Contract Types

Forms of Contracts

• Completion – A product is delivered– Cost or Fixed Price– Product must be delivered– Contract completed on delivery and

acceptance

• Term – Level of Effort– Amount of labor delivered over time– Use personnel and facilities as spelled out

General Rules

• Fixed Price– Perform work, deliver product, get paid– Contractor is at risk

• Cost– Contractor provides “best effort,” works to a

percentage of negotiated costs and then notifies the government

Which Type?

• Nature and complexity of effort

• Urgency

• Period of performance

• Competition

• Difficulty in defining performance

• Availability of data

General Budgeting Rule

• PMs must budget to the “most likely price”

• Most likely price– Varies by contract type

Cost Reimbursement

• Establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed except at his own risk

• Provide payment of ALLOWABLE incurred costs to the extent provided in the contract

Cost-Plus-Fixed-Fee

• Pays all reasonably incurred and allowable costs plus a fixed dollar amount as a fee

• Fee based on the estimated cost of the contract and stays “fixed” regardless of actual costs

CPFF

• Appropriate when estimates of cost, performance, and schedule are uncertain

• Flexibility is needed

• Monitoring needs are high

• Change is anticipated

CPFF

• Contractors recover costs

• Provides least incentive to contractor to control costs and be efficient

• Incentive to underrun is because the fixed fee becomes a higher percentage

• Trade-offs between cost and technical excellence

• Budget to expected cost plus fixed fee

Cost-Plus-Award-Fee

• Acts like a CPFF except the fixed fee is 0% or some small base fee

• Contractor earns more fee through and “Award Fee Plan”

• Award is the unilateral right of the government

CPAF

• Appropriate when estimates of cost, performance, and schedule are uncertain

• More incentive is desired than CPFF

• Administrative capability is available

• Award is based on judgment of Award Determining Official

• Budget to expected costs plus entire available fee

Cost-Plus-Incentive-Fee

• Shift cost risk to contractor

• Contractor should assume more risk:– More detailed specs– Less uncertainty– Better able to estimate costs

• Contractor now shares in overruns and underruns

CPIF

• Negotiate certain items– Target cost– Target fee– Max fee – Min fee– Share line

• Regardless of cost the fee is never more than the max, nor less than the min

CPIF

• Appropriate when uncertainties can be identified and quantified to some degree

• Used to incentivize the contractor when uncertainties still preclude Fixed Price

• Used in R&D when uncertainties can be resolved by $$

Share Formula

• Expressed as a percentage with the government’s share first

• Example:– 80/20 share means that the government pays

80% of overruns or keeps 80% of underruns

– Contractor’s fee is reduced by 20 cents for every dollar of overrun

– Contractor’s fee is increased by 20 cents for every dollar of underrun

CPIF

• Budget to expected cost and fee

Fee

Max

Target

Min

CostTarget

100/0

0/100

Effective range of Incentive80/20

Fixed Price Contracts

• Funding of cost overruns is not possible

• Contractor obligated to deliver specific product at the price negotiated regardless of cost

• Appropriate when cost, performance, and schedule uncertainty is low of manageable

Firm-Fixed-Price

• Contractor must manage cost within price

• Highest profit potential– More cost means less profit

• Completion form– Can have FP elements of a contract

• Level of Effort can be at a fixed price

• Budget to final negotiated price

Fixed Price Incentive Firm

• Uncertainty too great for FFP

• Completion form

• Contractor must perform

• Contractor performs at own expense when costs exceed ceiling price

FPIF

• Negotiate– Target Cost– Target Profit– Ceiling Price– Share line

• Profit is more than target if final cost is less than target cost and decreased if final cost is more than target cost

• Regardless, the ceiling is firm

FPIFProfit

Target Profit

TargetCost

CostAt

PTA

Contract price lineBased on Share

Point of Total Assumption

Ceiling Price

FPIF

• Budget to the target price of the contract– Budgeting to the ceiling price indicates that

the government does not believe that the incentives will change contractor performance

FP w/Economic Price Adjustment

• Price negotiate on assumptions regarding economic prices of materials or labor

• EPA clause kicks in if assumptions fail and some trigger is set-off

• Can be pre-negotiated or based on an index

• Budged to anticipated price– Does not include EPA– EPA adjustment should be unlikely