Contract Types

For the government to be successful in the purchase of goods or services, it is imperative that the contracting officer choose the type of contract that best fits their requirements. In selecting which contract type to use, the contracting officer seeks to find a balance that provides the contractor with reasonable risk and the greatest incentive for performance. The Federal Acquisition Regulation (FAR) provides two broad categories of contract types: firm-fixed price (FFP) and cost-reimbursement.

Firm-Fixed Price (FFP)

In an FFP contract, the contractor assumes full responsibility (or risk) for the profit or loss of the contract. This means that, if a contractor agrees to provide twenty sprockets for $1000 dollars, they bear the full risk, regardless of whether the sprockets actually cost $800 dollars (a $200 dollar profit) or $1200 dollars (a $200 dollar loss). In most cases, an FFP is used where the risk is minimal or can be predicted with a reasonable degree of certainty. Consequently, the government will not allow the contractor to raise or lower their price without good cause(s). One excellent example of FFP use is sealed bidding.

With a cost-reimbursement contract, the government assumes the majority of risk. The contractor is not rewarded through the FFP profit or loss system; rather profit is provided in the form of a negotiated fee the government agrees to pay, except in the case of cost or cost-sharing contracts. The contractor is reimbursed for allowable incurred costs of the contract (with a predetermined ceiling amount) along with profit. A contracting officer may choose a cost, cost-type, cost-sharing, fixed-fee, incentive-fee, or award-fee contract, depending on the specifications of the procurement. Because the government assumes a greater amount of risk, they require greater accounting systems to calculate costs of the contract and provide increased oversight during the contract life. These contracts are used when uncertainties do not allow the contracting officer to determine costs with reasonable accuracy.

To help the contracting officer choose between the two types, the FAR lists 11 factors to help determine which contract type to select. They are:

• Price competition: How many are bidding/proposing?
  
• Price analysis: What does the market research say?
  
• Cost analysis: How much does it cost to make or do?
  
• Type and complexity of requirement: Is it a pencil or aircraft carrier?
  
• Urgency of the requirement: Do they need it tomorrow or in six months?
  
• Period or length of production run: Is the length one month or two years?
  
• Contractor's technical capability and financial responsibility: Does the contractor have the knowledge and funds necessary to complete the contract?
  
• Adequacy of contractor's accounting system: Can they account for allowable costs?
  
• Concurrent contracts: What's going on with this type of requirement now?
  
• Extent or nature of proposed sub-contracting: How much subcontracting is required?
  
• Acquisition history: Is this good or service acquired on a reoccurring basis?
  

For more information regarding the types of contracts available, please review FAR Part 16 online at http://farsite.hill.af.mil/reghtml/regs/far2afmcfars/fardfars/far/16.htm, or contact your nearest North Carolina PTAC counselor.

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