The Complete Guide to Government Contract Types

Kenneth R. Segel

• Publisher: Berrett-Koehler Publishers
• Year: 2016
• ISBN:
  9781567264692
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Everything You Need to Know About Government Contract Types As the world's single largest buyer of goods and services, the federal government has many ways to structure its procurements. Different situations and conditions often determine the best vehicle for a particular purchase. Contracting officers must assess a wide range of factors to determine which contract type will provide the government the best value and the least risk. The Complete Guide to Government Contract Types provides a comprehensive overview of the key government contract vehicles and types: fixed-price, cost-reimbursement, incentive, and other (which includes letter, indefinite-delivery/indefinite-quantity, and time-and-material contracts). The author first explains the selection process for contract vehicles, which is the basis for selecting the appropriate contract type for the work in question. He then presents a comprehensive, in-depth analysis of each contract type, explaining how each works best to meet certain types of requirements and conditions.This is an essential resource for both contracting officers and contractors seeking to understand and work effectively within the nuances of contract selection and compliance.

PART I

Fixed-Price Contracts

CHAPTER 1

Firm-Fixed-Price Contract

Typically used to procure commercial items or other products or services containing an adequately defined specification, the firm-fixed-price (FFP) contract is the most widely used of government contract types. A specification is defined as “a detailed statement … of the measurements, quality, materials, or other items to be provided under a contract.”¹ Products may include commercial off-the-shelf (COTS) hardware such as bolts and fasteners, a jet engine that has passed qualification testing, or a building for which the government provides a detailed blueprint or services such as program management support. An FFP contract is uniquely suited for procuring commercial or well-defined items or services.

COs typically administer numerous FFP contracts over the course of their careers. Accordingly, the CO should have a thorough understanding of its definition, use, purpose, applicability, performance requirements, financial elements, and risks.

DEFINITION

An FFP contract is part of the family of fixed-price contracts that the government uses to procure supplies and services for a specified price. An FFP contract is not subject to adjustment on the basis of the contractor’s cost increases during contract performance. It can be modified, however, when there is a “constructive” change such as an alteration to the PWS or specification; when an economic price adjustment is in order; and after a defective pricing incident. The contractor assumes all risk under an FFP contract and is therefore incentivized to perform well. An FFP contract places minimal administrative burden on both parties.

USE

FFP contracts are widely used under the following circumstances:

1. Full production and follow-on production. “Production” is defined as developing new or making improvements to materials, equipment, tools, processes, systems, techniques, methods, and tools used in products and services.

2. For commercial supplies and services. FAR 2.101 defines “commercial item” to mean:

(1) Any item, other than real property, that is of a type customarily used by the general public or by non-governmental entities for purposes other than governmental purposes, and –

(i) Has been sold, leased, or licensed to the general public; or

(ii) Has been offered for sale, lease, or license to the general public;

(2) Any item that evolved from an item described in paragraph (1) of this definition through advances in technology or performance and that is not yet available in the commercial marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under a Government solicitation;

(3) Any item that would satisfy a criterion expressed in paragraphs (1) or (2) of this definition, but for –

(i) Modifications of a type customarily available in the commercial marketplace; or

(ii) Minor modifications of a type not customarily available in the commercial marketplace made to meet Federal Government requirements. Minor modifications imply modifications that do not significantly alter the nongovernmental function or essential physical characteristics of an item or component, or change the purpose of a process. Factors to be considered in determining whether a modification is minor include the value and size of the modification and the comparative value and size of the final product. Dollar values and percentages may be used as guideposts, but are not conclusive evidence that a modification is minor;

(4) Any combination of items meeting the requirements of paragraphs (1), (2), (3), or (5) of this definition that are of a type customarily combined and sold in combination to the general public;

(5) Installation services, maintenance services, repair services, training services, and other services if –

(i) Such services are procured for support of an item referred to in paragraph (1), (2), (3), or (4) of this definition, regardless of whether such services are provided by the same source or at the same time as the item; and

(ii) The source of such services provides similar services contemporaneously to the general public under terms and conditions similar to those offered to the Federal Government;

(6) Services of a type offered and sold competitively in substantial quantities in the commercial marketplace based on established catalog or market prices for specific tasks performed or specific outcomes to be achieved and under standard commercial terms and conditions. For purposes of these services –

(i) ‘Catalog price’ means a price included in a catalog, price list, schedule, or other form that is regularly maintained by the manufacturer or vendor, is either published or otherwise available for inspection by customers, and states prices at which sales are currently, or were last, made to a significant number of buyers constituting the general public; and

(ii) ‘Market prices’ means current prices that are established in the course of ordinary trade between buyers and sellers free to bargain and that can be substantiated through competition or from sources independent of the offerors.

(7) Any item, combination of items, or service referred to in paragraphs (1) through (6) of this definition, notwithstanding the fact that the item, combination of items, or service is transferred between or among separate divisions, subsidiaries, or affiliates of a contractor; or

(8) A nondevelopmental item, if the procuring agency determines the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments.

