1. Selecting Contract Types & Incentives
Under ProTech

2. OBJECTIVE FAR 16.103(a) states,
“The objective is to negotiate a contract type and price (or estimated cost and fee) that will result in reasonable contract risk and provide the contractor with the greatest incentive for efficient and economical performance. “
Performance Based Acquisition (PBA) is a method of preparing service contracts that emphasizes the service outcomes the Government would like the contractor to provide.
The use of PBA has been encouraged by the Office of Management and Budget (OMB) to drive down the costs of contracts while improving contractor performance. To the maximum extent practicable, agencies shall use performance-based methods for acquiring services.
FAR 37.6 prescribes policies and procedures for acquiring services using performance-based acquisition methods. Additionally, the Seven Steps to Performance-Based Acquisition available at is the leading procedural document on the subject.
The major work statement used to enable this process is the Performance Work Statement or PWS. The PWS will be the focus of this session.

3. FACTORS IN SELECTING CONTRACT TYPES
Price competition.
Price analysis.
Cost analysis.
Type and complexity of the requirement.
Combining contract types.
Urgency of the requirement.
Period of performance or length of production run.
Contractor's technical capability and financial responsibility.
Adequacy of the contractor's accounting system.
Concurrent contracts.
Extent and nature of proposed subcontracting.
Acquisition history.
Factors in selecting contract types.
There are many factors that the contracting officer should consider in selecting and negotiating the contract type. They include the following:
(a)Price competition. Normally, effective price competition results in realistic pricing, and a fixed-price contract is ordinarily in the Government's interest.
(b)Price analysis. Price analysis with or without competition, may provide a basis for selecting the contract type. The degree to which price analysis can provide a realistic pricing standard should be carefully considered. (See (b).)
(c)Cost analysis. In the absence of effective price competition and if price analysis is not sufficient, the cost estimates of the offeror and the Government provide the bases for negotiating contract pricing arrangements. It is essential that the uncertainties involved in performance and their possible impact upon costs be identified and evaluated, so that a contract type that places a reasonable degree of cost responsibility upon the contractor can be negotiated.
(d)Type and complexity of the requirement. Complex requirements, particularly those unique to the Government, usually result in greater risk assumption by the Government. This is especially true for complex research and development contracts, when performance uncertainties or the likelihood of changes makes it difficult to estimate performance costs in advance. As a requirement recurs or as quantity production begins, the cost risk should shift to the contractor, and a fixed-price contract should be considered.
(e)Combining contract types. If the entire contract cannot be firm-fixed-price, the contracting officer shall consider whether or not a portion of the contract can be established on a firm-fixed-price basis.
(f)Urgency of the requirement. If urgency is a primary factor, the Government may choose to assume a greater proportion of risk or it may offer incentives tailored to performance outcomes to ensure timely contract performance.
(g)Period of performance or length of production run. In times of economic uncertainty, contracts extending over a relatively long period may require economic price adjustment or price redetermination clauses.
(h)Contractor's technical capability and financial responsibility.
(i)Adequacy of the contractor's accounting system. Before agreeing on a contract type other than firm-fixed-price, the contracting officer shall ensure that the contractor's accounting system will permit timely development of all necessary cost data in the form required by the proposed contract type. This factor may be critical -
(1) When the contract type requires price revision while performance is in progress; or
(2) When a cost-reimbursement contract is being considered and all current or past experience with the contractor has been on a fixed-price basis. See (a)(12).
(j)Concurrent contracts. If performance under the proposed contract involves concurrent operations under other contracts, the impact of those contracts, including their pricing arrangements, should be considered.
(k)Extent and nature of proposed subcontracting. If the contractor proposes extensive subcontracting, a contract type reflecting the actual risks to the prime contractor should be selected.
(l)Acquisition history. Contractor risk usually decreases as the requirement is repetitively acquired. Also, product descriptions or descriptions of services to be performed can be defined more clearly.

4. CONTRACT TYPES FIXED-PRICE CONTRACTS COST-REIMBURSEMENT CONTRACTS
– a term used to signify differences in contract structure or form, including compensation arrangements and amount of risk (either to the government or to the contractor).
Contract types fall into two broad categories: 
FIXED-PRICE CONTRACTS
COST-REIMBURSEMENT CONTRACTS
Contract type is one element of contract compensation arrangements. Other aspects include contract financing, profit or fee, incentive arrangements, and contract terms and conditions.
After an agency determines a need, it develops an acquisition strategy. Part of this strategy involves determining which contract type will best serve the government’s needs.

