FAR Part 16 – An Overview

1. Why is this important

2. Practical considerations – contract selection

3. Overview of Firm Fixed Price Contracts

4. Overview of Cost Reimbursement Contracts

5. Other types of contracts

 Determines allocation of risk
 Contractor v. Government
 Determines administrative effort
 Accounting function – billing, reporting, etc.
 Management/government oversight
 Determines amount and nature of profit
 Should be consistent with SOW (i.e. R&D)
 Primary Motive: Maximize efficient &
economical performance
 Note: It is in the CO’s best interest to select the most
appropriate contract type
 Does this contract –
 Balance risk
 Provide an incentive to control costs

 Nature & Form of Request

 Complexity
 Uncertainties (i.e. Research &
Development)
 CO may consider shifting from cost reimbursement
to fixed price contract after uncertainty is lifted (i.e.
production begins)
 Timing
 Urgent requests - Gov’t may concede risk or incentive

 Period of Performance
 Consider EPA (Economic Price Adjustments) for long-
term fixed price contracts

 Adequacy of Contractor’s Accounting System

 Significant requirements for cost reimbursement type
 Fixed Price
 Cost Reimbursement
 Incentive/Award
 Indefinite Delivery
 Definite quantity
 Requirements contracts
 Indefinite quantity
 Time & Materials or Labor Hour
 Letter Contracts
 Basic Agreements
 Cost
Reimbursement
• Government bears risk
• High Administrative Effort
• Fee/profit is limited
Fixed Price
• Contractor bears risk
• Low Administrative Effort
• Fee/profit is unlimited
 May be a firm or adjustable price

 Contractor entitled to profit and bears risk of loss –

incentive to control costs

 CO may use award, performance, or delivery

incentive in these contracts

 Suitable for commercial items or goods/services

for which a price can be reasonably determined

 Each party must have clear understanding of scope,

requirements
 Firm Fixed Price
(FFP)

FFP, Level of FFP w/Economic

Effort Price Adjustments

Fixed Price Fixed Price

Redetermination Incentive/Award
 Price not subject to adjustment

 Maximum risk for contractor

 Minimum administrative burden

 To be used when price can be predicted with

a level of certainty

 “FFP contracts best utilize basic profit motive”

 May be upward or downward

 3 Types –
 Adjustment based on price fluctuation
 Adjustment based on actual cost of labor or material
 10% max upward adjustment
 Adjustment based on cost indexes of labor or material
(as identified in the contract)

 May be used when…

 Instable market or labor conditions
 Industry specific contingencies beyond contractor
control
Prospective Retrospective

Used for R&D

Used for quantity contracts < $100k &
production short performance
period

Initial ceiling set and

Price redetermined
then redetermined
at stated time in
upon completion of
future
contract.

Note: Redetermination contracts are rarely used.

Note: Redetermination is always downward.
 Generally only used when:
 Work cannot be clearly defined (i.e. R&D)
 Level of effort can be agreed to at outset
 # of labor hours
 Contract price is less than $100k

 Price based on effort rather than results

 A fixed amount is paid for a specific level-of-effort
over a stated period of time
 Downward price adjustment if # of hours is less than
LOE per contract
 Provides for reimbursement of allowable
incurred costs up to contract amount
 Costs must be reasonable, allocable, and allowable,
and properly accounted for

 Contractor bears risk for incurred costs in

excess of contract ceiling amount
 “Limitation of Funds” clauses
 Contractor must provide notice
 w/in 30-90 days, cost will reach 75-85%
 CO must approve additional funding
 Suitable for use when uncertainties exist
 Costs cannot be estimated
 Fixed price cannot be established
 Performance risk is high (e.g., new technology, new
processes, R&D)

 Limitations
 Contractor accounting system adequacy
 Billing at “provisional” rates
 Ability to segregate costs
 Not to be used for commercial items
 Cost
Cost
Sharing
Contracts
Contracts

Cost Plus
Award / Cost Plus
Incentive Fixed Fee
Fee
 Contractor gets reimbursed for allowable cost
but receives NO fee

 Application
 May be appropriate for R&D contract w/not for profit
entity
 Contractor reimbursed for a % of allowable
costs and receives NO fee

 Suitable for R&D contracts where contractor

will receive long-term benefits
 Provides for a negotiated fixed fee
 Statutory limits on fee
 R&D (15%), A/E (6%), Other (10%)

 2 Forms:
 Completion Form
 Requires contractor to complete entire scope of work
before payment of fee

 Term Form
 Contractor must complete specific level of effort
 Fee is payable at expiration of contract term (gov’t must be
satisfied with level of effort)

Note: The government prefers the completion form over the term form
 May be “fixed price” or “cost reimbursement”
 Designed to encourage contractor efficiency
 Incentive contracts may be based on:
 Cost
 Fee is adjusted upward or downward by the sharing formula, based on
the relationship of Actual Cost to Target Cost
 Negotiate target cost, target fee, & fee adjustment formula
 Performance – tied to results, technical merit
 Delivery – used when timely deliver is critical

 Award Fees – “Base” + “Award” Fee

 Subjective evaluation
 T&M
 Payment based on labor hours @ specified rates
 “Fully Loaded Rates”
 Material reimbursed at cost
 Must include a ceiling price
 May be used when extent of labor cannot be estimated

 Labor Hour
 Same as above except no materials are provided

**Little incentive for contractor to control cost

 Provides government with flexibility
 Delivery Order (Supplies) v. Task Order (Services)
 Three Basic Types:
◦ Definite Quantity
 Contractor provides definite quantity over stated period of time
 Short lead time requirement
◦ Requirements Contracts
 Contractor fills all orders
 Subject to maximum
◦ Indefinite Quantity
 Guaranteed minimum
 Written preliminary agreement
 Allows contractor to perform without a formal
contract in place
 Used when there is an “urgent” need
 Definitive price established within 180 days
or before 40% of work is performed
 Written instruments, NOT contracts

 Simplifies future contract negotiation

 Sets clauses applicable to future contracts
 Used when a substantial number of separate contracts
may be awarded and significant recurring negotiating
problems have been experienced with the contractor.