No Slide Title

CONTRACT TYPESModule Lead:OO-ALC/PKCAAugust 2007Integrity ~ Service ~ ExcellenceWar-Winning Capabilities On Time, On Cost

Air Force Materiel Command

2Course OverviewLength:2 HoursMethod of delivery: Slide PresentationCourse contents: Selecting a contract type after analyzing many factorsThe RequirementProduction StagesRiskCompetitive or Non-CompetitiveIndustrial Base, Market Research, TechnologyType of fundsETCHandout of Contract Types3OverviewSelecting Contract TypesContract RiskFactors in Selecting Contract TypeContract Type by FAR PartFixed Price ContractsCost Reimbursement ContractsOther Contract Vehicles and Agreements

4Selecting Contract TypesDegree and Timing of Contractor Responsibility

Amount & Nature of Profit Incentive Encouraging Contractor to Achieve Goal

RiskRewardFAR 16.1014We begin with Selecting Contract Types

A wide selection of contract types are available to the Government to provide flexibility in acquiring the variety and volume of supplies and services needed. But overall, contract types basically vary according to two things:

1)Degree & Timing of the responsibility assumed by the contractor for the costs of performance (which equates to risk) and2)The amount and nature of the profit incentive offered to the contractor for achieving/exceeding specified standards or goals.

Some procurements are RESTRICTED to certain contract types; whereas others are UNILATERALLY decided by the Government, or may be negotiated between the Government and Contractor.

5Profile in Contract RiskFixed-Price-Incentive (FPI)Cost-Plus-Award-Fee (CPAF)Cost-Plus-Incentive-Fee (CPIF)Cost-Sharing (CS)Cost-Plus-Fixed-Fee (CPFF)Firm-Fixed-Price (FFP)Sharing RiskGreatest Risk on GovernmentGreatest Risk on Contractor5This Profile in Contract Risks chart shows a continuum of Contract types.

Although FFP is the preferred contract type, if the requirement is vague and the contractor bears a great amount of risk; the contractors proposal will likely be inflated to cover contingencies and reduce the probability of incurring a loss.

However at the opposite end of the spectrum, with cost reimbursement contracts, the contractor has less incentive to control costs and the Government bears a greater risk.

The Goal is to determine the appropriate type of contract and pricing arrangement that will best mitigate and apportion the expected risk in accordance with regulations, statutes and sound business judgment.

6Cost Risk & Contract TypeCOST RISK AND CONTRACT TYPECost RiskHigh

__________________________________LowRequirement DefinitionVague__________________________________Well-defined Production StagesConcept Studies & Basic ResearchExploratory DevelopmentTest/ DemonstrationFull-scale DevelopmentFull ProductionFollow-on ProductionContract TypeVariedCPFFCPIF, FPIFCPIF, FPIF, FFPFFP, FPIF, FPEPAFFP, FPIF, FPEPA6This chart is a representation of the previous slide. If youll notice, there is a relationship between the first and second rows labeled Cost Risk and Requirement Definition and the third and fourth rows Production Stages and Contract Type.

The HIGHER RISK, VAGUE requirements such as Research & Development, Tests and Studies tend to be cost type. However, as requirements become more well defined and risk decreases, such as with Full/Follow-on Production (supplies & services), the contracts become fixed price. Basically as circumstances change, a different contract may be appropriate in later periods than the one used initially.

7Factors in Selecting Contract TypesNormally, price competition results in realistic pricingPrice CompetitionPrice AnalysisIn the absence of price competition or price analysisCost AnalysisWith or without competition, may provide selection basisFAR 16.1047FAR 16.104, lays out a framework of factors to consider when deciding on contract type, which include

Price Competition, which forces competitors to provide realistic proposals Price analysis, which means evaluating the bottom line price without evaluating the separate cost elements and profit. For example,Some Price analysis techniques include - (i) Comparing the proposed price to others received in response to the solicitation,(ii) Comparing it to prices for the same or similar items, (iv) Comparison against a competitive published price lists, (v) Or comparison with the Independent Government Estimate.

In the absence of competition or price analysis, an Analysis of the individual cost elements of the contractors proposal can be performed; which may include an audit and technical evaluation when appropriate.

8More Factors in Selecting Contract TypesContractors Technical Capability and Financial ResponsibilityFAR 16.104Type & Complexity of the RequirementUrgency of the RequirementGovernment may choose to take on more of the risk Complex contracts generally involves more Government riskExtent & Nature of Proposed Subcontracting Contract should be selected accordingly8Type & Complexity: Simple requirements usually means simple contracts; Complex Requirements, generally drive more complex contracts

In Urgent situations, the Government may elect to take on more risk or offer incentives to ensure timely performance

An evaluation of the Contractors Technical Capability and Financial responsibility is another consideration.

A significant amount of the work being performed by a subcontractor, mitigates the risk for the prime. The contract type should therefore reflect the actual risk for the prime contractor.

9More Factors in Selecting Contract TypesAdequacy of the Contractors Accounting SystemConsider pricing arrangements of other operating contracts Concurrent ContractsBefore agreeing on any contract type other than FFP, the CO should make sure the contractor can produce timely cost data in the form required by the contract.Acquisition HistoryContractor risk usually decreases with repetitive acquisition FAR 16.1049The Adequacy of the Contractors Accounting System this could be critical when the contract type requires price revision while performance is in progress, or when a cost-reimbursement contract is being considered. The impact of Concurrent Contracts, including their pricing arrangements, should be considered. And finally, previous or repetitive acquisitions means product/service descriptions can be defined more clearly and therefore decreasing risk

10Contract Type by FAR PartFAR 12 Commercial ItemsFAR 14 Sealed BiddingFAR 15Contract By Negotiation

Firm Fixed PriceFixed Price w/EPAFirm Fixed PriceFixed Price w/ EPAAny contract type or combination of typesContracts under FAR 13 would use FFP, if determined to be commercial items and any contract type if non-commercial10Summarizing Contract Type by FAR Part we see that for Part 12- Commercial Items, FFP or FP w/EPA is appropriate. Except for very specific circumstances (as provided in paragraph 12.207 for commercial services), use of any other contract type is prohibited.