5. CONTRACTOR RESPONSIBILITY CONTRACT TYPE SPECTRUM
THE SPECTRUM
COST-PLUS-FIXED-FEE
FIRM-FIXED-PRICE
LESS
CONTRACTOR RESPONSIBILITY
MORE
An incentive is a stimulus to a desired action that exists in every business arrangement. The effective application of incentives is essential to building successful business arrangements that maximize value for all parties. The Department of Defense (DoD) is committed to adopting incentive strategies that attract, motivate, and reward traditional and nontraditional contractors to ensure high performance. At the core of incentive-based contracting is the contractor’s inherent motivation to maximize profit. Incentive contracts provide the opportunity for a contractor to realize increased profit for attaining cost, performance, and schedule goals. At the same time, negative incentives may be employed to motivate contractors to avoid reduced profitability when outcomes fall short of the DoD’s desired levels. Incentive contracts should be structured to achieve desired objectives through reasonable and attainable targets that are clearly communicated to the contractor.
CONTRACT TYPE SPECTRUM

6. FIXED-PRICE FP
A fixed-price contract is a type of contract where the payment amount does not depend on resources used or time expended. This is opposed to a cost-plus contract, which is intended to cover the costs with additional profit made.
Includes:
Firm-Fixed-Price (FFP)
Fixed-Price with Economic Price Adjustment (FPEPA)
Fixed-Price Award Fee (FPAF)
Fixed-Price Incentive Fee (FPIF)
Fixed-Price Level of Effort (FPLOE)
Re: FAR 16.2 and 16.4
These are the most common types of contracts and the price of the contract is set before the contract is started. A fixed-price type contract places the maximum risk and responsibility for all costs and resulting profit or loss on the contractor. If the contractor does not perform efficiently, they may experience a loss on the contract. If the contractor does not perform in accordance with the terms of the contract, they are subject to Termination for Default.

7. COST REIMBURSABLE
In general, a cost-reimbursement contract (CR) provides for payment to the contractor of allowable costs incurred during performance; that is, the final amount payable by the Government is determined by the contractor's actual cost experience.
Includes:
Cost Plus Award Fee (CPAF)
Cost Plus Fixed Fee (CPFF)
Cost Plus Incentive Fee (CPIF)
Re: FAR 16.3 and 16.4
Cost reimbursable contracts provide for payment of all allowable expenses to the extent prescribed in the contract. These contracts establish an estimate of total costs for the purpose of obligating funds and establishing a ceiling which the contractor shall not exceed, except at his own risk, without the approval of the contracting officer.
Cost reimbursable contracts are normally used when uncertainties in contract performance do not permit costs to be estimated with sufficient accuracy to allow for the use of any type of fixed-price contract

8. INCENTIVES
– a portion of profit, fee, or the term of the contract that is dependent upon criteria that further enhance Government and contractor interests.
Re: FAR 16.4
An incentive is a stimulus to a desired action that exists in every business arrangement. The effective application of incentives is essential to building successful business arrangements that maximize value for all parties. They are appropriate when a firm-fixed price contract is not appropriate and the supplies or services can be acquired at lower cost, and in certain instances with improved delivery or technical performance.
Incentive contracts are designed to achieve specific objectives by doing two things. First, by establishing reasonable and attainable targets that are clearly communicated to the contractor; and secondly, by including appropriate incentive arrangements designed to motivate contractor efforts that might not otherwise be emphasized and discourage inefficiency and waste.
At the core of incentive-based contracting is the contractor’s inherent motivation to maximize profit, and provides the opportunity for a contractor to realize increased profit for attaining cost, performance, and schedule goals. At the same time, negative incentives may be employed to motivate contractors to avoid reduced profitability when outcomes fall short of desired levels.

