Presentation on theme: "Module Lead: OO-ALC/PKCA August 2007"— Presentation transcript:
1 Module Lead: OO-ALC/PKCA August 2007 Air Force Materiel CommandWar-Winning Capabilities … On Time, On CostCONTRACT TYPESModule Lead:OO-ALC/PKCAAugust 2007Integrity ~ Service ~ Excellence
2 Course Overview Length: 2 Hours Method of delivery: Slide Presentation Course contents:Selecting a contract type after analyzing many factorsThe RequirementProduction StagesRiskCompetitive or Non-CompetitiveIndustrial Base, Market Research, TechnologyType of fundsETCHandout of Contract Types
3 Overview Selecting Contract Types Contract Risk Factors in Selecting Contract TypeContract Type by FAR PartFixed Price ContractsCost Reimbursement ContractsOther Contract Vehicles and Agreements
4 Selecting Contract Types Degree and Timing of Contractor ResponsibilityAmount & Nature of Profit Incentive Encouraging Contractor to Achieve GoalRiskRewardWe 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.FAR
5 Profile in Contract Risk Cost-Plus-Fixed-Fee (CPFF)Greatest Risk on GovernmentCost-Plus-Award-Fee (CPAF)Cost-Plus-Incentive-Fee (CPIF)Cost-Sharing (CS)Sharing RiskFixed-Price-Incentive (FPI)This 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 contractor’s 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.Firm-Fixed-Price (FFP)Greatest Risk on Contractor
6 Cost Risk & Contract Type COST RISK AND CONTRACT TYPECost RiskHigh__________________________________LowRequirement DefinitionVagueWell-definedProduction StagesConcept Studies & Basic ResearchExploratory DevelopmentTest/ DemonstrationFull-scale DevelopmentFull ProductionFollow-on ProductionContract TypeVariedCPFFCPIF, FPIFCPIF, FPIF, FFPFFP, FPIF, FPEPAThis chart is a representation of the previous slide.If you’ll 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.
7 Factors in Selecting Contract Types Price CompetitionNormally, price competition results in realistic pricingPrice AnalysisWith or without competition, may provide selection basisCost AnalysisFAR , lays out a framework of factors to consider when deciding on contract type, which include…Price Competition, which forces competitors to provide realistic proposalsPrice 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 contractor’s proposal can be performed; which may include an audit and technical evaluation when appropriate.In the absence of price competition or price analysisFAR
8 More Factors in Selecting Contract Types Type & Complexity of the RequirementComplex contracts generally involves more Government riskUrgency of the RequirementGovernment may choose to take on more of the riskContractor’s Technical Capability and Financial ResponsibilityType & Complexity: Simple requirements usually means simple contracts; Complex Requirements, generally drive more complex contractsIn Urgent situations, the Government may elect to take on more risk or offer incentives to ensure timely performanceAn evaluation of the Contractor’s 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.Extent & Nature of Proposed SubcontractingContract should be selected accordinglyFAR
9 More Factors in Selecting Contract Types Adequacy of the Contractor’s Accounting SystemBefore 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.Concurrent ContractsConsider pricing arrangements of other operating contractsAcquisition HistoryThe Adequacy of the Contractor’s 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 riskContractor risk usually decreases with repetitive acquisitionFAR
10 Contract Type by FAR Part Contracts under FAR 13 would use FFP, if determined to be commercial items and any contract type if non-commercialFAR 12Commercial ItemsFAR 14Sealed BiddingFAR 15Contract By NegotiationFirm Fixed PriceFixed Price w/EPAFixed Price w/ EPAAny contract type or combination of typesSummarizing 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 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.
11 Primary Contract Types “There are 2 Primary Contract Types”FixedPriceContractsCostReimbursementBasically 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.
14 Firm Fixed Price Description Application Price 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/EPAApplicationA FFP contract represents full payment for the work and the price is not subject to adjustment regardless of the contractor’s cost experience. Exceeding the negotiated price is at the contractor’s 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 % Contractor share ratio. The contractor bears all responsibility for any profit/ loss resulting from his activitiesTYPICAL 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.“A 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…”FAR
15 Fixed 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.This is an example of a simple requirement for a readily available commercial item (porta- potties) for which FFP would be appropriate.