Part 14- Sealed Bidding also only permits these 2 contract types, whereas Part 15 allows any type.

Part 13 Simplified Acquisition Procedures: If commercial FFP, if non-commercial then any type.

11Primary Contract TypesThere are 2 Primary Contract TypesFixedPriceContractsCostReimbursementContracts11Basically the major contract types, fall into 2 broad categories: Fixed Price & Cost ReimbursementFP contracts are used when costs can be estimated with a high degree of accuracy, whereasCR contracts would be appropriate when there are technical and cost uncertainties that do not permit costs to be estimated sufficiently/accurately.

12 Fixed Price Contracts

FAR 16.21213Fixed Price ContractsFirm Fixed Price Fixed Price w/Award FeeFixed Price w/Economic Price Adjustment Fixed Price w/Price Re-determinationFixed Price IncentiveFixed Price Level of Effort13The various Fixed Price contracts include, FFP, FP w/EPA, Fixed Price Incentive, Fixed Price Award Fee, FP w/Price Re-determination and FP LOE

14Firm Fixed PricePrice not subject to adjustmentContractor at maximum risk and full responsibilityFor profitFor lossMinimum administrative burden on partiesContracts from sealed bidding can be only FFP, FP w/EPAA firm-fixed-price contract is suitable for acquiring commercial items or other supplies or services on the basis of reasonably definite functional or detailed specifications when the contracting officer can establish fair and reasonable prices at the outset ApplicationFAR 16.202Description14A FFP contract represents full payment for the work and the price is not subject to adjustment regardless of the contractors cost experience. Exceeding the negotiated price is at the contractors expense. Therefore, with this type of contract the maximum risk and incentive to control costs is placed on the contractor.

In incentive terms, this contact has a 0% Government - 100% Contractor share ratio. The contractor bears all responsibility for any profit/ loss resulting from his activities

TYPICAL APPLICATION: When there is adequate competition, prior purchases of similar/same supplies or services, when adequate cost or pricing data is available or the contractor is willing to accept a FFP contract, at a level which represents assumption of a reasonable proportion of the risk.

15Fixed Price ExampleA requirement exists for 35 portable toilets to be placed at ball field visitor gates, and other locations on base. An additional 100 are needed on a one time basis for the Armed Forces Day Open House. 15This is an example of a simple requirement for a readily available commercial item (porta- potties) for which FFP would be appropriate.16Fixed Price w/Economic Price Adjustment (EPA)Fixed price contract with upward or downward revisions Based on specified contingencies (not duplicated in base price)Three general types of Economic Price AdjustmentsEstablished pricesActual Costs of Labor or MaterialsCost indexes of Labor or MaterialsCommercial Items must be procured using FFP or FP w/ EPAA fixed-price with economic price adjustment may be used when (i) there is serious doubt concerning the stability of market or labor conditions that will exist during an extended period of contract performance, and (ii) contingencies that would otherwise be include in the contract price can be identified and covered separately in the contract. ApplicationFAR 16.203Description16A Fixed Price w/Economic Price Adjustment contract protects the Government and Contractor against significant fluctuations in market conditions or changes in labor & material costs.

The price paid by the Government may be revised upward or downward if certain contingencies occur. This arrangement will prevent the contractor from including the contingency in the contract price.

EPA provisions can be based on Established Prices, Actual Costs or Cost Indexes that should be specifically identified in the contract. The adjustment clause(s) vary according to the nature of the adjustment. For example separate clauses exist for:-Basic Steel versus Nonstandard steel items,-Standard supplies versus Semi-standard supplies-And Labor or material costs using the actual costs method versus labor or material costs using cost indexes. (ASPM, 1-22)

The appropriate use for this type of contract would be for requirements that could be impacted by unstable economic conditions and when performance will occur over an extended period of time

17Adjustments under Fixed Price with EPA1. 2.4. 3. Restricted to Industry-Wide Contingencies Material & Labor contingencies should be beyond contractors control CO must determine its necessary to protect the contractor and governmentOr, CO must provide for price adjustment in case of changes in contractors established pricesFAR 16.203-217There are limitations when using a FP w/EPA, which are outlined here:-Adjustments are restricted to contingencies that are industry wide and beyond the contractors control.-In addition an EPA shall not be used unless the contracting officer determines that it is necessary, either to protect the contractor and Government from significant fluctuations in labor or material costs or to provide for contract price adjustment in the event of changes in the contractors established prices.

18Fixed Price w/EPA ExampleA requirement for a follow-on production aircraft component contains nickel as one of the key materials in the manufacture of the items. Contract performance is expected to be for a period of 5 years.18This FP w/EPA example involves a requirement that contains nickel as one of the components. The concern in this instance is the stability of the cost of nickel over an extended period of time.19Incentive ContractsWhen Firm Fixed Price is not appropriateSupplies and services can be acquired at lower costs by relating profit to performanceDelivery and Technical performance can be acquired at lower costs by relating profit to performance

1. Cost Incentives2. Performance Incentives3. Delivery Incentives4. Multiple IncentivesIncentives used:Description19Incentive contracts are appropriate when a straight firm-fixed-price arrangement is not appropriate and the requirements can be acquired at lower costs and, in certain instances, with improved delivery or technical performance, by relating the amount of profit or fee to the contractors performance.

