1. Contracting Officer Podcast Slides
Knowledge & Insights From Contracting Officers

2. What is a Letter Contract?
Episode 046
What is a Letter Contract?
Original Air Date: September 27, 2015
Hosts: Kevin Jans & Paul Schauer

3. Formatting notes
Hyperlinks: Blue font indicates hyperlinks – presentation must be in ‘Slide Show’ mode to activate the link
Red bold font indicates a point of emphasis
Green bold font indicates CO’s personal comment or perspective

4. Introduction
Purpose of this podcast: To examine and discuss Letter Contracts
This is a way for Government to get work started quickly, before agreeing to every detail of the contract
Letter contracts are used when:
In Government’s interest to start work immediately, AND
Negotiating a definitive contract is not possible in sufficient time to meet the requirement

5. Introduction
Should be as complete and definite as possible under the circumstances
Factors:
Sole-source negotiation situation
When based on price competition, must include a ceiling
Performance needs to start NOW!

6. When do Letter Contracts happen?
Acquisition Time Zones (from Podcast Episode 003)
Requirements Zone
Market Research Zone
RFP Zone
Source Selection Zone (or sole source)
These interactions occur throughout the entire Pre-Award phase of the process

7. Letter Contract – Definition
FAR – A letter contract is a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services
Sometimes called an undefinitized contract action (UCA)

8. Three “Shall Nots…” Letter contracts SHALL NOT:
Commit the Government in excess of funds available at the time the letter contract is executed
Be entered into without competition when it is required (FAR Part 6)
Justification & Approvals (J&As) and letter contracts go hand-in-hand
Be amended to new add requirements unless inseparable from the existing letter contract

9. More Factors of Letter Contracts
Must have a negotiated definitization schedule that includes:
Proposal due date, pricing data requirements, make/buy, & subcontract plans
Negotiation start date
Target date for definitization (stick to this like it is a competitive source selection)

10. More Factors of Letter Contracts
Definitization
Shall be the earliest practicable date
Within 180 days or before 40% of the work is complete (whichever is first)
Can be extended “in extreme cases”

11. More Factors of Letter Contracts
Government’s maximum liability
SHALL NOT exceed 50% of the estimated cost of the definitive contract unless approved in advance (of reaching 50%) by whoever authorized the letter contract
If price/fee agreement can’t be reached, CO can UNILATERALLY determine a reasonable cost or fee (with HCA approval)

12. Three Clauses One that describes the rules for starting work
One that says Government will only pay up to the max amount stated in the letter contract
One that spells out the definitization schedule

13. Why are Letter Contracts important?
Government contracting process can take a long time
A letter contract allows work to start NOW!

14. Why Should Government Care?
Might be your only chance of meeting a critical schedule requirement
Sometimes perceived as giving away all negotiation power because you’re already committed to the contractor
If allowed to linger, definitized price will be whatever the contractor spends
Contractor ends up defining requirements because work is complete or past the point where changes are feasible
Easy to be lax about schedule once work starts and urgency seems to be over

15. Why Should Government Care?
What usually happens: the CO moves on to other urgent work and ends up negotiating mostly actuals
Not good for Government: no cost control
Not good for Industry: Government assumes a low fee (performance is already or nearly complete, so there is negligible risk)

16. Why Should Industry Care?
Letter contracts are not a free-for-all
Difficult to price when actuals and estimates are combined
Difficult to complete work efficiently if requirements are a moving target

17. Summary
Letter contracts cut through the red tape and get work started NOW
Include a schedule for definitization that should be followed as if it is a source selection
Limit the contractor’s expenditures to an established ceiling
Requires communication and trust
Be mindful of the user/acquisition office line
User needs/requirements must be “officially” passed through the contracting officer
Lots of room for confusion/complication/frustration if communications aren’t clear

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