Contract Types

Forms of Contracts Completion – A product is delivered –Cost or Fixed Price –Product must be delivered –Contract completed on delivery and acceptance Term – Level of Effort –Amount of labor delivered over time –Use personnel and facilities as spelled out

General Rules Fixed Price –Perform work, deliver product, get paid –Contractor is at risk Cost –Contractor provides “best effort,” works to a percentage of negotiated costs and then notifies the government

Which Type? Nature and complexity of effort Urgency Period of performance Competition Difficulty in defining performance Availability of data

General Budgeting Rule PMs must budget to the “most likely price” Most likely price –Varies by contract type

Cost Reimbursement Establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed except at his own risk Provide payment of ALLOWABLE incurred costs to the extent provided in the contract

Cost-Plus- Fixed-Fee Pays all reasonably incurred and allowable costs plus a fixed dollar amount as a fee Fee based on the estimated cost of the contract and stays “fixed” regardless of actual costs

CPFF Appropriate when estimates of cost, performance, and schedule are uncertain Flexibility is needed Monitoring needs are high Change is anticipated

CPFF Contractors recover costs Provides least incentive to contractor to control costs and be efficient Incentive to underrun is because the fixed fee becomes a higher percentage Trade-offs between cost and technical excellence Budget to expected cost plus fixed fee

Cost-Plus- Award-Fee Acts like a CPFF except the fixed fee is 0% or some small base fee Contractor earns more fee through and “Award Fee Plan” Award is the unilateral right of the government

CPAF Appropriate when estimates of cost, performance, and schedule are uncertain More incentive is desired than CPFF Administrative capability is available Award is based on judgment of Award Determining Official Budget to expected costs plus entire available fee

Cost-Plus- Incentive-Fee Shift cost risk to contractor Contractor should assume more risk: –More detailed specs –Less uncertainty –Better able to estimate costs Contractor now shares in overruns and underruns

CPIF Negotiate certain items –Target cost –Target fee –Max fee –Min fee –Share line Regardless of cost the fee is never more than the max, nor less than the min

CPIF Appropriate when uncertainties can be identified and quantified to some degree Used to incentivize the contractor when uncertainties still preclude Fixed Price Used in R&D when uncertainties can be resolved by $$

Share Formula Expressed as a percentage with the government’s share first Example: –80/20 share means that the government pays 80% of overruns or keeps 80% of underruns –Contractor’s fee is reduced by 20 cents for every dollar of overrun –Contractor’s fee is increased by 20 cents for every dollar of underrun

CPIF Budget to expected cost and fee Fee Max Target Min Cost Target 100/0 0/100 Effective range of Incentive 80/20

Fixed Price Contracts Funding of cost overruns is not possible Contractor obligated to deliver specific product at the price negotiated regardless of cost Appropriate when cost, performance, and schedule uncertainty is low of manageable

Firm-Fixed- Price Contractor must manage cost within price Highest profit potential –More cost means less profit Completion form –Can have FP elements of a contract Level of Effort can be at a fixed price Budget to final negotiated price

Fixed Price Incentive Firm Uncertainty too great for FFP Completion form Contractor must perform Contractor performs at own expense when costs exceed ceiling price

FPIF Negotiate –Target Cost –Target Profit –Ceiling Price –Share line Profit is more than target if final cost is less than target cost and decreased if final cost is more than target cost Regardless, the ceiling is firm

FPIF Profit Target Profit Target Cost At PTA Contract price line Based on Share Point of Total Assumption Ceiling Price

FPIF Budget to the target price of the contract –Budgeting to the ceiling price indicates that the government does not believe that the incentives will change contractor performance

FP w/Economic Price Adjustment Price negotiate on assumptions regarding economic prices of materials or labor EPA clause kicks in if assumptions fail and some trigger is set-off Can be pre-negotiated or based on an index Budged to anticipated price –Does not include EPA –EPA adjustment should be unlikely