16 Fixed Price w/Economic Price Adjustment (EPA) DescriptionFixed price contract with upward or downward revisionsBased 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/ EPAApplication“A 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.”A 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 timeFAR
17 Adjustments under Fixed Price with EPA Material & Labor contingencies should be beyond contractor’s controlRestricted to “Industry-Wide Contingencies”1.2.Or, CO must provide for price adjustment in case of changes in contractor’s established pricesCO must determine its necessary to protect the contractor and government3.There are limitations when using a FP w/EPA, which are outlined here:-Adjustments are restricted to contingencies that are industry wide and beyond the contractor’s 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 contractor’s established prices.4.FAR
18 Fixed Price w/EPA Example A 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.This 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.
19 Incentive Contracts Description Incentives used: 1. Cost Incentives When 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 performanceIncentives used:1. Cost Incentives2. Performance Incentives3. Delivery Incentives4. Multiple IncentivesIncentive 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 contractor’s 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).
20 Fixed Price Incentive (Firm & Successive Target) Firm TargetSuccessive TargetSpecifies-Target Cost-Target Profit-Price Ceiling-Profit Adjustment FormulaUpon completion & final cost, final price is determined by formulaIf final price exceeds Price Ceiling, the contractor suffers lossNegotiate-Initial Target Cost-Initial Target Profit-Profit AdjustmentFormula (floor/ceiling)-Production Point-Price CeilingAt Production Point, negotiate “firm target”-Firm Target cost-Firm Target profit-May use FFIF or FFPThere 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 lossA 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.FAR
21 Fixed Price Incentive Firm (FPIF) DescriptionThe contractor has an opportunity to make a higher profit by completing the work below the ceiling price and/or meeting OBJECTIVE performance targetsA FPIF contract would be appropriate when “a ceiling price can be established that covers the most PROBABLE risk andthe proposed profit sharing formula would MOTIVATE the contractor to control costs…and 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”Once price exceeds Fixed Price ceiling, the contractor is responsible for all allowable costs over price ceilingFAR 16.4
22 Fixed 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 & underrunsThe 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.
24 Fixed Price Incentive Firm (FPIF) ExampleTarget Cost$10,000,000Target Profit$850,000Target Price$10,850,000Price Ceiling$11,500,000Share Ratio70/30To 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 Ratio 70/30
25 Fixed Price Incentive Firm (FPIF) Profit (Dollars)70/30 Share Line$1,200,000$850,0000/100 Share LinePTATarget$400,000This is a graphical illustration of the previous slideNotice 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 dollarTo 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 Contractor’s Targeted ProfitAs 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 contractPrice CeilingProfit$0Loss$8 M$9 M$10 M$11 M$12 MCost (Dollars)
26 Fixed Price Incentive Firm Example A 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.This 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.
27 Fixed Price w/Award Fees (FPAF) DescriptionEstablish a fixed price (including normal profit)Provide periodic evaluation of contractor performance against award fee planIssue solicitation only whenExpected benefits exceed administrative costsEstablished award-fee evaluation procedures/boardD&F approved at the appropriate level is requiredApplicationGenerally 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 requirementsThe 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 contractor’s 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 contractor’s 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.“Award-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.”FAR
28 Fixed 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 which evaluates factors, prepares reportFee Determining Official = Final DecisionThe 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 contractor’s focus)Award Fee Board -Fee Determining Official
29 Fixed Price w/Award Fee Example A 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 they’ve 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.A FPAF example…in 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.
