency
would otherwise perform, but instead of
receiving compensation from the procuring
agency, the vendor charges third parties or
end users all or a portion of the fees for the
services or end products.53
Additional Flexibilities
and Innovations
FAR Part 16’s contract types and agreements 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
law, Executive Order, or other regulation,
that the acquisition strategy is a permissible exercise of the acquisition team’s
authority.50 This discretion is not without
its limits. FAR 16.102(b) goes on to state
that contract types not described in this
regulation may not be used, unless the
contracting agency obtains a deviation
under FAR Subpart 1.4.51
Despite this, there has been a growing
trend to develop new contract vehicles in
recent years, such as new contract vehicles
28
Of all the contract
types discussed in
this article, incentive
type contracts have
undergone the most
significant changes in
recent years.
In addition, procuring agencies and contractors frequently rely on the use of “hybrid”
contracts, which mix and match different
contract types into a single instrument.54 For
example, under a hybrid contract, certain
line items may be priced on a fixed-price
basis, other line items may allow the contractor to invoice the government on a costreimbursement basis, and other line items
for provisioning, spare parts, or services may
be based on an indefinite-delivery type basis.
Combining these different contract types
into a single instrument can avoid unnecessary delays and costs associated with issuing
separate contracts, while taking into account
varying degrees of risk and incentives for different phases of the program.
Pittleman, PC, where he specializes in assist-
8.
ing clients with legal issues arising in con-
9.
Ibid., at §12.207 (encouraging the use of firmfixed-price contracts or fixed-price contracts
with economic price adjustments when acquiring commercial items and requiring certain
determinations and findings before using indefinite-delivery, T&M, or LH contracts). See also
75 Fed. Reg. 59,195 (Sept. 27, 2010) (proposing
revisions to 48 C.F.R. Subparts 8.4, 12.2, and
16.6. These newly proposed FAR rules are
intended to implement recommendations in
GAO Report No. 09–579 (June 2009), titled
‘‘Minimal Compliance with New Safeguards for
Time-and-Materials Contracts for Commercial
Services and Safeguards Have Not Been
Applied to GSA Schedules Program.’’
10.
48 C.F.R. §§34.005-3 through 34.005-6 (setting
forth policies on the use of different contract
types and pricing approaches during concept
exploration, demonstration, full-scale development, and full production phases of major systems); Ibid., at §234.004 (regarding the
determination of contract type for development programs under Department of Defense
programs).
11.
Ibid., at §§35.006 and 235.006 (discussing the
use of cost-reimbursement and fixed-price contracts in research and development efforts, as
well as determination and approval requirements for each). Ibid., at §35.015(b) (encouraging the use of basic agreements with
educational institutions and nonprofit organizations conducting research and development
on behalf of the government).
12.
Ibid., at §36.207 (establishing a preference for
“lump-sum” or fixed-price contracts when
acquiring construction) and §36.208 (requiring
prior approval when using cost-plus-fixed-fee,
price-incentive, or other contract types with
cost variation or adjustment feature when
other contractors are performing at the same
work site on a firm-fixed-price, lump sum, or
unit price basis); ibid., at §216.306(c) (which
restricts the use of cost-plus-fixed-fee contracts by the Department of Defense for construction funded by annual military
construction appropriations acts).
13.
Ibid., at §37.601(b)(3) (encouraging the use of
incentive type contracts where appropriate).
nection with the award and performance of
their government contracts and subcontracts.
His practice includes bid protests, protest
defenses, claims, internal investigations, matters affecting small business contracts, and
ethics and regulatory compliance at both the
prime contract and subcontract levels.
MARK K. ROBERTS is a partner with the
accounting firm of Argy, Wiltse and Robinson,
PC, where he specializes in providing consulting and litigation support services involving
regulatory issues relating to contract pricing,
cost accounting, profitability, and administration. He also assists contractors in assessing
the adequacy of their accounting, estimating,
billing, and purchasing systems.
Conclusion
Over time, refinements and sophistication
of the government’s procurement system
has led to the development of many different types of fixed-price and cost-reimbursement contracts. Selecting the most appropriate vehicle to acquire goods and services
is a matter of negotiation and requires the
exercise of sound business judgment.
As stated in American Tel. & Tel. Co, v.
Untied States,55 “the regulations entrust
the contracting officer with especially great
discretion, extending even to [his or her]
application of procurement regulations.”
The key to negotiating the most appropriate
contract type must take into account schedule, cost, and performance risks that the
contractor or government bears; the incentives that can be achieved by efficient and
economical performance; and the degree of
oversight needed by the procuring agency
to ensure delivery of a useful product, service, or building to the end user. A thorough
understanding of the uses of these vehicles
and limitations—set forth in the FAR, DFARS,
or other agency FAR supplements—is essential to accomplish this objective. CM
instructors for Federal Publications Seminars.