The way this works is that performance targets are established and increases in profit or fee are provided if the contractor exceeds the targets, but decreases would be applied to the extent that the targets are not met. FPIF, FPAF as well as CPIF and CPAF are all considered Incentive contracts because they provide an opportunity for the contractor to make MORE MONEY for BETTER PERFORMANCE (as defined by the Government). A key difference between Incentive Contracts and Award Contracts is that incentive fees are based upon an objective evaluation, whereas award fees are based upon a subjective evaluation.

As noted here there are several incentives that can be used such as Cost, Performance, Delivery or Multiple Incentives. However, no incentive contract may provide for other incentives without also providing a cost incentive (or constraint).

20Fixed Price Incentive (Firm & Successive Target) Firm TargetSpecifies-Target Cost-Target Profit-Price Ceiling-Profit Adjustment Formula

Upon completion & final cost, final price is determined by formula

If final price exceeds Price Ceiling, the contractor suffers lossNegotiate -Initial Target Cost -Initial Target Profit -Profit Adjustment Formula (floor/ceiling) -Production Point -Price Ceiling

At Production Point, negotiate firm target -Firm Target cost -Firm Target profit -May use FFIF or FFP

FAR 16.403 Successive Target20There are actually 2 types of Fixed Price Incentive contracts, with the components of each listed in the first block of each column.

With the Firm Target approach, the Target Cost and Target Profit are projected once, at the onset of the contract.-After the contract is complete, Final Profit is determined by comparing the Final Negotiated Cost to the Target Cost, and then adjusting the Target Profit IAW the Profit Adjustment Formula (Share Ratio). -So if the final cost is less than the target cost, application of the formula results in the contractor receiving a higher profit than targeted - But if the final cost is more than target cost, application of the formula means the contractor receives less profit than targeted. -The Final Price (which is the Final Negotiated Cost plus Final Profit) however can never exceed the Price Ceiling! So, if the final negotiated cost exceeds the price ceiling, the contractor absorbs the difference as a loss

A Successive Target differs slightly in that Initial Target Costs & Profit are projected, and a pre-determined Production Point is also included. When the contractor reaches this particular point in the production process, a Firm Target Cost is negotiated and Firm Target Profit is determined in accordance with the Profit Adjustment Formula. If enough info is available, a FFP can be negotiated at that point, or a FPIF can be established and the final price negotiated later.

21Fixed Price Incentive Firm (FPIF)FAR 16.4Description The contractor has an opportunity to make a higher profit by completing the work below the ceiling price and/or meeting OBJECTIVE performance targetsOnce price exceeds Fixed Price ceiling, the contractor is responsible for all allowable costs over price ceiling

21A FPIF contract would be appropriate when a ceiling price can be established that covers the most PROBABLE risk and the proposed profit sharing formula would MOTIVATE the contractor to control costsand meet other objectives .

The contractor has an opportunity to make a higher profit by completing the work below the ceiling price/meeting OBJECTIVE performance targets.

TYPICAL APPLICATION: Production of a major system based on a prototype

22Fixed Price Incentive Firm (FPIF)ELEMENTSTarget Cost = Projected costTarget Profit = Estimated profit for Target CostPrice Ceiling = Not-to-Exceed (NTE) PriceProfit Adjustment Formula = Share RatioOr, how the contractor shares in Cost overruns & underruns 22The components or elements of the FPIF are again... Target Cost: what the contractor is PROJECTING. Target Profit: is what the contractor will get if he hits his PROJECTION; although there is no profit ceiling or floor.PRICE CEILING: the point at which the CONTRACTOR begins paying costs out of POCKETand The PROFIT ADJUSTMENT FORMULA ,which shows us how much of every dollar of costs over or under the target, the GOV versus the CONTRACTOR gains or loses.

23FPIF FormulasREFER TO HANDOUT2324Fixed Price Incentive Firm (FPIF)ExampleTarget Cost$10,000,000Target Profit$850,000Target Price$10,850,000Price Ceiling$11,500,000Share Ratio70/3024To illustrate, in this example we have the following elements:Target Cost$10,000,000Target Profit $850,000 which equals,

Target Price$10,850,000Price Ceiling$11,500,000Share Ratio70/30

25Fixed Price Incentive Firm (FPIF)$850,000$1,200,000$400,000$0$12 M$11 M$10 M$9 M$8 M70/30 Share Line0/100 Share Line

TargetPTALossProfit (Dollars)Cost (Dollars)ProfitPrice Ceiling

25This is a graphical illustration of the previous slide

Notice the 70/30 share line THIS MEANS that for all the costs underruns ( which are to the LEFT of the Target), the Government will save 70 cents and the Contractor will gain 30 cents of each additional dollar

To the RIGHT of the Target, the Government will spend an extra 70 cents and the Contractor will lose 30 cents of each additional dollar, which comes out of the Contractors Targeted Profit

As costs continue to increase, the contractor will reach the Point of Total Assumption.Once the contractor reaches this point (which is equivalent to the Pessimistic Cost Estimate) he pays 100% of any additional costs, which again comes from profit. As you can see in the graph, the slope becomes very steep after this point and the contractor BEGINS LOSING HIS FEE VERY QUICKLY.

Once the PRICE CEILING is reached, the contractor is at zero profit and pays each additional dollar out of pocket; which means a loss (negative profit) on the contract

26Fixed Price Incentive Firm ExampleA requirement exists for a new grounds maintenance contract. Two of the items included in the requirement are snow removal during the winter months and debris collection in the summer months when the area is subject to a lot of high wind storms. You want to include a pricing arrangement that will motivate the contractor to respond quickly to clear snowdrifts and remove limbs in the street.26This is a general example of when a FPIF contract would be appropriate. This scenario involves a grounds maintenance contract for which there are periods that you need to motivate the contractor to improve response time, which is a criteria that can be objectively measured.27Fixed Price w/Award Fees (FPAF)Establish a fixed price (including normal profit)Provide periodic evaluation of contractor performance against award fee planIssue solicitation only when Expected benefits exceed administrative costsEstablished award-fee evaluation procedures/boardD&F approved at the appropriate level is requiredAward-fee provisions may be used 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.ApplicationFAR 16.404Description27Generally speaking the contractor receives more profit for every dollar that costs are reduced. With a FPAF contact, an additional fee can also be earned for superior performance. However if an award fee contract is used, the award fee can be earned only when the contractor meets at least minimum essential contract requirements

The FPAF contract establishes a Fixed Price with normal profit, Standards for evaluating contractor performance and Procedures for calculating a fee based on performance against those standards.

