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Contract Types and Recurring Requirements

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Presentation on theme: "Contract Types and Recurring Requirements"— Presentation transcript:

1 Contract Types and Recurring Requirements

2 Categories of Contract Types
Fixed-Price contracts Cost-Reimbursement contracts Government FFP CPFF Low Risk High Risk Contractor CPFF FFP

3 Transition of Contract Types Through the Maturity of a Program
Cost CPFF CPIF CPIF/FPIF Studies/ Research/ Concept Refinement FPIF/FFP LRIP Production Deployment Technology Development Sys Dev Follow -On Production SYS Demo VERY BROAD REQUIREMENT…………WELL DEFINED REQUIREMENT

4 The Contracting Officer shall insert FAR 52
The Contracting Officer shall insert FAR , Type of Contract, into the solicitation unless it is for: a fixed-price acquisition made under simplified acquisition procedure information or planning purposes "The Government contemplates award of a ___________________ (Contracting Officer insert specific type of contract) contract resulting from this solicitation." (Provision)

5 The Contracting Process, FFP
Vs. Cost Reimbursement FIXED PRICE Ktr req’d to deliver product/perform service Provides for a firm price or in some cases an adjustable price Contract represents full payment for the work; kr exceeds at own risk COST REIMBURSEMENT Ktr req’d to deliver “best effort” Reasonable, allowable, allocable costs will be reimbursed Contract amount represents an estimate of total cost; cannot be exceeded without CO approval

6 The Contracting Process, Firm Fixed Price
Vs. Cost Reimbursement Contract Types COST REIMBURSEMENT Use when technical/cost uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy Use only when: FIXED PRICE Use when technical and cost uncertainties involved in contract performance can be estimated with sufficient accuracy Use when work can be clearly defined

7 The Contracting Process, Firm Fixed Price
Vs. Cost Reimbursement Contract Types FIXED PRICE Kr bears more responsibility for performance costs and resulting profit (or loss) Use FFP or FP/EPA when acquiring commercial items using sealed bidding, and negotiated procurements COST REIMBURSEMENT Kr has adequate accounting system Govt monitoring ensures efficient methods and effective cost controls Kr bears less responsibility Prohibited for commercial items Use with negotiated procedures

8 Contract Types - Characteristics
Cost Fixed Price Promise Best Effort Deliverable Risk to Contractor Low High Risk to Government High ? Cash Flow Cost Incurred On Delivery Progress Payments Yes Performance Based Payments Preferred Administration High Low Fee/Profit Periodic On Delivery

9 Types of Firm Fixed PRICE Contracts
Firm Fixed Price (FFP) Fixed Price with Economic Price Adjustment (FPEPA) Firm Fixed Price Incentive Fee (FPIF) Firm Fixed Price Award Fee (FPAF) Firm Fixed Price Level of Effort (FPLOE) Firm Fixed Price Redeterminable (FPR) - Prospective or Retroactive

10 Features of the FFP Contract
Price not subject to adjustment regardless of contract performance 100% of financial risk is on the contractor Least amount of administrative burden on the contracting officer Preferred over all other contract types Used with FAR Parts 13, 14 and 15 Used in acquiring commercial items

11 Features of the FP/EPA Contract
Preferred over cost-reimbursement type contracts Reduces contract’s fixed-price risk for government & contractor More administrative burden for the contracting officer Used with sealed bidding or negotiated procurements Used in acquiring commercial items

Incentivizes Contractor to Control Costs Greater Profit when Final Cost is less than Target Less Profit when Final Cost is more than Target Retains the characteristics of the fixed-price contract in that there is a Ceiling Price Mitigates Contractor Risk in that the government assumes a share of the cost risk Benefits Government as the Government also shares in cost savings

13 When final cost exceeds KC; Final price is KC
When final cost is $800; Final price is $950 Y X PTA PT 100 PP 50 1000 CT 1500 CP PO 150 800 CO 1550 KC When final cost exceeds KC; Final price is KC Optimistic Profit 75/25 - Under Target Share Ratio 90/10 - Over Target Share Ratio Target Profit Either the Optimistic and Pessimistic Costs are negotiated or the share ratios are negotiated and the Co and Cp are computed using the share ratio formula. Pessimistic Profit COSTS: OPTIMISTIC TARGET PESSIMISTIC CEILING FIXED PRICE INCENTIVE (FIRM TARGET)

14 FPPR - Fixed Price w/ Prospective Price Redetermination
Should be used for acquisitions of quantity production or services where it is possible to negotiate a fair and reasonable FFP for an initial period, but not for subsequent periods of performance Contracting officer must determine that a FFP or FPI contract will not satisfy the requirement Contractor must have an adequate accounting system Price must be redetermined promptly at time(s) specified for subsequent periods of performance Fixed Price with Prospective Price Redermination is appropriate for acquisitions of quantity production or services for which it is possible to negotiate a fair and reasonable firm fixed price for an initial period, but not for subsequent periods of contract performance. Provides for firm fixed price for an initial period of the contract deliveries or performance and prospective redetermination at a stated time or times during performance, of the price of subsequent periods of performance. The initial period should be the longest period for which it is possible to negotiate a fair and reasonable firm fixed price. Each subsequent pricing period should be at least 12 months. The contract may provide for a ceiling price based on evaluation of the uncertainties involved in performance and their possible cost impact. The ceiling price should provide for assumption of a reasonable proportion of the risk by the contractor, and once established may be adjusted only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances.