They conduct various classes on government
contracts–related topics for federal officials
and contractor personnel. See www.fedpubseminars.com, “Types of Government Contracts,” a comprehensive two-day course on
the practical, legal, accounting, and management systems implications in the use of various contract vehicles, which is among the
seminars that Darst and Roberts teach on
behalf of Federal Publications Seminars.
Send comments about this article to
[email protected].
Endnotes
1.
48 C.F.R. §16.103(a) (2009).
2.
Memorandum for Acquisition Professionals re:
“Better Buying Power: Guidance for Obtaining
Greater Efficiency and Productivity in Defense
Spending” (September 14, 2010): 6.
3.
McDonnell Douglas Corp. v. United States, 567
F.3d 1340 (Fed. Cir. 2009).
4.
48 C.F.R. §16.104.
5.
Note that a number of agency FAR supplements
include additional guidance and limitations on
the use of different contract types that may be
used by agency officials to acquire goods, services, and construction.
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
Brian A. Darst and Mark K. Roberts are co-
Ibid., at §§12.207 and 16.301-3(b).
14. See www.usaspending.gov/trends (based on
data reported to USAspending.gov by agencies
as of November 3, 2010). USAspending.gov
provides statistics showing the amount of federal dollars obligated using different types of
contracts since fiscal year 2001.
15.
FAR 16.205 and 16.206.
16.
Ibid., at 16.203.
17.
Ibid., at 16.203-3, 16.205-3, and 16.206-3. See
also DFARS 216.203-4 (limiting the use of EPA
provisions in Department of Defense contracts
to those acquisitions exceeding the simplified
acquisition threshold and will not be completed within six months after contract award).
18.
19.
20.
Ibid., at 16.202-1; Southern Dredging Co., Inc.,
ENG BCA No. 5843, 92-2 BCA §24,886 (denying
a request for equitable adjustment due to a 50
percent increase in the price of oil following
the invasion of Kuwait, on the basis that the
contractor assumed the risk of fluctuations in
the cost of necessary materials and supplies).
See, generally, 48 C.F.R. §§31.100 through
31.108.
Ibid., at §31.201-2(a). Office of Management
and Budget Circular No. A-87, titled “Cost Principles for State and Local Governments,
Revised,” sets forth the principles for determining the allowable costs of contracts and subcontracts with state, local, and federally
recognized Indian tribal governments. See 48
C.F.R. §31.602 and 2 C.F.R. §§225.5 through
225.55 (2010). OMB Circular No. A-21, titled
“Cost Principles for Educational Institutions,
Revised,” provides principles for determining
the costs applicable to research and development, training, and other work performed by
educational institutions under contracts with
the government. Finally, OMB Circular No.
A-122, titled “Cost Principles for Nonprofit
Organizations,” sets forth principles for determining the costs applicable to work performed
by nonprofit organizations under contracts, as
well as grants and other agreements, with the
government. See 48 C.F.R. §31.702 and 2 C.F.R.
§§230.5 through 230.50 (2010). In many
respects, the cost allowability provisions of
these OMB Circulars are similar to the requirements in FAR Subpart 31.2, but differ somewhat due to the unique nature of these
contracting parties’ accounting systems.
21. 48 C.F.R. §§9903.101 through 9903.307.
22.
Ibid., at §9903.201-1.
23. Tital Corp. v. West, 129 F.3d 1479 (Fed. Cir.
1997); 48 C.F.R. §16.301-1. There are some
exceptions to this rule, including cases where
the cost overrun is unforeseeable (RMI, Inc. v.
United States, 800 F.2d 246 (Fed. Cir. 1986)),
the government induces the contractor to continue working even though funding was not
available (American Elec. Labs., Inc. v. United
States, 774 F.2d 1110 (Fed. Cir. 1985)), and the
government orders out-of-scope work causing
the contractor to overrun its ceiling (DSS Serv.,
Inc. v. General Serv. Admin., CBCA No. 1093
(April 16, 2009)). Nevertheless, the general
rule is that the contractor may not recover
costs above the ceiling unless and until the
contracting officer authorizes the contractor to
exceed that amount. See also, Advanced Materials, Inc., ASBCA No. 47014, 96-1 BCA ¶28, 002.
28.
Ibid., at §16.405-2.
31.
Ibid., at §16.402-4.
32.
See, e.g., GAO, “Guidance on Award Fees Has
Led To Better Practices but Is Not Consistently
Applied” (Washington, DC, 2009); GAO, “Use of
Award Fees for Achieving Program Outcomes
Should Be Improved” (Washington, DC, 2007);
GAO, “Minimal Compliance with New Safeguards for Time-and-Materials Contracts for
Commercial Services and Safeguards Have Not
Been Applied to GSA Schedules Program”
(Washington, DC, 2009).
33.
See OMB Memorandum For Chief Acquisition
Officers, Senior Procurement Executives re:
“Appropriate Use of Incentive Contracts”
(December 4, 2007); Memorandum for Secretaries of the Military Departments (Attn: Acquisition Executives) Directors of Defense Agencies
re: “Proper Use of Award Fee Contracts and
Award Fee Provisions” (April 24, 2007); Memorandum for Secretaries of the Military Departments (Attn: Acquisition Executives) Directors
of Defense Agencies re: “Award Fee Contracts
(FAR 16, DFARS 215, DFARS 216)” (March 29,
2006).