These Standards and Procedures are documented in the Award Fee Plan, which is negotiated and becomes part of the contract. The plan specifies the areas of importance to the Government and the applicable percentage that will be applied to the award fee pool. The contractors performance is then evaluated at specific intervals and documented in a report. The reports are subsequently submitted to the Fee Determining Official who performs a purely SUBJECTIVE EVALUATION and decides the amount the contractor is entitled to.

As you can see the application for this type of contract is for those efforts for which performance can not be OBJECTIVELY measured. The use of this contract type has recently come under close scrutiny because in some instances it has been questioned whether an incentive type contract was more appropriate and it also appears the contractor is receiving the award fee even with poor performance. This has lead to recent guidance that b4 an FPAF can be awarded a D&F must be prepared. So rule of thumb is, when the contractors performance CAN be objectively measured an Incentive Fee contract as discussed earlier would be appropriate. Only when performance CAN NOT be objectively measured should an Award Fee contract be used. 28Fixed Price Award Fee (FPAF)ELEMENTSBase Fee = not allowed in FPAFAward Fee = Extra earned for performance of evaluation factorsAward Fee Plan = Living Document Award Fee Board = Management team whichevaluates factors, prepares reportFee Determining Official = Final Decision 28The elements for the FPAF contract are listed here. Base Fee No base fee is allowed, profit included in fixed priceAward Fee based upon performanceAward Fee Plan which is referred to as a living document because it can be revised as needed (change evaluation criteria, weights to re-direct contractors focus)Award Fee Board - Fee Determining Official

29Fixed Price w/Award Fee ExampleA requirement is being worked for a copier maintenance contract. The requirements are pretty cut and dry but in the past end users have not been particularly happy with the service theyve received. The contractor always leaves a mess when they are finished and seem to show up to perform maintenance when demand for the copier is greatest, creating a backlog of copying. You think potential awardees would be more responsive to more money for better service.29A FPAF examplein this instance you are looking to obtain better service as defined by the satisfaction of the end users. A FPAF contract is used to mitigate the risk of the user not being fully satisfied because of judgmental acceptance criteria. 30True or False?$10,000FAR 16.402-1No incentive contract may be provided for other incentives without also providing a Cost incentive or constraint

Contracting VersionContracting Version3031True!AnswerFAR 16.402-1

Contracting VersionContracting Version3132True or False?FAR 16.203-2RE: Firm Fixed Price w/ EPAThe CO should ensure contingency allowances are included in the base price and in any adjustments requested by the contractor. $10,000

Contracting VersionContracting Version3233

Contracting Version

Contracting VersionFAR 16.203-2 AnswerFALSE, Shouldn't duplicate contingencies!3334Contracts resulting from sealed bidding can be only

Firm-Fixed Price or Fixed Price w/ Award FeesFirm-Fixed Price or Cost-Plus-Fixed FeeFirm-Fixed Price or Fixed Price w/ Economic Price AdjustmentFirm-Fixed Price or Cost-Plus-Award Fee

Contracting Version

Contracting Version$25,000FAR 16.1023435C Firm Fixed Price & Fixed Price w/ EPA!

Contracting Version

Contracting VersionAnswerFAR 16.2013536Fixed Price w/(Prospective/Retroactive) Price Re-determination Prospective (Future)FFP for initial delivery period can be established

Re-determine price at every 12 months (or more) during future performance

Price Ceiling may be established to allow contractor so share riskFixed Ceiling price

Award after fair billable rate is negotiated

Price re-determined within ceiling after completion of contract

Useful for R&D >$100K

Price Ceiling established to allow contractor to share risk Retroactive (Past)FAR 16.205 thru 20636Fixed Price w/price re-determination.This type of contract would be appropriate when costs of performance after the first year can not be estimated with confidence and the Government needs a firm commitment from the contractor to deliver supplies/services during subsequent years.

There are 2 different types of price re-determinations, based upon when the re-evaluation occurs.

With Prospective (Future) Price Re-determination, the contract is FFP for the initial period and the price for subsequent periods is determined at stated intervals.

For Retroactive (Past) Re-determinations, the price established at the onset is only a ceiling price. The final price is determined through negotiations, after completion of the contract.

As you can see with a prospective approach a price ceiling may be established but is required for a retroactive approach.

TYPICAL APPLICATION: Prospective re-determination would be long-term production of spare parts for a major system and for Retroactive R&D contracts , $100k with a short performance period.

37Firm Fixed Price, Level of EffortContractor provides a specified level of effortOver a stated period of timeWork required can only be stated in general termsContract amount less than $100K (unless higher approved)Agreed that result cannot be achieved with less effortLevel of Effort agreed upon in advanceA firm-fixed price, level-of-effort term contract is suitable for investigation or study of a specific research and development area. The product of the contract is usually a report showing the results achieved through the application of the required level of effort. However, payment is based on the effort expended rather than on the results achieved.ApplicationFAR 16.207Description37When a FFP LOE contract is used, payment is based on effort expended rather than results achieved. The contractor provides specified effort over a stated period of time for a fixed fee.

This type of contract should only be used when the work CAN NOT be clearly defined, but effort CAN be agreed upon.

TYPICAL APPLICATION: R&D Investigation or studies; and is limited to acquisitions for less than $100k.