9. CONTRACT TYPES DEFINE
The expectations, obligations, incentives and rewards for both the government and the contractor
Degree and timing of the responsibility assumed by the contractor for the costs of performance
The amount and nature of the profit incentive offered to the contractor for achieving or exceeding specified standards or goals
An example of a tree diagram for cleaning services is shown.
At each level of breakdown, the parts must be mutually exclusive and collectively exhaustive of the next higher level. Furthermore, there must be no overlap among the parts at a particular level, and nothing must be left out.
Check the scope statement for completeness and accuracy.
Check that each activity is broken down into all tasks necessary for that activity to be completed.
Check that all tasks are identified and defined in “do what” terms not “how to” terms.
Check that completion criteria are defined for each task.
Check that the data requirements (reports, software, or other deliverables) have been identified and associated with tasks.
Check that all required government-furnished property has been identified.

10. PROTECH CONTRACT TYPES
ProTech offers multiple pricing arrangements to allow the contracting office to select the pricing arrangement or arrangements most appropriate to the circumstances for the Task Order (TO):
Fixed-Price (FP)
Cost Reimbursable (CR)
Time and Materials/Labor Hour (TM/LH)
Note: Hybrid orders (multiple pricing arrangements) may be placed under ProTech.

11. FIRM-FIXED PRICE
FFP
Price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract
Maximum risk and full responsibility for all costs and resulting profit or loss placed on the contractor
Used when –
acquiring commercial items or for acquiring other supplies or services on the basis of reasonably definite functional or detailed specifications
Contracting officer must establish fair and reasonable prices at the outset
Re: FAR Firm-fixed-price contracts
FFP provides maximum incentive for the contractor to control costs and perform effectively, and imposes a minimum administrative burden on the contracting parties.

12. FIXED PRICE W. ECONOMIC PRICE ADJUSTMENT
FPEPA
Provides for upward and downward revision of the stated contract price upon the occurrence of specified contingencies based on:
established prices
actual costs of labor or material
cost indexes of labor or material
Used when –
there is serious doubt concerning the stability of market or labor conditions
contingencies that would otherwise be included in the contract price can be identified and covered separately in the contract
Re: FAR Fixed-price contracts with economic price adjustment
FPEPA is designed to cope with the economic uncertainties that threaten long-term fixed-price arrangements. Using an FPEPA contract may motivate a contractor to accept a fixed-price effort because of its built-in mechanism to mitigate the risk.

13. FPAF FIXED-PRICE AWARD FEE
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.
Fixed price (including normal profit) paid for satisfactory contract performance
Award fee earned (if any) will be paid in addition to that fixed price
Re: FAR Fixed-price contracts with award fees
Conditions for use may include:
It is not feasible to set objective incentive targets
Management interest – factors of concern may change over the contract period
Unquantifiable subjective performance areas – such as responsiveness, customer service, etc.
When only subjective incentives will achieve a desired goal.

14. FIXED PRICE INCENTIVE FEE
FPIF
Provides for adjusting profit and establishing the final contract price by application of a formula based on the relationship of total final negotiated cost to total target cost
The final price is subject to a price ceiling, negotiated at the outset
Use when –
A firm-fixed-price contract is not suitable
The contractor’s assumption of a degree of cost responsibility will provide a positive profit incentive for effective cost control and performance
A reasonable opportunity for the incentives to have a meaningful impact on the contractor’s management of the work
Re: FAR Fixed-price incentive contracts

15. FIXED-PRICE LEVEL OF EFFORT
FPLOE
Provides a specified level of effort, over a stated period of time
work that can be stated only in general terms; and
Government pays the contractor a fixed dollar amount
payment is based on the effort expended rather than on the results achieved
Used when –
Requiring investigation or study in a specific research and development area
Deliverable usually a report showing the results achieved through application of the required level of effort
Re: FAR Firm-fixed-price, level-of-effort term contracts
Firm-fixed-price, level-of-effort term contracts.
Description.
A firm-fixed-price, level-of-effort term contract requires—
(a) The contractor to provide a specified level of effort, over a stated period of time, on work that can be stated only in general terms; and
(b) The Government to pay the contractor a fixed dollar amount.
Application.
A firm-fixed-price, level-of-effort term contract is suitable for investigation or study in a specific research and development area. The product of the contract is usually a report showing the results achieved through application of the required level of effort. However, payment is based on the effort expended rather than on the results achieved.
Limitations.
This contract type may be used only when—
(a) The work required cannot otherwise be clearly defined;
(b) The required level of effort is identified and agreed upon in advance;
(c) There is reasonable assurance that the intended result cannot be achieved by expending less than the stipulated effort; and
(d) The contract price is $150,000 or less, unless approved by the chief of the contracting office.

