Module Lead: OO-ALC/PKCA August 2007

Module Lead: OO-ALC/PKCA August 2007
Air Force Materiel Command War-Winning Capabilities … On Time, On Cost CONTRACT TYPES Module Lead: OO-ALC/PKCA August 2007 Integrity ~ Service ~ Excellence

Course Overview Length: 2 Hours Method of delivery: Slide Presentation
Course contents: Selecting a contract type after analyzing many factors The Requirement Production Stages Risk Competitive or Non-Competitive Industrial Base, Market Research, Technology Type of funds ETC Handout of Contract Types

Overview Selecting Contract Types Contract Risk
Factors in Selecting Contract Type Contract Type by FAR Part Fixed Price Contracts Cost Reimbursement Contracts Other Contract Vehicles and Agreements

Selecting Contract Types
Degree and Timing of Contractor Responsibility Amount & Nature of Profit Incentive Encouraging Contractor to Achieve Goal Risk Reward We 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) and 2)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

Profile in Contract Risk
Cost-Plus-Fixed-Fee (CPFF) Greatest Risk on Government Cost-Plus-Award-Fee (CPAF) Cost-Plus-Incentive-Fee (CPIF) Cost-Sharing (CS) Sharing Risk Fixed-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

Cost Risk & Contract Type
COST RISK AND CONTRACT TYPE Cost Risk High __________________________________ Low Requirement Definition Vague Well-defined Production Stages Concept Studies & Basic Research Exploratory Development Test/ Demonstration Full-scale Development Full Production Follow-on Production Contract Type Varied CPFF CPIF, FPIF CPIF, FPIF, FFP FFP, FPIF, FPEPA This 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.

Factors in Selecting Contract Types
Price Competition Normally, price competition results in realistic pricing Price Analysis With or without competition, may provide selection basis Cost Analysis FAR , 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 contractor’s proposal can be performed; which may include an audit and technical evaluation when appropriate. In the absence of price competition or price analysis FAR

More Factors in Selecting Contract Types
Type & Complexity of the Requirement Complex contracts generally involves more Government risk Urgency of the Requirement Government may choose to take on more of the risk Contractor’s Technical Capability and Financial Responsibility Type & 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 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 Subcontracting Contract should be selected accordingly FAR

More Factors in Selecting Contract Types
Adequacy of the Contractor’s Accounting System Before 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 Contracts Consider pricing arrangements of other operating contracts Acquisition History The 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 risk Contractor risk usually decreases with repetitive acquisition FAR

Contract Type by FAR Part
Contracts under FAR 13 would use FFP, if determined to be commercial items and any contract type if non-commercial FAR 12 Commercial Items FAR 14 Sealed Bidding FAR 15 Contract By Negotiation Firm Fixed Price Fixed Price w/EPA Fixed Price w/ EPA Any contract type or combination of types Summarizing 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.

Primary Contract Types
“There are 2 Primary Contract Types” Fixed Price Contracts Cost Reimbursement Basically the major contract types, fall into 2 broad categories: Fixed Price & Cost Reimbursement FP contracts are used when costs can be estimated with a high degree of accuracy, whereas CR contracts would be appropriate when there are technical and cost uncertainties that do not permit costs to be estimated sufficiently/accurately.

Fixed Price Contracts FAR 16.2

Fixed Price Contracts Firm Fixed Price Fixed Price w/Award Fee
Fixed Price w/Economic Price Adjustment Fixed Price w/Price Re-determination Fixed Price Incentive Fixed Price Level of Effort The various Fixed Price contracts include, FFP, FP w/EPA, Fixed Price Incentive, Fixed Price Award Fee, FP w/Price Re-determination and FP LOE

Firm Fixed Price Description Application
Price not subject to adjustment Contractor at maximum risk and full responsibility For profit For loss Minimum administrative burden on parties Contracts from sealed bidding can be only FFP, FP w/EPA Application A 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 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. “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

Fixed Price Example A 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.

Fixed Price w/Economic Price Adjustment (EPA)
Description Fixed price contract with upward or downward revisions Based on specified contingencies (not duplicated in base price) Three general types of Economic Price Adjustments Established prices Actual Costs of Labor or Materials Cost indexes of Labor or Materials Commercial Items must be procured using FFP or FP w/ EPA Application “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 time FAR

Adjustments under Fixed Price with EPA
Material & Labor contingencies should be beyond contractor’s control Restricted to “Industry-Wide Contingencies” 1. 2. Or, CO must provide for price adjustment in case of changes in contractor’s established prices CO must determine its necessary to protect the contractor and government 3. 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

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.