The deliverable, in this instance would likely be report (s) on the contractors progress, and at the end of the period of performance.

38 Cost Reimbursement Contracts

FAR 16.33839Cost Reimbursement ContractsCostCost Plus Award FeeCost Sharing Cost Plus Fixed FeeCost Plus Incentive Fee39The various Cost Reimbursement Contracts include Cost, Cost Sharing, CPIF, CPAF and CPFF40Cost Reimbursement ContractsFor reimbursement for Allowable Incurred CostCannot estimate accurately enough for FP contractObligate funds and Establish a Ceiling

Use only if:1. Adequate contractor accounting system2. Appropriate Government Surveillance3. Statutory limit on the fee (FAR 15.404-4(c)(4))4. Acquisition of non-commercial itemsApplicationFAR 16.302Description40Cost Reimbursement contracts provide for reasonable, allowable and allocable costs up to the ceiling specified in the contract. A ceiling is established which represents an estimated total cost, that can not be exceeded without Contracting Officer approval.The limitations for using cost contracts are outlined at the bottom of the slide. -the contractors accounting system must accurately capture incurred costs.-Government monitoring is also necessary to ensure the use efficient methods and effective cost controls-Adherence to any statutory limits on fee-Cost contracts can not be used to acquire commercial itemsSTATUTORY LIMITATIONS FAR 15.404-4(c)(4)(i) The contracting officer shall not negotiate a price or fee that exceeds the following statutory limitations, imposed by 10 U.S.C. 2306(d) and 41 U.S.C. 254(b):(A) For experimental, developmental, or research work performed under a cost-plus-fixed-fee contract, the fee shall not exceed 15 percent of the contracts estimated cost, excluding fee.(B) For architect-engineer services for public works or utilities, the contract price or the estimated cost and fee for production and delivery of designs, plans, drawings, and specifications shall not exceed 6 percent of the estimated cost of construction of the public work or utility, excluding fees.(C) For other cost-plus-fixed-fee contracts, the fee shall not exceed 10 percent of the contracts estimated cost, excluding fee.(ii) The contracting officers signature on the price negotiation memorandum or other documentation supporting determination of fair and reasonable price documents the contracting officers determination that the statutory price or fee limitations have not been exceeded.41CostA cost-reimbursement contractContractor receives no feeA cost contract may be appropriate for research and development work, particularly with nonprofit educational institutions or other nonprofit organization, and for facilities contracts. ApplicationFAR 16.302Description41With a Cost Contract the Government pays the allowable incurred costs to the extent provided in the contract and the contractor receives no fee.

TYPICAL APPLICATION: joint research with non-profit organizations

42Cost ExampleThere is a requirement for a study of earthquake fault lines in the eastern United States, for which universities and colleges with Geology Departments may be interested in performing. A cost contract with no fee would be appropriate in this instance since universities/colleges are not for profit organizations.42An example of when a cost contract would be usedthis is pretty straight forward, you have a study performed by a university or college.43Cost SharingCost-reimbursement contractContractor receives no feeReimbursed only for agreed-upon portion of allowable costsA cost-sharing contract may be used when the contractor agrees to absorb a portion of the costs, in expectation of substantial compensating benefits. ApplicationDescriptionFAR 16.30343Cost sharing is an arrangement in which the contractor agrees to absorb an agreed upon part of the costs.

This type of contract would typically be used for Research & Development work that the contractor will derive substantial commercial benefits from.

44Cost Incentive ContractsWhen Firm Fixed Price is not appropriateSupplies and services can be acquired at lower costs by relating profit to performanceDelivery and Technical performance can be acquired at lower costs by relating profit to performanceProhibited: Cost-Plus-Percentage-of-Cost1. Cost Incentives2. Performance Incentives3. Delivery Incentives4. Multiple IncentivesIncentives used:FAR 16.302Description44The general description for Cost Incentive contracts is essentially the same as FPI contracts, except it is important to note that cost plus percentage of cost is prohibited.

45Cost-Plus-Incentive FeeInitially negotiated fee adjusted later by formulaFee Adjustment Formula based on Total allowable costs vs. Total target costsSpecifies target cost, target fee and min & max feesIf Total allowable < Total target, then Fee IncreasesIf Total Allowable > Total target, then Fee DecreasesAppropriate for services or development and test programs whencost reimbursement contract is necessary; and a target cost and a fee adjustment formula can be negotiated that are likely to motivate the contractor to manage effectively.DescriptionFAR 16.405-1Application45A cost-plus-incentive-fee contract is a cost-reimbursement contract that provides for an initially negotiated fee to be adjusted later by a formula, which is based on the relationship of Total allowable costs to Total target costs.

The increase or decrease in fee is intended to provide an incentive for the contractor to manage costs effectively. However, unlike the FPIF which had no profit ceiling or floor, the CPIF is limited by a Maximum and Minimum Fee.

A CPIF contract would be the best approach when an OBJECTIVE relationship can be established between the fee and measures of performance such as actual costs, delivery dates, performance benchmarks, etc.

TYPICAL APPLICATION: Research and development of the prototype for a major system

46Cost Plus Incentive Fee (CPIF)ELEMENTSTarget Cost = Projected costTarget Profit = Estimated profit for Target CostPrice Ceiling = NTE PriceProfit Adjustment Formula = Share LineOR, how the contractor shares in Cost overruns & underruns 46The definitions for the CPIF elements are the same as those covered for the FPI version. Just a reminder

Target Cost is what the contractor is PROJECTING.Target Profit is what hell get if he hits his PROJECTION.The PRICE CEILING is the point at which the CONTRACTOR begins paying costs out of his pocket.

The PROFIT ADJUSTMENT FORMULA specifies how much of every dollar of cost over/under the Target Cost, the Gov versus the CONTRACTOR gains/loses.