30 $10,000True or False?Contracting VersionContracting VersionNo incentive contract may be provided for other incentives without also providing a Cost incentive or constraintFAR
32 $10,000True or False?Contracting VersionContracting VersionRE: Firm Fixed Price w/ EPA The CO should ensure contingency allowances are included in the base price and in any adjustments requested by the contractor.FAR
34 Contracts resulting from sealed bidding can be only… $25,000Contracts resulting from sealed bidding can be only…Contracting VersionContracting VersionFirm-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 FeeFAR
36 Fixed Price w/(Prospective/Retroactive) Price Re-determination Prospective (Future)Retroactive (Past)FFP for initial delivery period can be establishedRe-determine price at every 12 months (or more) during future performancePrice Ceiling may be established to allow contractor so share riskFixed Ceiling priceAward after fair billable rate is negotiatedPrice re-determined within ceiling after completion of contractUseful for R&D >$100KPrice Ceiling established to allow contractor to share riskFixed 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.FAR thru 206
37 Firm Fixed Price, Level of Effort DescriptionContractor provides a specified “level of effort”Over 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 advanceApplication“A 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.”When 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 contractor’s progress, and at the end of the period of performance.FAR
39 Cost Reimbursement Contracts Cost Plus Award FeeCost SharingCost Plus Fixed FeeCost Plus Incentive FeeThe various Cost Reimbursement Contracts include Cost, Cost Sharing, CPIF, CPAF and CPFF
40 Cost Reimbursement Contracts DescriptionFor reimbursement for Allowable Incurred CostCannot estimate accurately enough for FP contractObligate funds and Establish a CeilingApplicationUse only if:1. Adequate contractor accounting system2. Appropriate Government Surveillance3. Statutory limit on the fee (FAR (c)(4))4. Acquisition of non-commercial itemsCost 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 contractor’s 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 (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 contract’s 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 contract’s estimated cost, excluding fee.(ii) The contracting officer’s signature on the price negotiation memorandum or other documentation supporting determination of fair and reasonable price documents the contracting officer’s determination that the statutory price or fee limitations have not been exceeded.FAR
41 Cost Description A cost-reimbursement contract Contractor receives no feeApplication“A cost contract may be appropriate for research and development work, particularly with nonprofit educational institutions or other nonprofit organization, and for facilities contracts.”With 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”FAR
42 Cost 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.An example of when a cost contract would be used…this is pretty straight forward, you have a study performed by a university or college.
43 Cost Sharing Description Application Cost-reimbursement contract Contractor receives no feeReimbursed only for agreed-upon portion of allowable costsApplicationCost 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.“A cost-sharing contract may be used when the contractor agrees to absorb a portion of the costs, in expectation of substantial compensating benefits.”FAR
44 Cost Incentive Contracts DescriptionWhen 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-CostIncentives used:1. Cost Incentives2. Performance Incentives3. Delivery Incentives4. Multiple IncentivesThe 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.FAR
45 Cost-Plus-Incentive Fee DescriptionInitially negotiated fee adjusted later by formulaFee Adjustment Formula based onTotal 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 DecreasesApplicationA 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”“Appropriate for services or development and test programs when…cost 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.”FAR
46 Cost 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 & underrunsThe 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 he’ll 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.
47 Cost Plus Incentive Fee (CPIF) ExampleTarget Cost$10,000,000Target Profit$750,000Maximum Fee$1,350,000Minimum Fee$300,000Share Ratio85/15To illustrate the CPIF, for this example we have:Target Cost $10,000,000Target Profit $750,000Maximum Fee $1,350,000Minimum Fee $300,000Share Ratio 85/15
48 Cost Plus Incentive Fee (CPIF) 0/100 Share LineProfit (Dollars)Maximum Fee$1,500,000Target$1,000,000$500,00085/15 Share LineThis is the graphical illustration, which is similar to the FPI graph, except that a Minimum and Maximum fee has been added.Minimum Fee$0Loss$6 M$8 M$10 M$12 M$14 MCost (Dollars)
49 Cost Plus Incentive Fee Example A 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.Improved 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.
