1 / 20

Contract Types and Appropriate Incentives

Contract Types and Appropriate Incentives. Contract Types & Appropriate Incentives. Jo Cunningham Distinguished Member of Laboratory Staff Sandia National Laboratories Session #3, 1:00pm - 1:30pm ET NCMA’s 1 st Performance-Based Service Acquisition

salome
Download Presentation

Contract Types and Appropriate Incentives

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Contract Types and Appropriate Incentives

  2. Contract Types & Appropriate Incentives Jo Cunningham Distinguished Member of Laboratory Staff Sandia National Laboratories Session #3, 1:00pm - 1:30pm ET NCMA’s 1st Performance-Based Service Acquisition Community of Practice - Virtual Conference Wednesday, March 31, 2010 12:00pm - 4:00pm ET

  3. Basic Decisions: • Selecting the contract pricing arrangement is THE most important decision you will ever make! • The Second most important decision is how to motivate the contractor.

  4. What’s Really in it For Me? Describe how you saved us $10 MillionAND reduced our risks!

  5. Contract Types • Two Basic Contract Types: • Fixed Price • FFP, FFP/EPA, FP+AF, FP+I, FF Rate, Cost-Share • Cost Reimbursement • CNF, CPFF, CPIF, CPAW, Cost-Share • T&M, LH

  6. Contractor Performance Considerations • Firm Fixed Price: Failure is not an option • Time & Materials: We can’t fail as long as we show up for work. • Cost Reimbursable: We will give it our best try, but failure may be an option

  7. Cost Risk & Contract Type Cost Risk: High >>>>>>>>>>>>>>>>>>>>>>>> Low Requirement Definition Vague >>>>>>>>>>>>>>>>>>>>>>>>> Well Defined ProductionConcept Exploratory Test/ Full scale Full StagesStudies, & Development Demo Development Production Basic Research Contract Varied CPFF CPIF, CPIF, FPIF, FFP, FPIF, Type FPIF or FFP or FPEPA

  8. Firm Fixed Price Principal Risks: None, Contractor assumes all cost risk Use When: The requirement is well-defined. Contractors are experienced in meeting the fixed price. Market conditions are stable. Financial risks are otherwise insignificant Typical Application: Commercial supplies and services, Generally NOT appropriate for R&D. Contractor is required to: Provide acceptable deliverable at the time, place and price specified in the contract Contractor Incentive: Generally realizes an additional dollar of profit for every dollar that costs are reduced

  9. Fixed Price Economic Price Adjustment Principal Risks: Unstable market prices for labor or material over life of contract. Use When: Market prices at risk are severable and significant. Risks stem from industry-wide contingencies beyond contractor's control. Dollars at risk outweigh administrative burdens of an FPEPA. Typical Application: Long-term contracts for commercial supplies during a period of high inflation. Contractor is required to: Provide acceptable deliverable at the time and place specified in the contract at the adjusted price. Contractor Incentive: Generally realizes an additional dollar of profit for every dollar that costs are reduced

  10. Fixed Price Incentive Fee Principal Risks: Moderately uncertain contract labor or material requirements Use When: Ceiling price can be established that covers most probable risks inherent in nature of work. Proposed profit sharing formula would motivate contractor to control costs to & meet other objectives Typical Application: Production of a major system based on a prototype. Contractor is required to: Provide acceptable deliverable at time & place specified in contract, at or below ceiling price. Contractor Incentive: Realizes a higher profit by completing work below ceiling price and/or by meeting objective performance targets

  11. Fixed Price Award Fee Principal Risks: Risk that the user will not be fully satisfied because of judgmental acceptance criteria. Use When: Judgmental standards can be fairly applied by Award-fee panel. The potential fee is large enough to both: (1) Provide meaningful incentive; (2) Justify related administrative burdens. Typical Application: Performance-based service contracts. Contractor is required to: Perform at time, place, and price fixed in contract. Contractor Incentive: Generally realizes an additional dollar of profit for every dollar that costs are reduced; earns an additional fee for satisfying performance standards

  12. Fixed Price Prospective Redetermination Principal Risks: Costs of performance after the first year because they cannot be estimated with confidence. Use When: Buyer needs a firm commitment from contractor to deliver supplies /services during subsequent years. Dollars at risk outweigh administrative burdens of FPRP. Typical Application: Long-term production of spare parts for a major system. Contractor is required to: Provide acceptable deliverables at time & place specified in contract at price established for each period. Contractor Incentive: For the period of performance, realizes an additional dollar of profit for every dollar that costs are reduced.

