Contract types
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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.

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Contract types

Contract Types


Forms of contracts

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

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

Which Type?

  • Nature and complexity of effort

  • Urgency

  • Period of performance

  • Competition

  • Difficulty in defining performance

  • Availability of data


General budgeting rule

General Budgeting Rule

  • PMs must budget to the “most likely price”

  • Most likely price

    • Varies by contract type


Cost reimbursement

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

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


Contract types

CPFF

  • Appropriate when estimates of cost, performance, and schedule are uncertain

  • Flexibility is needed

  • Monitoring needs are high

  • Change is anticipated


Contract types

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

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


Contract types

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

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


Contract types

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


Contract types

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

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


Contract types

CPIF

  • Budget to expected cost and fee

Fee

100/0

Effective range of Incentive

80/20

Max

Target

0/100

Min

Cost

Target


Fixed price contracts

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

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

Fixed Price Incentive Firm

  • Uncertainty too great for FFP

  • Completion form

  • Contractor must perform

  • Contractor performs at own expense when costs exceed ceiling price


Contract types

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


Contract types

FPIF

Profit

Contract price line

Based on Share

Target Profit

Point of

Total Assumption

Ceiling Price

Cost

At

PTA

Target

Cost


Contract types

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

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


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