50 Cost-Plus-Award Fee (CPAF) DescriptionCost reimbursement with base reimbursementAward fee earned in whole or part by performanceGov’t unilaterally determines criteria for award feeFee paid by Gov’t judgment based on contract criteriaFee should be sufficient to motivate excellenceQuality, Timeliness, Technical IngenuityCost-Effective ManagementApplicationNot 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 performance…and 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”“The cost-plus-award-fee is suitable for use when…the 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.FAR
51 Cost Plus Award Fee ELEMENTS Base Fee = What the contractor receives even at $0 award feeAward Fee = Extra earned for performance of evaluation factorsAward Fee Plan = “Living Document”Award Fee Board = Management team which evaluates factorsFee Determining Official = Final DecisionThe 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 FeeAward FeeAward Fee PlanAward Fee BoardFee Determining Official
52 Cost Plus Award Fee Motivate and reward a contractor for - Purchase of capital assets (including machine tools) manufactured in the US, on major defense acquisitions programs; orManagement 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.
53 Cost Plus Award Fee Positives Negatives Tailor incentives to desired performance objectivesFocus on key risk itemsStabilize long term relationsNegativesCumbersome and bureaucraticKey players change – may affect continuityEvaluations can at times appear “punitive”
54 Cost-Plus-Fixed Fee Description Application Payment of negotiated fee fixedStatutory fee limitations apply (FAR (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 resultsApplicationA 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 contractors…but 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 (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 contract’s 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 contract’s estimated cost, excluding fee.(ii) The contracting officer’s signature on the price negotiation memorandum or other documentation supporting determination of fair and reasonable price documents the contracting officer’s determination that the statutory price or fee limitations have not been exceeded.“The 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.”FAR
55 Cost Plus Fixed Fee (CPFF) ELEMENTSESTIMATED COSTFIXED FEEContractor is entitled the Fixed Fee…regardless of the actual costThe only elements of a CFFF are:ESTIMATED COSTFIXED FEE
56 Cost-Plus-Fixed Fee “Completion” Form “Term” Form Describes scope of Stating a definite goal or targetSpecifying an end product2. Contractor required to deliver the specified end product within estimated cost as condition of paymentDescribes scope- In general terms- Obligates contractor to a level-of-effort for a specified timeIf the Gov’t considers performance satisfactory contractor is paid fixed fee at the end of the specified timeA Cost-Plus-Fixed-Fee contract may take one of two basic forms—Completion 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 contractor’s 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.FAR
57 Cost Plus Fixed Fee Example The 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.A CPFF example from the Intermediate Contracting Student Guide describes a R&D contract to develop a new process.
58 Cost Reimbursement - Contract Clauses Cost-type ContractsAllowable Cost and PaymentFixed FeeFixed Fee – ConstructionIncentive FeeCost Contract – No FeeCost Sharing Contract – No FeePredetermined Indirect Cost RatesPrompt Payment for Construction ContractsIncentive-type ContractsIncentive Price Revision – Firm TargetIncentive Price Revision – Successive TargetsFAR – Cost Reimbursement Contract ClausesFAR – 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).
61 $50,000Cost Reimbursement Contracts should be used only when uncertainties don’t permit costs to be…Contracting VersionContracting VersionProjected in the government estimateEstimated accurately enough for FP contractProjected past 1 yearQuantified for minor parts of the scopeFAR
62 B. Estimated Accurately enough for FP! AnswerContracting VersionContracting VersionB. Estimated Accurately enough for FP!FAR
63 Cost Reimbursement Contracts can be used only with… $100,000Contracting VersionCost Reimbursement Contracts can be used only with…Contracting VersionAdequate contractor accounting systemAppropriate Government SurveillanceAcquisition of non-commercial itemsAll of the aboveFAR
64 Answer D. All of the above! FAR 16.301-3 Contracting Version
65 $100,000Cost Reimbursement Contracts establish an estimated total cost in order to…Contracting VersionContracting VersionObligate funds and Establish a FloorObligate funds and Establish a CeilingDeobligate funds and Establish a WallDeobligate funds and Establish a SkylightFAR