47Cost Plus Incentive Fee (CPIF)ExampleTarget Cost$10,000,000Target Profit$750,000Maximum Fee$1,350,000Minimum Fee$300,000Share Ratio85/1547To illustrate the CPIF, for this example we have:Target Cost$10,000,000Target Profit$750,000Maximum Fee$1,350,000Minimum Fee$300,000Share Ratio85/1548Cost Plus Incentive Fee (CPIF)$1,500,000$500,000$0$14 M$12 M$10 M$8 M$6 M85/15 Share Line0/100 Share Line

TargetMinimum FeeLossProfit (Dollars)Cost (Dollars)$1,000,000

Maximum Fee48This is the graphical illustration, which is similar to the FPI graph, except that a Minimum and Maximum fee has been added.49Cost Plus Incentive Fee ExampleA requirement is being worked for a new military cargo plane. The customer wants to improve the speed and payload capacity of the aircraft, but also wants a better price. A CPIF contract would motivate the contractor to make these improvements while holding the price down. 49Improved speed and payload capacity are quantifiable performance criteria, but at the same time you want to provide an incentive for the contractor to control costs, so a CPIF would be appropriate.50Cost-Plus-Award Fee (CPAF)Cost reimbursement with base reimbursementAward fee earned in whole or part by performanceGovt unilaterally determines criteria for award fee Fee paid by Govt judgment based on contract criteriaFee should be sufficient to motivate excellence Quality, Timeliness, Technical IngenuityCost-Effective ManagementThe cost-plus-award-fee is suitable for use whenthe likelihood of meeting acquisition objectives will be enhanced by using a contract that effectively motivated the contractor toward exceptional performance and provides the Government with the flexibility to evaluate both actual performance and the conditions under which it was achieved.ApplicationFAR 16.405Description50Not surprisingly the CPAF description is similar to the FPAF. Keeping in mind that an award fee is purely subjective, a CPAF contract would be best when Objective incentive targets ARE NOT feasible for critical aspects of performanceand judgmental standards can be fairly applied and a potential fee would provide a meaningful incentive.

A D&F must be prepared and signed at the appropriate level.

TYPICAL APPLICATION: Large Scale Research Study

51Cost Plus Award Fee ELEMENTSBase Fee = What the contractor receives even at $0 award fee Award Fee = Extra earned for performance of evaluation factorsAward Fee Plan = Living Document Award Fee Board = Management team which evaluates factorsFee Determining Official = Final Decision 51The elements for the CPAF contract differs from the FP counterpart in that it includes a Base Fee that is fixed at the inception of the contract., but all other elements are the same.

Base Fee Award FeeAward Fee PlanAward Fee Board Fee Determining Official

52Cost Plus Award FeeMotivate and reward a contractor for -Purchase of capital assets (including machine tools) manufactured in the US, on major defense acquisitions programs; or

Management performance areas which cannot be measured objectively and where normal incentive provisions cannot be usedLogistics supportQualityTimelinessIngenuityCost effectivenessThese are areas under the control of management which may be susceptible only to subjective measurement and evaluation.5253Cost Plus Award FeePositivesTailor incentives to desired performance objectivesFocus on key risk itemsStabilize long term relations

NegativesCumbersome and bureaucraticKey players change may affect continuityEvaluations can at times appear punitive 5354Cost-Plus-Fixed FeePayment of negotiated fee fixed Statutory fee limitations apply (FAR 15.404-4(c)(4))Fee may be adjusted as a result of contract changesPermits contracting efforts where contractors may otherwise be at too great a riskContractor has minimal incentive to control costsNot used once preliminary studies indicate achievable resultsThe contract is for the performance of research or preliminary exploration or study, and the level of effort required is unknown; or the contract is for development and test, and using a cost-plus-incentive-fee is not practical normally should not be used in development of major systems.DescriptionFAR 16.306Application54A Cost-plus-Fixed-Fee contract is a cost-reimbursement contract that provides for payment of a negotiated fee that is fixed at the inception of the contract. The fixed fee does not vary with actual cost (but may be adjusted as a result of changes in the work to be performed). This contract type permits contracting for efforts that might otherwise present too great a risk to contractorsbut it provides the contractor only a minimum incentive to control costs.

This type of contract would be appropriate when Relating fee to performance (e.g. to actual costs) would be unworkable or not as useful. The incentive in this case would be the contractor realizes a higher rate of return (fee/cost) as total cost decreases.STATUTORY LIMITATIONS FAR 15.404-4(c)(4)(i) The contracting officer shall not negotiate a price or fee that exceeds the following statutory limitations, imposed by 10 U.S.C. 2306(d) and 41 U.S.C. 254(b):(A) For experimental, developmental, or research work performed under a cost-plus-fixed-fee contract, the fee shall not exceed 15 percent of the contracts estimated cost, excluding fee.(B) For architect-engineer services for public works or utilities, the contract price or the estimated cost and fee for production and delivery of designs, plans, drawings, and specifications shall not exceed 6 percent of the estimated cost of construction of the public work or utility, excluding fees.(C) For other cost-plus-fixed-fee contracts, the fee shall not exceed 10 percent of the contracts estimated cost, excluding fee.(ii) The contracting officers signature on the price negotiation memorandum or other documentation supporting determination of fair and reasonable price documents the contracting officers determination that the statutory price or fee limitations have not been exceeded.