Incentive Contracts Description Incentives used: 1. Cost Incentives
When Firm Fixed Price is not appropriate Supplies and services can be acquired at lower costs by relating profit to performance Delivery and Technical performance can be acquired at lower costs by relating profit to performance Incentives used: 1. Cost Incentives 2. Performance Incentives 3. Delivery Incentives 4. Multiple Incentives Incentive 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).

Fixed Price Incentive (Firm & Successive Target)
Firm Target Successive Target Specifies -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 loss Negotiate -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 There 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. FAR

Fixed Price Incentive Firm (FPIF)
Description The contractor has an opportunity to make a higher profit by completing the work below the ceiling price and/or meeting OBJECTIVE performance targets A 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 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 ceiling FAR 16.4

ELEMENTS Target Cost = Projected cost Target Profit = Estimated profit for Target Cost Price Ceiling = Not-to-Exceed (NTE) Price Profit Adjustment Formula = Share Ratio Or, how the contractor shares in Cost overruns & underruns The 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 POCKET and 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.

FPIF Formulas REFER TO HANDOUT

Example Target Cost $10,000,000 Target Profit $850,000 Target Price $10,850,000 Price Ceiling $11,500,000 Share Ratio 70/30 To illustrate, in this example we have the following elements: Target Cost $10,000,000 Target Profit $850,000 which equals, Target Price $10,850,000 Price Ceiling $11,500,000 Share Ratio 70/30

Profit (Dollars) 70/30 Share Line $1,200,000 $850,000 0/100 Share Line PTA Target $400,000 This 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 Contractor’s 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 Price Ceiling Profit $0 Loss $8 M $9 M $10 M $11 M $12 M Cost (Dollars)

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.

Fixed Price w/Award Fees (FPAF)
Description Establish a fixed price (including normal profit) Provide periodic evaluation of contractor performance against award fee plan Issue solicitation only when Expected benefits exceed administrative costs Established award-fee evaluation procedures/board D&F approved at the appropriate level is required Application Generally 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 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

Fixed Price Award Fee (FPAF)
ELEMENTS Base Fee = not allowed in FPAF Award Fee = Extra earned for performance of evaluation factors Award Fee Plan = “Living Document” Award Fee Board = Management team which evaluates factors, prepares report Fee Determining Official = Final Decision The elements for the FPAF contract are listed here. Base Fee – No base fee is allowed, profit included in fixed price Award Fee – based upon performance Award 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

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.

$10,000 True or False? Contracting Version Contracting Version No incentive contract may be provided for other incentives without also providing a Cost incentive or constraint FAR

Answer Contracting Version Contracting Version True! FAR

$10,000 True or False? Contracting Version Contracting Version RE: 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

FALSE, Shouldn't duplicate contingencies!
Answer Contracting Version Contracting Version FALSE, Shouldn't duplicate contingencies! FAR

Contracts resulting from sealed bidding can be only…
$25,000 Contracts resulting from sealed bidding can be only… Contracting Version Contracting Version Firm-Fixed Price or Fixed Price w/ Award Fees Firm-Fixed Price or Cost-Plus-Fixed Fee Firm-Fixed Price or Fixed Price w/ Economic Price Adjustment Firm-Fixed Price or Cost-Plus-Award Fee FAR

C Firm Fixed Price & Fixed Price w/ EPA!
Answer Contracting Version Contracting Version C Firm Fixed Price & Fixed Price w/ EPA! FAR

Fixed Price w/(Prospective/Retroactive) Price Re-determination
Prospective (Future) Retroactive (Past) 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 risk Fixed 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 Fixed 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

Firm Fixed Price, Level of Effort
Description Contractor provides a specified “level of effort” Over a stated period of time Work required can only be stated in general terms Contract amount less than $100K (unless higher approved) Agreed that result cannot be achieved with less effort Level of Effort agreed upon in advance Application “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

Cost Reimbursement Contracts
FAR 16.3

Cost Plus Award Fee Cost Sharing Cost Plus Fixed Fee Cost Plus Incentive Fee The various Cost Reimbursement Contracts include Cost, Cost Sharing, CPIF, CPAF and CPFF

Description For reimbursement for Allowable Incurred Cost Cannot estimate accurately enough for FP contract Obligate funds and Establish a Ceiling Application Use only if: 1. Adequate contractor accounting system 2. Appropriate Government Surveillance 3. Statutory limit on the fee (FAR (c)(4)) 4. Acquisition of non-commercial items Cost 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 items 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. FAR

Cost Description A cost-reimbursement contract
Contractor receives no fee Application “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

Cost Example There 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.

