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Chapter 6: Cost Contract

Segel, Kenneth R. Berrett-Koehler Publishers ePub

Cost contracts are part of the family of cost-reimbursement contracts designed to enable the government to purchase R&D work at an undeterminable unit price at a particular point in time. FAR 16.302(b). Cost contracts do not involve any fee. FAR 16.302(a). Given that the contractor has little incentive to control costs, these contracts pose high risk to the government.

Cost contracts are quite complicated as they require a projection of costs. If costs are not estimated with some accuracy, the government may be required to expend financial resources in excess of the predetermined ceiling price (the maximum amount of money the government intends to pay under the contract). Although the government is solely responsible for any excess costs under a cost contract, the FAR has established built-in safeguards to assist both parties in meeting their objectives.

Contractors are often willing to forgo fee on a contract when they anticipate they may realize future business or when they are trying to break into a market. Universities and other nonprofit organizations commonly engage in non–fee-bearing contracts for research studies.

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Chapter 1: Firm-Fixed-Price Contract

Segel, Kenneth R. Berrett-Koehler Publishers ePub

Typically used to procure commercial items or other products or services containing an adequately defined specification, the firm-fixed-price (FFP) contract is the most widely used of government contract types. A specification is defined as “a detailed statement … of the measurements, quality, materials, or other items to be provided under a contract.”1 Products may include commercial off-the-shelf (COTS) hardware such as bolts and fasteners, a jet engine that has passed qualification testing, or a building for which the government provides a detailed blueprint or services such as program management support. An FFP contract is uniquely suited for procuring commercial or well-defined items or services.

COs typically administer numerous FFP contracts over the course of their careers. Accordingly, the CO should have a thorough understanding of its definition, use, purpose, applicability, performance requirements, financial elements, and risks.

An FFP contract is part of the family of fixed-price contracts that the government uses to procure supplies and services for a specified price. An FFP contract is not subject to adjustment on the basis of the contractor’s cost increases during contract performance. It can be modified, however, when there is a “constructive” change such as an alteration to the PWS or specification; when an economic price adjustment is in order; and after a defective pricing incident. The contractor assumes all risk under an FFP contract and is therefore incentivized to perform well. An FFP contract places minimal administrative burden on both parties.

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Chapter 16: Letter Contract

Segel, Kenneth R. Berrett-Koehler Publishers ePub

A letter contract is a useful preliminary contractual instrument when time is of the essence. It enables the CO to authorize a contractor to start work immediately and to negotiate a fair and equitable contract or purchase order while the work is underway.

A letter contract is defined as “a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services.” FAR 16.603-1.

FAR 16.603-2 provides the following guidelines for drafting and implementing letter contracts:

1. A letter contract is used to bind the parties in a contractual arrangement when it is in the government’s best interest to have the contractor start work immediately.

2. The contracting officer will use this contract type when there is insufficient time to negotiate an alternate contract type to meet the requirements.

3. The letter contract should be as complete and definitive as possible.

4. A price ceiling will be addressed in the letter contract when it is awarded based on competition.

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Chapter 3: Fixed-Price Contract with Prospective Price Redetermination

Segel, Kenneth R. Berrett-Koehler Publishers ePub

From solicitation, subcontractor selection, negotiation, and award, a large-dollar, long-term FFP contract requires considerable preparation and forethought to attain best value for a specified effort. Yet, price reasonableness cannot necessarily be assessed at initial award for a number of reasons. For example, the scope of work has yet to be fully defined for follow-on work. It is thus necessary to establish price reasonableness upon the award of each specified effort rather than at the onset of the initial contract. A fixed-price contract with prospective price redetermination (FPRP) is an ideal contract type to accommodate this need. Given the FPRP’s significance and frequent use, it is important to understand its definition, use, application, price, limitations, financing, and risk.

An FPRP contract encompasses an FFP contract for a preliminary period of contract delivery or performance followed by the negotiation of subsequent FFP contract work. The contract identifies the periods for new FFP prices to be negotiated. FAR 16.205-1(b).

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Chapter 4: Fixed-Ceiling-Price Contract with Retroactive Price Redetermination

Segel, Kenneth R. Berrett-Koehler Publishers ePub

When a noncompetitive, low-value contract is required, but there is no time to justify the price prior to issuance, a fixed-ceiling-price contract with retroactive price redetermination (FPRR) may be the ideal contract type. To ensure an expeditious procurement, the CO must have a comprehensive understanding of this contract type, including its definition, use, application, price, limitations, benefits, constraints, performance requirements, financial elements, and associated risks.

When funding must be allocated quickly to commence work on a low-value R&D agreement, but it is not possible to negotiate a fair and reasonable price at time of award, FAR 16.206-2 allows the CO to grant an FPRR contract estimated at the simplified acquisition threshold or less. A ceiling price is established up front and the final price is determined at contract completion, as prescribed in FAR 52.216-6.

The simplified acquisition threshold is the maximum dollar value of a procurement that may use simplified acquisition procedures. The dollar threshold is found at 41 U.S.C. § 134 and the simplified procedures prescribed are found in FAR Part 13.

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