55Cost Plus Fixed Fee (CPFF)ELEMENTSESTIMATED COST FIXED FEE

Contractor is entitled the Fixed Feeregardless of the actual cost55The only elements of a CFFF are:

ESTIMATED COST FIXED FEE56Cost-Plus-Fixed FeeCompletion FormDescribes scope of Stating a definite goal or target Specifying an end product

2. Contractor required to deliver the specified end product within estimated cost as condition of payment Describes scope - In general terms- Obligates contractor to a level-of-effort for a specified time

If the Govt considers performance satisfactory contractor is paid fixed fee at the end of the specified timeTerm FormFAR 16.30656A Cost-Plus-Fixed-Fee contract may take one of two basic formsCompletion or Term. The Completion Form describes the scope of work by stating a definite goal or target and specifying an end product. This form of contract normally requires the contractor to complete and deliver the specified end product (e.g.,a final report of research accomplishing the goal or target) within the estimated cost ( if possible, as a condition for payment of the entire fixed fee). However, in the event the work cannot be completed within the estimated cost, the Government may increase the estimated cost and require more effort, but without an increase in the fee. (2) The term form describes the scope of work in general terms and obligates the contractor to devote a specified level of effort for a stated time period. Under this form, if the performance is considered satisfactory by the Government, the fixed fee is payable at the expiration of the agreed-upon period, upon contractor statement that the level of effort specified in the contract has been expended. Renewal for further periods of performance is a new acquisition that involves new cost and fee arrangements.

(3) Because of the differences in the contractors obligation, the completion form is preferred over the term form whenever the work or milestones can be defined well enough to permit development of realistic estimates ,within which the work can expected to be completed. (4) The term form shall not be used unless the contractor is obligated by the contract to provide a specific level of effort within a definite time period. 57Cost Plus Fixed Fee ExampleThe Navy is attempting to develop a process which, when applied to the hulls of ships will render them non-magnetic. They want to replace the older wooden-hulled mine sweeps. Market research indicates nothing of that nature is being produced. As a result, an exploratory development contract is needed.57A CPFF example from the Intermediate Contracting Student Guide describes a R&D contract to develop a new process.58Cost Reimbursement - Contract ClausesCost-type Contracts52.216-7 Allowable Cost and Payment52.216-8 Fixed Fee52.216-9 Fixed Fee Construction52.216-10 Incentive Fee52.216-11 Cost Contract No Fee52.216-12 Cost Sharing Contract No Fee52.216-15 Predetermined Indirect Cost Rates52.232-27 Prompt Payment for Construction Contracts

Incentive-type Contracts52.216-7 Allowable Cost and Payment52.216-10 Incentive Fee52.216-16 Incentive Price Revision Firm Target52.216-17 Incentive Price Revision Successive Targets

58FAR 16.307 Cost Reimbursement Contract ClausesFAR 16.406 Incentive Contracts ClausesInsert appropriate clauses in solicitations and contracts when a cost-reimbursement or incentive type contract is contemplated. Review each clause to determine applicability to contract type (CPFF, CPIF, CR-No Fee, Cost Sharing-No Fee, CPAF).59Cost Reimbursement Contracts allow for payment of

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Contracting Version$50,000FAR 16.301-1Allowable Retroactive Costs Allowable Projected CostsAllowable Incurred Costs Allowable Advanced Costs

5960C. Allowable Incurred Costs!

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Contracting VersionAnswerFAR 16.301-16061Cost Reimbursement Contracts should be used only when uncertainties dont permit costs to be

Projected in the government estimateEstimated accurately enough for FP contractProjected past 1 yearQuantified for minor parts of the scope

Contracting Version$50,000FAR 16.301-2Contracting Version6162B. Estimated Accurately enough for FP!

Contracting VersionAnswerFAR 16.301-2Contracting Version6263Cost Reimbursement Contracts can be used only with

Adequate contractor accounting systemAppropriate Government SurveillanceAcquisition of non-commercial itemsAll of the above

Contracting Version$100,000FAR 16.301-3Contracting Version6364D. All of the above!

Contracting VersionAnswerFAR 16.301-3Contracting Version6465Cost Reimbursement Contracts establish an estimated total cost in order to Obligate funds and Establish a FloorObligate funds and Establish a CeilingDeobligate funds and Establish a WallDeobligate funds and Establish a Skylight

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Contracting VersionFAR 16.301-1$100,0006566B. Obligate Funds and Establish a Ceiling!

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Contracting VersionFAR 16.301-1Answer6667Cost & Fixed Incentive Contracts should be used when

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Contracting Version$250,000FAR 16.401Firm Fixed Price is not appropriateSupplies and services can be acquired at lower costs by relating profit to performanceDelivery and Technical performance can be acquired at lower costs by relating profit to performanceAll of the above6768D. All of the above!

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Contracting VersionAnswerFAR 16.4016869Cost & Fixed Incentive Contracts can use which of the following

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Contracting Version$250,000FAR 16.402Cost IncentivesPerformance IncentivesDelivery IncentivesAll of the above6970D. All of the above!

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Contracting VersionAnswerFAR 16.4027071Which contract type is prohibited? Cost-Sharing Cost-Plus-Award-FeeCost-Plus-Percentage-of-Cost None of the Types Above

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Contracting Version$500,000FAR 16.1027172C. Cost-plus-percentage-of-cost!

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Contracting VersionAnswerFAR 16.1027273Contracts under FAR 15 (Contract By Negotiation) can be

Firm-Fixed Price, Fixed Price w/ EPA only Firm-Fixed Price, Cost-Plus-Award-Fee, Cost-Plus-Fixed Fee onlyAll types except Time & Materials / Labor-Hour Any type or combination of types

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Contracting Version$500,000FAR 16.1027374D. Any type or combination of types!

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Contracting VersionAnswerFAR 16.1027475Other Contract VehiclesTime & MaterialsBasic Agreements Letter ContractsLabor-HourBasic Ordering Agreements (BOAs)Indefinite Delivery 75Some of the other contractual documents and agreements include:-Indefinite Delivery Contracts-Time & Material, -Labor Hour and Letter Contracts,-Basic Agreements and Basic Ordering Agreements76Indefinite Delivery Three TypesDefinite Quantity ContractsDefinite Quantity of supplies or services during a fixed periodIndefinite Quantity Indefinite Delivery (IDIQ) Contracts Minimum & MaximumIndefinite Quantity of supplies or services during a fixed periodRequirements ContractBest Estimated Quantity (BEQ)Provides for filling actual requirements by placing order during a fixed periodAll known government requirements (of that sort) will be placed with that contractorFAR 16.576There are three types of indefinite-delivery contracts: Definite Quantity, Requirements and Indefinite-quantity contracts. Requirements and IDIQ contracts may also known as delivery order or task order contracts.