Cost Sharing Description Application Cost-reimbursement contract
Contractor receives no fee Reimbursed only for agreed-upon portion of allowable costs Application Cost 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

Cost Incentive Contracts
Description When Firm Fixed Price is not appropriate Supplies and services can be acquired at lower costs by relating profit to performance Delivery and Technical performance can be acquired at lower costs by relating profit to performance Prohibited: Cost-Plus-Percentage-of-Cost Incentives used: 1. Cost Incentives 2. Performance Incentives 3. Delivery Incentives 4. Multiple Incentives The 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

Cost-Plus-Incentive Fee
Description Initially negotiated fee adjusted later by formula Fee Adjustment Formula based on Total allowable costs vs. Total target costs Specifies target cost, target fee and min & max fees If Total allowable < Total target, then Fee Increases If Total Allowable > Total target, then Fee Decreases Application A 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

Cost Plus Incentive Fee (CPIF)
ELEMENTS Target Cost = Projected cost Target Profit = Estimated profit for Target Cost Price Ceiling = NTE Price Profit Adjustment Formula = Share Line OR, how the contractor shares in Cost overruns & underruns The 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.

Example Target Cost $10,000,000 Target Profit $750,000 Maximum Fee $1,350,000 Minimum Fee $300,000 Share Ratio 85/15 To illustrate the CPIF, for this example we have: Target Cost $10,000,000 Target Profit $750,000 Maximum Fee $1,350,000 Minimum Fee $300,000 Share Ratio 85/15

0/100 Share Line Profit (Dollars) Maximum Fee $1,500,000 Target $1,000,000 $500,000 85/15 Share Line This is the graphical illustration, which is similar to the FPI graph, except that a Minimum and Maximum fee has been added. Minimum Fee $0 Loss $6 M $8 M $10 M $12 M $14 M Cost (Dollars)

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.

Cost-Plus-Award Fee (CPAF)
Description Cost reimbursement with base reimbursement Award fee earned in whole or part by performance Gov’t unilaterally determines criteria for award fee Fee paid by Gov’t judgment based on contract criteria Fee should be sufficient to motivate excellence Quality, Timeliness, Technical Ingenuity Cost-Effective Management Application Not 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

Cost Plus Award Fee ELEMENTS
Base Fee = What the contractor receives even at $0 award fee Award Fee = Extra earned for performance of evaluation factors Award Fee Plan = “Living Document” Award Fee Board = Management team which evaluates factors Fee Determining Official = Final Decision The 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 Fee Award Fee Plan Award Fee Board Fee Determining Official

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; or Management performance areas which cannot be measured objectively and where normal incentive provisions cannot be used Logistics support Quality Timeliness Ingenuity Cost effectiveness These are areas under the control of management which may be susceptible only to subjective measurement and evaluation.

Cost Plus Award Fee Positives Negatives
Tailor incentives to desired performance objectives Focus on key risk items Stabilize long term relations Negatives Cumbersome and bureaucratic Key players change – may affect continuity Evaluations can at times appear “punitive”

Cost-Plus-Fixed Fee Description Application
Payment of negotiated fee fixed Statutory fee limitations apply (FAR (c)(4)) Fee may be adjusted as a result of contract changes Permits contracting efforts where contractors may otherwise be at too great a risk Contractor has minimal incentive to control costs Not used once preliminary studies indicate achievable results Application A 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

Cost Plus Fixed Fee (CPFF)
ELEMENTS ESTIMATED COST FIXED FEE Contractor is entitled the Fixed Fee…regardless of the actual cost The only elements of a CFFF are: ESTIMATED COST FIXED FEE

Cost-Plus-Fixed Fee “Completion” Form “Term” Form Describes 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 Gov’t considers performance satisfactory contractor is paid fixed fee at the end of the specified time A 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

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.

Cost Reimbursement - Contract Clauses
Cost-type Contracts Allowable Cost and Payment Fixed Fee Fixed Fee – Construction Incentive Fee Cost Contract – No Fee Cost Sharing Contract – No Fee Predetermined Indirect Cost Rates Prompt Payment for Construction Contracts Incentive-type Contracts Incentive Price Revision – Firm Target Incentive Price Revision – Successive Targets FAR – Cost Reimbursement Contract Clauses FAR – Incentive Contracts Clauses Insert 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).