16. CPAF COST PLUS AWARD FEE Fee consists of -
a base amount fixed at inception of the contract, at the discretion of the contracting officer, and
an award amount that the contractor may earn in whole or in part during performance
Use when –
It is desirable to provide motivation for excellence in the areas of cost, schedule, and technical performance
Meeting acquisition objectives will be enhanced with the flexibility to evaluate both actual performance and the conditions under which it was achieved
Additional administrative effort can be justified
FAR (e) and Cost-plus-award-fee contracts
CPAF contracts provide for a fee consisting of a base fee (not to exceed 3%) and an award fee pool amount that is sufficient to motivate contractor excellance in cost, schedule, and technical performance.

17. CPFF COST PLUS FIXED FEE
Provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract
does not vary with actual cost
may be adjusted as a result of changes in work to be performed under the contract
Use when –
Performance of research or preliminary exploration or study is required, and the level of effort required is unknown
The contract is for development and test, and using a cost-plus- incentive-fee contract is not practical
CPFF
Re: FAR Cost-plus-fixed-fee contracts
Completion Form
Requires contractor to work to a definite goal or target
Specifies an end product
End product must be delivered to earn entire fee
Term Form
Obligates contractor to devote and expend a specified level of effort for a stated period of time
As long as effort is satisfactory to the government, the fee is paid
Remember that regardless of the final cost outcomes under a Cost-Plus-Fixed-Fee (CPFF) Contract, the fee to the contractor is fixed. The fee under a CPFF contract is a function of the estimated target cost and a percentage of that cost as a fee. This point is negotiated prior to contract performance and does not change unless the contract is modified to change something in the requirement. As much as a CPFF contract can be said to motivate contractor performance, the realization of different final fee percentages is the incentive.

18. COST PLUS INCENTIVE FEE
CPIF
Provides for an initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs
specifies a target cost, a target fee, minimum and maximum fees, and a fee adjustment formula
The formula provides, within limits, for increases in fee above target fee when total allowable costs are less than target costs, and decreases in fee below target fee when total allowable costs exceed target costs
Use when –
appropriate for services or development and test programs
both cost and technical performance incentives is desirable and administratively practical
Re: FAR and Cost-plus-incentive-fee contracts

19. TIME & MATERIALS/LABOR HOUR
TM contracts are a hybrid of fixed-price and cost-reimbursement contracts
Presents the highest risk to the government and lowest risk to the contractor
Least desirable contract type for the government
Does not encourage effective cost control
Requires extraordinary surveillance
Allows COs to buy supplies or services on the basis of:
Direct labor hours at specified fixed hourly rates
Actual material costs
Use when –
it’s not possible to accurately estimate the extent or duration of the work, or to anticipate costs with any reasonable degree of confidence
Re: FAR Time-and-Materials, Labor-Hour, and Letter Contracts
TM/LH contracts should be used only if the CO executes a D&F that no other contract type is suitable (FAR (d)). A CO may not use a TM/LH contract simply by establishing that the service is offered on a TM/LH basis commercially and that the offered rate is fair and reasonable. The CO must first affirmatively establish that it is not suitable to acquire the service using any other contract type.
Resembles a CR contract in that neither requires the completion of the task as written within the agreed to maximum price, and both types pay the contractor actual hours worked. There is no cost incentive for either contract type.
The TM/LH contract requires contractors to provide their best effort. Since the contractor doesn’t have a profit incentive for cost control or labor efficiency, the government must exercise additional oversight to protect their interests.

20. TIME & MATERIALS/LABOR HOUR
Time and Material (TM) and Labor Hour (LH)
Determinations and Findings (D & F) required by FAR (c) and CAM
PMs will assist TO COs, when necessary, verifying
the work is of a T & M nature, and
the facts and rationale justify that no other contract-type is suitable
The LH contract is a type of TM contract that excludes materials.
Used only for services

21. For additional questions contact protech.services@noaa.gov
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