34. 48 C.F.R. §16.401(d). This rule was first introduced in October 2009 as an interim revision to
the FAR. See 74 Fed. Reg. 52,856 (October 14,
2009). The final rule was published on September 29, 2010. 75 Fed. Reg. 60,248, 60,26160,263 (September 29, 2010). This final rule
made only minor changes to the interim rule.
35. 48 C.F.R. §16.401-1(e).
36.
Memorandum for Acquisition Professionals, see
note 2, at 6–7. This memorandum also suggests that defense agencies limit the use of
T&M and CPAF contracts when acquiring services, and that “when robust competition”
exists or there is recent competitive pricing history, agencies acquiring services rely more on
the use of firm-fixed-price contracts. Ibid., at
12–13.
37.
48 C.F.R. 16.501-2.
38.
See Stratos Mobile Networks U.S.A. v. United
States, 213 F.3d 1375, 1380 (Fed. Cir. 2000). All
General Services Administration Federal Supply
Schedule contracts, as well as many agencyissued multiple award contracts, are indefinitedelivery contracts. Another, more limited type
of contract that can be used to deal with
uncertainties associated with the quantity of
effort required are the fixed-price and costreimbursement level of effort term contracts.
See 48 C.F.R. §16.207-1.
CrystaComm, Inc., ASBCA No. 37177, 90-2 BCA
¶ 22,692; see also 48 C.F.R. §16.301-3.
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.
40.
Ibid., at §16.503(a); see also Medart, Inc. v.
Austin, 967 F.2d 579, 581 (Fed. Cir. 1992).
FAR 16.403, 16.404, 16.405-1, and 16.405-2.
The FAR also recognizes two different types of
FPI contracts: 1) fixed-price-incentive (firm
target) contracts and 2) fixed-price-incentive
(successive targets) contracts.
42.
See, e.g., Travel Centre v. Barram, 236 F.3d 1316
(Fed. Cir. 2001) (finding no fault in the government’s “less than ideal contracting tactics”
when soliciting for an IDIQ contract with a minimum purchase threshold of $100, had figures
estimating $2.5 million per year profit from
contract, and then the government stopped
using the contractor after $500,000 of gross
sales); IMS Eng’rs-Architects, P.C .v. United
States, 87 Fed. Cl. 541 (2009) (in which the
court held that a contractor had no termination for convenience claims under its IDIQ contracts since the government had ordered more
than the minimum quantities under those
contracts).
43.
Memorandum for Acquisition Professionals, see
note 2, at 12 (T&M contracts “are the least
preferred contract type for understanding
costs”).
29. 48 C.F.R. §16.404.
30.
24. 48 C.F.R. §§35.003 and 35.005.
25.
See www.usaspending.gov/trends (based on
data reported to USAspending.gov by agencies
as of November 3, 2010).
44.
FAR 52.232-7(d) and 52.212-4(i)(3) (ALT I).
45.
GAO, “Improved Insight and Controls Needed
over Time-and-Materials Contracts” (Washington, DC, 2007).
46. 48 C.F.R. §§12.207(b) and 216.601; see also
Memorandum for Commander, United States
Special Operations Command, et al. re: “Proper
Use of Time-and-Materials Contract Types”
(March 20, 2008) and 75 Fed. Reg. 59,195 (September 27, 2010).
47.
48 C.F.R. §16.601(c).
48.
Ibid., at §16.701-703; see also ibid., at §216.703
(governing the placement of basic ordering
agreements and the issuance of orders by the
Department of Defense).
49.
Ibid., at §16.702(a).
50.
Ibid., at §1.102(d).
51.
Ibid., at §16.102(b).
52. See generally HQ AFMC Directorate of Contracting, AFMC Award-Fee & Award–Term Guide
(December 2002), available at www.daytonaero.com/Files/resource/62.pdf; NASA Procurement Information Circular No. 06-02
(January 25, 2006), titled “Use of Award Term
Incentive,” available at www.hq.nasa.gov/
office/procurement/regs/pic06-02.html.
53. See, e.g., GAO, “No-Cost Contracts for Event
Planning Services,” B-308968 (November 27,
2007), Public Comm’s Servs., Inc., B-400058;
B-400058.3 (July 18, 2009).
54. 48 C.F.R. §16.102(b) states that “[c]ontracts
negotiated under part 15 may be of any type or
combination of types that will promote the
government’s interest, except as restricted in
this part.” See also 10 U.S.C. §2306(a) and 41
U.S.C. §254(a)).
55. 307 F.3d 1374, 1379 (Fed. Cir. 2002).
41. 48 C.F.R. §16.504(a); see also Dot Sys., Inc. v.
United States, 231 Ct. Cl. 765 (1982).
31