Cost Reimbursement Contracts allow for payment of…
$50,000 Cost Reimbursement Contracts allow for payment of… Contracting Version Contracting Version Allowable Retroactive Costs Allowable Projected Costs Allowable Incurred Costs Allowable Advanced Costs FAR

C. Allowable Incurred Costs!
Answer Contracting Version Contracting Version C. Allowable Incurred Costs! FAR

$50,000 Cost Reimbursement Contracts should be used only when uncertainties don’t permit costs to be… Contracting Version Contracting Version Projected in the government estimate Estimated accurately enough for FP contract Projected past 1 year Quantified for minor parts of the scope FAR

B. Estimated Accurately enough for FP!
Answer Contracting Version Contracting Version B. Estimated Accurately enough for FP! FAR

Cost Reimbursement Contracts can be used only with…
$100,000 Contracting Version Cost Reimbursement Contracts can be used only with… Contracting Version Adequate contractor accounting system Appropriate Government Surveillance Acquisition of non-commercial items All of the above FAR

Answer D. All of the above! FAR 16.301-3 Contracting Version

$100,000 Cost Reimbursement Contracts establish an estimated total cost in order to… Contracting Version Contracting Version Obligate funds and Establish a Floor Obligate funds and Establish a Ceiling Deobligate funds and Establish a Wall Deobligate funds and Establish a Skylight FAR

B. Obligate Funds and Establish a Ceiling!
Answer Contracting Version Contracting Version B. Obligate Funds and Establish a Ceiling! FAR

Cost & Fixed Incentive Contracts should be used when…
$250,000 Cost & Fixed Incentive Contracts should be used when… Contracting Version Contracting Version Firm Fixed Price is not appropriate Supplies and services can be acquired at lower costs by relating profit to performance Delivery and Technical performance can be acquired at lower costs by relating profit to performance All of the above FAR

Answer D. All of the above! FAR 16.401 Contracting Version

Cost & Fixed Incentive Contracts can use which of the following…
$250,000 Cost & Fixed Incentive Contracts can use which of the following… Contracting Version Contracting Version Cost Incentives Performance Incentives Delivery Incentives All of the above FAR

Answer D. All of the above! FAR 16.402 Contracting Version

Which contract type is prohibited?
$500,000 Which contract type is prohibited? Contracting Version Contracting Version Cost-Sharing Cost-Plus-Award-Fee Cost-Plus-Percentage-of-Cost None of the Types Above FAR

C. Cost-plus-percentage-of-cost!
Answer Contracting Version Contracting Version C. Cost-plus-percentage-of-cost! FAR

Contracts under FAR 15 (Contract By Negotiation) can be…
$500,000 Contracts under FAR 15 (Contract By Negotiation) can be… Contracting Version Contracting Version Firm-Fixed Price, Fixed Price w/ EPA only Firm-Fixed Price, Cost-Plus-Award-Fee, Cost-Plus-Fixed Fee only All types except Time & Materials / Labor-Hour Any type or combination of types FAR

D. Any type or combination of types!
Answer Contracting Version Contracting Version D. Any type or combination of types! FAR

Other Contract Vehicles…
Letter Contracts Indefinite Delivery Time & Materials Basic Agreements Labor-Hour Basic 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

Indefinite Delivery – Three Types
Definite Quantity Contracts Definite Quantity of supplies or services during a fixed period Indefinite Quantity Indefinite Delivery (IDIQ) Contracts Minimum & Maximum Indefinite Quantity of supplies or services during a fixed period Requirements Contract Best Estimated Quantity (BEQ) Provides for filling actual requirements by placing order during a fixed period All known government requirements (of that sort) will be placed with that contractor There 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 Contract Requirements – 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

Indefinite Delivery - Contract Clauses
Definite-Quantity Ordering Order Limitations Definite Quantity Indefinite-Quantity Indefinite Quantity Single 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) Requirements Requirements

Requirements Example A 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.

Time & Materials (T&M), Labor Hours
Description Payment 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 efficiency Application “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

Letter Contracts Description Application
Preliminary contract that authorizes contractor to begin work immediately Includes (not-to-exceed) price ceiling Application A 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

Letter Contract Example
The roof has blown off the commissary warehouse and $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.

Basic Agreement & Basic Ordering Agreement
Use when multiple awards anticipated w/contractor Written statement of understanding containing clauses BOAs: Possible description of supplies and services Neither are contracts Description Application When 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

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

Answer Contracting Version Contracting Version True! FAR

A T&M contract may not be awarded before execution of which?
$1,000,000 A T&M contract may not be awarded before execution of which? Contracting Version Contracting Version Any required Determination & Findings Any required Funding Documents Any required Definitized Cost or Pricing Data Any required New SPS versions FAR

A. Any Required Determination & Findings!
Answer Contracting Version Contracting Version A. Any Required Determination & Findings! FAR

Questions?

Module Lead: OO-ALC/PKCA August 2007

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Module Lead: OO-ALC/PKCA August 2007

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