The appropriate type of indefinite-delivery contract may be used for recurring requirements (supplies or services) for which the exact times/quantities of future deliveries are not known at the time of contract award.

All 3 offer the advantages of: (i) Allowing Government stocks to be maintained at minimum levels; and (ii) Direct shipment to users. Indefinite-quantity contracts and requirements contracts also offer (i) Flexibility in both quantities and delivery scheduling; and (ii) Ordering of supplies or services after requirements materialize.

Some distinctions to note between an IDIQ and Requirements contract:IDIQ Minimum & Maximum quantity is established, first order funded and awarded along with Basic ContractRequirements Best Estimated Quantity is specified, funding is not required at the time of award. All requirements that generate during the life of the contract must be acquired from the awardee. Optional ordering periods should therefore be used, so if a contractors performance is not satisfactory, the Government can simply elect not to exercise the option.

77Indefinite Delivery - Contract ClausesDefinite-Quantity52.216-18 Ordering52.216-19 Order Limitations52.216-20 Definite Quantity

Indefinite-Quantity52.216-18 Ordering52.216-19 Order Limitations52.216-22 Indefinite Quantity52.216-27 Single or Multiple Awards (if multiple award)52.216-28 Multiple Awards for A&AS (if A&AS multiple award over 3 years and $10) 5353.216-9000 Awarding Orders Under Multiple Award Contracts (if multiple award)

Requirements 52.216-18 Ordering52.216-19 Order Limitations52.216-21 Requirements7778Requirements ExampleA contract is needed for maintenance and repair of hand held portable radios over the next five years. Historical data indicates between 15-20% of the radios will require some type of repair during any given year. 78An example of when a requirements contract would be appropriateyou anticipate recurring repairs over a period time, but dont exactly how many or when they will occur.79Time & Materials (T&M), Labor HoursPayment for direct labor hours at a fixed hourly rate (including overhead, G&A and profit)Payment for materials at cost (including handling costs)No positive profit incentive for cost control or labor efficiencyMay be used only 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 confidencemay be used (1) only after the contracting officer executes a determination and findings that no other contract is suitable; and (2) only if the contract includes a ceiling price that the contractor exceeds at its own risk. DescriptionFAR 16.601Application79A Time-and-Materials contract, the least preferred type, provides for acquiring supplies or services on the basis of Direct labor hours at specified fixed hourly rates and actual cost for materials.

Because a T&M contract provides no incentive to the contractor for cost control or labor efficiency, appropriate Government surveillance is required to ensure efficient methods and effective cost controls are being used. A T&M contract may be used only if the contracting officer prepares a determination and findings that no other contract type is suitable.

A labor-hour contract is just a variation of the time-and-materials contract, in that materials are not supplied by the contractor.

80Letter ContractsPreliminary contract that authorizes contractor to begin work immediately Includes (not-to-exceed) price ceiling

FAR 16.603DescriptionApplicationA letter contract may be used when (1) the Governments interests demand that the contractor be given a binding commitment so that work can start immediately and (2)negotiating a definitive contract is not possible in sufficient time to meet the requirement. 80A letter contract is a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services. A letter contract may be used when (1)the Governments interests demand that the contractor be given a binding commitment so work can start immediately and (2)negotiating a definitive contract is not possible in sufficient time to meet the requirement. However, a letter contract should be as complete and definite as possible under the circumstances.

Before a letter contract can be issued, a determination in writing (signed at the appropriate level) stating that no other contract is suitable must be in place.81Letter Contract ExampleThe roof has blown off the commissary warehouse and $3,000,000 in merchandise could be at risk.81An example of situation that would dictate a letter contractwithout question this would be something that would need to be addressed immediately.82Basic Agreement & Basic Ordering AgreementUse when multiple awards anticipated w/contractor Written statement of understanding containing clausesBOAs: Possible description of supplies and servicesNeither are contracts

FAR 16.601DescriptionApplicationWhen a substantial number of separate contracts may be awarded to a contractor during a particular period and significant recurring negotiating problems have been experienced with the contractor. 82A Basic Agreement is a written instrument of understanding, negotiated between the Government and a contractor, that (1)contains contract clauses applying to future contracts between the parties. Future contracts then incorporate by reference or attachment the applicable clauses agreed upon in the basic agreement. A basic agreement is not a contract.

A Basic Ordering Agreement is essentially the same but includes (2)a description, as specific as practicable, of supplies or services to be provided, and (3)methods for pricing, issuing, and delivering future orders under the basic ordering agreement.

A BOA may be used to expedite contracting for uncertain requirements (supplies/services) when specific items, quantities, and prices are not known at the time the agreement is executed, but a substantial number of requirements covered by the agreement are anticipated to be purchased from the contractor. Benefits can include reducing administrative lead-time, inventory investment, and inventory obsolescence due to design changes. 83True or False?

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Contracting Version$1,000,000FAR 16.601A Time & Material contract provides no positive profit incentive for cost control or labor efficiency.8384

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Contracting VersionAnswerFAR 16.601True!8485A T&M contract may not be awarded before execution of which? Any required Determination & FindingsAny required Funding DocumentsAny required Definitized Cost or Pricing DataAny required New SPS versions

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Contracting VersionFAR 16.601$1,000,0008586A. Any Required Determination & Findings!

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Contracting VersionFAR 16.601Answer8687Questions? 87

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