15 FPRR - Fixed Price Retroactive Price Redetermination
Appropriate for research and development contracts estimated at $100,000 or less when established at outset that a fair and reasonable FFP cannot be negotiated Amount involved and short performance period make the use of any other Fixed Price contract impracticable Ceiling price negotiated w/shared risk Not used unless: Ktr's accounting system is adequate There is reasonable assurance that the price redetermination will take place promptly at the specified time The head of contracting activity (or higher official) approves its use in writing.

16 FPLOE - Fixed Price Level of Effort
Suitable for investigation or study in a specific research and development arena Has a contract product that is usually a report showing the result(s) achieved by application of the required level of effort Payment is based on the negotiated level of effort expended and not on results achieved Ktr required specified level of effort, over a stated period of time, on work that can be stated only in general terms

17 Features of FPLOE Contract
The work required cannot be clearly defined, otherwise, a FFP contract would be more practical The required level of effort is identified and agreed upon in advance of contract award There is a reasonable assurance that the intended result cannot be achieved by expending less than the stipulated effort Contract Price is $100,000 or less, unless approved by the Chief of the Contracting Office

18 FPAF - Fixed Price Award Fee
Can evaluate a contractor’s performance in: cost (effective needs) timeliness quality of work cooperation

19 Cost Contract Cost reimbursement contract in which the contractor receives no fee Normally applies only to nonprofit institutions and organizations willing to perform research for which there is no fee or other tangible benefits Most suitable for research and development Used only in negotiated procurements

20 CPFF -Cost Plus Fixed Fee
Cost reimbursement contract that provides for payment of allowable, allocable, reasonable costs & a negotiated fee that is fixed at inception of the contract. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes to the work to be performed. Contractor has minimum incentive to control costs It is costly to administer Contractor must have an adequate accounting system Least preferred type of contract because the contractor assumes no financial risk for the performance of the contract Used only with negotiated procurements

SUITABLE FOR: Research or preliminary exploration or study and the LOE required is unknown Development and test & using CPIF is not practical Normally should not be used Development of major systems once preliminary exploration, studies & risk reduction have indicated development is achievable and Government has established reasonably firm performance objectives and schedules

Appropriate for services or development and test programs when: Cost-reimbursement contract is necessary Target cost and fee adjustment formula can be negotiated that are likely to motivate the contractor to manage effectively Excellent to "wean" contractor from Cost Plus Fixed Fee Contract

23 Cost-Plus-Incentive-Fee (CPIF)
$70 800 900 1,000 1,100 1,400 Target Fee at Target Cost COST ($) Min Max $0 Min Fee at Pessimistic Cost Max Fee at Optimistic Cost Range of Incentive Effectiveness (RIE) $120 $20 75/25 87.5/12.5 FEE Range of Incentive Effectiveness. Optimistic Cost Target Cost Pessimistic Cost COST

24 Indefinite Delivery Contracts
Ordering Vehicles Flexibility Quantity Times Places Benefits Types Definite Quantity Requirements Indefinite Delivery

25 Benefits of Indefinite-delivery Contracts
Government stocks can be maintained at minimum levels Direct shipment to users Flexibility in both quantities and delivery scheduling Allows ordering of supplies or services after minimum quantity specified in the contract Faster deliveries

26 Indefinite Delivery Contract
Indefinite Quantity Contract Exact quantity unknown above the minimum Times/places unknown Guaranteed minimum Funds for min obligated on contract; above min obligated on delivery order Multiple award preference Multiple award contracts

27 Requirements Contract
Exact quantity unknown/realistic estimate Exact times/places unknown No guarantee/but promises to buy from awardee Funds obligated by each delivery order

28 Definite Delivery Contracts
Definite Quantity Contract Exact quantity known Exact times/places unknown Funds obligated on contract at time of award

29 Time and Materials Contracts
Provide for contracting for supplies or services on the basis of: direct labor hours at specified fixed hourly rates material at cost, which may include a material handling cost as part of the material cost

30 Types of Agreements NOT A CONTRACT
Basic Agreement Basic Ordering Agreement Blanket Purchase Agreement

31 Basic Ordering Agreement
The agreement contains: terms and clauses applying to future contracts between the parties during its term a description, as specific as practicable, of supplies or services to be provided methods for pricing, issuing, and delivering future orders under the basic ordering agreement

32 Blanket Purchase Agreements
Simplified method of filling anticipated repetitive needs for supplies or services by establishing "charge accounts" with qualified sources of supply. (FAR ) Establishing BPAs Usually a local supplier Place calls for supplies Pay monthly Establish more than one BPA to maintain competitive prices unless: 7-21/22

33 Multiple Awards should not be made when:
Only one contractor is capable of providing performance at the level of quality required Based on the contracting officer’s knowledge of the market, more favorable terms and conditions, including pricing, will be provided if a single award is made Administrative costs outweigh any potential benefits

34 Multiple Awards should not be made when (Cont’d):
Tasks are so integrally related that only a single contractor can reasonably perform the work The total estimated value of the contract is less than the simplified acquisition threshold The contracting officer determines that multiple awards would not be in the best interest of the Government

35 Market Conditions for Using Options
likely to be stable enough to preclude putting the contractor at undue risk not likely to change substantially during the option period

36 Use of Multiyear Contracts
No-year or multiyear funds are available Funds are likely to be available throughout the contract period at levels above the cancellation ceiling You expect no substantial change in the minimum need during the contemplated contract period You plan to award a FFP, FP/EPA or FPIF contract A multiyear contract would probably cost less than a string of 1-year contracts

37 SUMMARY There are two major categories of contract types: Fixed-Price and Cost Reimbursement To choose the appropriate contract type, the contracting officer must consider: performance risk market risk

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