66 B. Obligate Funds and Establish a Ceiling! AnswerContracting VersionContracting VersionB. Obligate Funds and Establish a Ceiling!FAR
67 Cost & Fixed Incentive Contracts should be used when… $250,000Cost & Fixed Incentive Contracts should be used when…Contracting VersionContracting VersionFirm 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 aboveFAR
68 Answer D. All of the above! FAR 16.401 Contracting Version
69 Cost & Fixed Incentive Contracts can use which of the following… $250,000Cost & Fixed Incentive Contracts can use which of the following…Contracting VersionContracting VersionCost IncentivesPerformance IncentivesDelivery IncentivesAll of the aboveFAR
70 Answer D. All of the above! FAR 16.402 Contracting Version
71 Which contract type is prohibited? $500,000Which contract type is prohibited?Contracting VersionContracting VersionCost-SharingCost-Plus-Award-FeeCost-Plus-Percentage-of-CostNone of the Types AboveFAR
72 C. Cost-plus-percentage-of-cost! AnswerContracting VersionContracting VersionC. Cost-plus-percentage-of-cost!FAR
73 Contracts under FAR 15 (Contract By Negotiation) can be… $500,000Contracts under FAR 15 (Contract By Negotiation) can be…Contracting VersionContracting VersionFirm-Fixed Price, Fixed Price w/ EPA onlyFirm-Fixed Price, Cost-Plus-Award-Fee, Cost-Plus-Fixed Fee onlyAll types except Time & Materials / Labor-HourAny type or combination of typesFAR
74 D. Any type or combination of types! AnswerContracting VersionContracting VersionD. Any type or combination of types!FAR
75 Other Contract Vehicles… Letter ContractsIndefinite DeliveryTime & MaterialsBasic AgreementsLabor-HourBasic Ordering Agreements (BOAs)Some of the other contractual documents and agreements include:-Indefinite Delivery Contracts-Time & Material,-Labor Hour and Letter Contracts,-Basic Agreements and Basic Ordering Agreements
76 Indefinite Delivery – Three Types Definite Quantity ContractsDefinite Quantity of supplies or services during a fixed periodIndefinite Quantity Indefinite Delivery (IDIQ) ContractsMinimum & 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 contractorThere 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 contractor’s performance is not satisfactory, the Government can simply elect not to exercise the option.FAR 16.5
77 Indefinite Delivery - Contract Clauses Definite-QuantityOrderingOrder LimitationsDefinite QuantityIndefinite-QuantityIndefinite QuantitySingle or Multiple Awards (if multiple award)Multiple Awards for A&AS (if A&AS multiple award over 3 years and $10)Awarding Orders Under Multiple Award Contracts (if multiple award)RequirementsRequirements
78 Requirements 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.An example of when a requirements contract would be appropriate…you anticipate recurring repairs over a period time, but don’t exactly how many or when they will occur.
79 Time & Materials (T&M), Labor Hours DescriptionPayment 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 efficiencyApplication“May 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 confidence…may 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 it’s own risk.A 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.FAR
80 Letter Contracts Description Application Preliminary contract that authorizes contractor to begin work immediatelyIncludes (not-to-exceed) price ceilingApplicationA letter contract may be used when (1) the Government’s 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.A 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 Government’s 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.FAR
81 Letter Contract Example The roof has blown off the commissary warehouseand $3,000,000 in merchandise could be at risk.An example of situation that would dictate a letter contract…without question this would be something that would need to be addressed immediately.
82 Basic Agreement & Basic Ordering Agreement Use when multiple awards anticipated w/contractorWritten statement of understanding containing clausesBOAs: Possible description of supplies and servicesNeither are contractsDescriptionApplicationWhen 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.A 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.FAR
83 $1,000,000True or False?Contracting VersionContracting VersionA Time & Material contract provides no positive profit incentive for cost control or labor efficiency.FAR
85 A T&M contract may not be awarded before execution of which? $1,000,000A T&M contract may not be awarded before execution of which?Contracting VersionContracting VersionAny required Determination & FindingsAny required Funding DocumentsAny required Definitized Cost or Pricing DataAny required New SPS versionsFAR
86 A. Any Required Determination & Findings! AnswerContracting VersionContracting VersionA. Any Required Determination & Findings!FAR