  13. Cost Plus Incentive Fee Principal Risks: Highly uncertain & speculative labor hours, labor mix, material requirements (and other) necessary to perform contract. Buyer assumes risks; benefiting if actual cost is lower than expected cost; losing if work can’t be completed within expected cost of performance. Use When: Objective relationship can be established between fee & such measures of performance as actual costs, delivery dates, performance benchmarks, etc. Typical Application: Research and development of prototype for major system. Contractor is required to: Make good faith effort to meet Buyer's needs within estimated cost in the Schedule. Contractor Incentive: Realizes a higher fee by completing work at lower cost and/or by meeting other objective performance targets

  14. Cost Plus Award Fee Principal Risks: Highly uncertain & speculative labor hours, labor mix, material requirements (and other things) necessary to perform contract. Buyer assumes risks inherent in contract; benefiting if actual cost is lower than expected cost; losing if work cannot be completed within expected cost of performance. Use When: Objective incentive targets are not feasible for critical aspects of performance. Judgmental standards can be fairly applied. Potential fee would provide a meaningful incentive. Typical Application: Large scale research study. Contractor is required to: Make good faith effort to meet Buyer's needs within estimated cost in the Schedule. Contractor Incentive: Realizes a higher fee by meeting judgmental performance standards.

  15. Cost Plus Fixed Fee Principal Risks: Highly uncertain & speculative labor hours, labor mix, material requirements (and other things) necessary to perform contract. Buyer assumes risks inherent in contract; benefiting if actual cost is lower than expected cost; losing if work cannot be completed within expected cost of performance. Use When: Relating fee to performance (e.g., to actual costs) would be unworkable or of marginal utility. Typical Application: Research studies. Contractor is required to: Make good faith effort to meet Buyer's needs within estimated cost in the Schedule. Contractor Incentive: Realizes a higher rate of return (i.e., fee divided by total cost) as total cost decreases.

  16. Cost Sharing Principal Risks: Highly uncertain & speculative labor hours, labor mix, material requirements (and other things) necessary to perform contract. Buyer assumes risks inherent in contract; benefiting if actual cost is lower than expected cost; losing if work cannot be completed within expected cost of performance. Use When: The contractor expects substantial compensating benefits for absorbing part of the costs and/or foregoing fee. Typical Application: Joint research where Contractor expects to derive long term benefits to his company. Contractor is required to: Make good faith effort to meet Buyer's needs within estimated cost in the Schedule. Contractor Incentive: Shares in the cost of providing a deliverable of mutual benefit..

  17. Cost No Fee Principal Risks: Highly uncertain & speculative labor hours, labor mix, material requirements (and other things) necessary to perform contract. Buyer assumes risks inherent in contract; benefiting if actual cost is lower than expected cost; losing if work cannot be completed within expected cost of performance. Use When: The supplier is a not-for-profit entity. Typical Application: Joint research with an educational institutions or other not-for-profit entities. Contractor is required to: Make good faith effort to meet Buyer's needs within estimated cost in the Schedule. Contractor Incentive: Providing a deliverable with benefits to both parties; Contractor expects to derive long term benefits to his firm; Enhanced reputation.

  18. Time and Materials Principal Risks: Highly uncertain & speculative labor hours, labor mix, material requirements (and other things) necessary to perform contract. Buyer assumes risks inherent in contract; benefiting if actual cost is lower than expected cost; losing if work cannot be completed within expected cost of performance. Use When: No other type of contract is suitable (e.g., labor & materials can’t be reliably estimated due to inherent uncertainties, and contractor does not have accounting system to support a job cost accounting system). Typical Application: Emergency repairs to heating plants and aircraft engines; hazardous waste removal; Contractor support for field exercises. Contractor is required to: Make good faith effort to meet Buyer's needs within ceiling price. Contractor Incentive: None, other than enhanced reputation.

  19. Firm Fixed Rate Principal Risks: Highly uncertain & speculative labor hours, labor mix, material requirements (and other things) necessary to perform contract. Buyer assumes risks inherent in contract; benefiting if actual cost is lower than expected cost; losing if work cannot be completed within expected cost of performance. Limit risk by ceiling price of $100,000 or less. Use When: No other type of contract is suitable (e.g., because costs are too low to justify an audit of the contractor's indirect expenses). Typical Application: Emergency repairs to facilities and equipment; Contractor support for small efforts <$100,000. Contractor is required to: Make good faith effort to meet Buyer's needs within ceiling price. Contractor Incentive: None, other than enhanced reputation.

  20. Summary • Initial steps to remember: • Discuss requirements with the customer & compare to the SOW, revising as necessary • Review the pricing types, and consider the pros & cons of each. • Pitfalls: • Avoid cost-type and T&M/LH if contractor has unsophisticated accounting system. • Avoid setting up Contractor for failure (e.g. using FFP when not appropriate) • Award / Incentive Fees = High Admin costs • Remember: Choosing Wisely Reduces Risks and may save you potentially significant costs!

More Related