3. “Procurement of supplies and services with a satisfactorily defined serviceable or detailed specification.” FAR 16.202-2.

4. When a fair and reasonable price can be established up front. A fair and reasonable price is one where the parties reach an amicable agreement built around conditions, quality, and timeliness of contract performance. Fair-and-reasonableness is defined as when the following conditions apply:

a. Ample price competition exists. FAR 16.202-2(a).

b. “There are reasonable price comparisons with prior purchases of the same or similar supplies or services made on a competitive basis or supported by valid cost or pricing data.” FAR 16.202-1(b).

c. “Available cost or pricing information permits realistic estimates of the probable costs of performance.” FAR 16.202-2(c).

d. “Performance uncertainties can be identified and reasonable estimates of their cost impact can be made.” FAR 16.202-2(d).

5. Market conditions are stable.

6. When risk is minimal or may be predicted with a high degree of certainty. FAR 16.103(b).

CONTRACT FINANCING

Contract financing, covered in FAR Part 32, is the method the government uses to pay the contractor prior to accepting products or services. Contract financing is available only for fixed-price contracts.

Given the importance of financing, it is necessary to understand the FAR requirements pertaining to (1) purpose and scope of contract financing, (2) order of preference, (3) private financing, (4) customary contract financing, and (5) limitation of funds.

Purpose and Scope of Contract Financing

Unless an audit or other financial review is required to ensure contract compliance, payments are typically due 30 days after receipt of a proper invoice. FAR 32.007. However, the government may consider alternate contract financing methods when “The value of the contract financing to the contractor is expected to be reflected in either (1) a bid or negotiated price that will be lower than such price would have been in the absence of the contract financing, or (2) contract terms and conditions, other than price, that are more beneficial to the Government than they would have been in the absence of the contract financing.” FAR 32.005.

Order of Preference

The government’s preferred order for contracting financing methods is as follows:

1. Private financing without government guarantee. FAR 32.106.

2. Customary contract financing other than loan guarantees and certain advanced payments. FAR 32.113. These include:

• Progress payments. FAR 32.5.

• Performance based payments (PBP). FAR 32.10.

• Advanced payments. FAR 32.4.

• Guaranteed loans. FAR 32.3.

• Financing supplies or services through combining two or more of the following: advanced payments, guaranteed loans, and either PBPs or progress payments (but not both). FAR 32.113.

3. Loan guarantees. FAR 32.113.

4. Unusual contract financing. FAR 32.114.

5. Advanced payments. FAR 32.113106(e).

Payment at time of receipt or specified time after receipt is less costly and less risky to the government; it also motivates the contractor to deliver the product or perform the service expeditiously. Payment in advance is the least attractive payment method in that it does not incentivize the contractor to perform at its best.

Although private financing without government guarantee is preferred over customary contract financing, loan guarantees, unusual contract financing, and advanced payments the government provides contract financing in the majority of fixed-price, noncommercial contracts where delivery times extend six months or more. The rationale is that the government does not want to handicap a contractor by not authorizing advanced payments.

Private Financing

The contractor assumes responsibility for financing the effort. The government is obligated to compensate the contractor for compliant work only. FAR 32.106.

Customary Contract Financing

Customary contract financing is defined as “financing deemed by an agency to be available for routine use by COs. Most customary contract financing arrangements should be usable by COs without specific reviews or approvals by higher management.” FAR 32.001.

Progress Payments

Progress payments are disbursements made to the contractor as costs are incurred during work performance. FAR 32.102(b). Progress payments reduce the need for working capital given that the CO need not secure money up front to pay for the project.

Progress payments also provide the CO the opportunity to monitor the contractor’s work. Segmented payments encourage the contractor to adhere to the stated work schedules. They also enable the CO to stop a project that is not progressing as planned.

FAR 32.503-8 establishes the ordinary method for liquidation rates. Liquidation rates are payments made when milestones are reached during contract performance. The milestones are established at contract inception. This payment method is derived by liquidating money from the total price as milestones are reached; this is referred to as the “liquidation rate.” (The liquidation rate is the same number as the progress payment rate.)

The alternate liquidation rate method found at FAR 32.503-9 establishes that the ordinary liquidation method addressed in FAR 32.503-8 applies unless the CO elects to alter it. The rationale for altering the liquidation rate is to permit the contractor to keep the profit earned for the completed items. Under FAR 32.503-9, the CO may reduce the liquidation rate under the following circumstances:

1. The contractor requests a reduction in the rate;

2. The rate has not been reduced in the preceding 12 months;

3. The contract delivery schedule extends at least 18 months from the contract award date;

4. Data on ...

Table of contents

• Cover
• Title Page
• Copyright
• About the Author
• Acknowledgments
• Contents
• Preface
• Introduction
• Part I: Fixed-Price Contracts
• Part II: Cost-Reimbursement Contracts
• Part III: Incentive Contracts
• Part IV: Other Contract Types
• Acronyms
• Index