16 Chapters
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Chapter 12: Fixed-Price-Incentive Contract

Segel, Kenneth R. Berrett-Koehler Publishers ePub

Fixed-price-incentive (FPI) contracts have experienced a resurgence in the past several years as a result of government budget cuts. This contract type can be used to drive down costs while securing high-quality products or services by incentivizing the contractor to perform optimally and to control costs. In large efforts where the product or service is achievable within a specified budget, FPI is an excellent contract type; however, considerable time and costs are involved in its administration.

An FPI contract includes profit rather than fee, which is specific to cost-type contracts. Profit is the amount of money a contractor realizes once the cost of performance is deducted from the amount to be paid under the terms of the contract.

An FPI contract encourages a contractor to control costs and improve technical performance or delivery. It provides a target cost, target profit, price ceiling, and profit adjustment formula. Instead of a profit ceiling or floor, the profit adjustment formula provides incentive to the contractor. FAR 16.403-1 states: “When the final cost is less than the target cost, application of the formula results in a final profit greater than the target profit; conversely, when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss.” Because profit fluctuates inversely with cost, an FPI contract offers both a positive and a negative quantifiable incentive to control costs.

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Chapter 13: Cost-Plus-Incentive-Fee Contract

Segel, Kenneth R. Berrett-Koehler Publishers ePub

In response to government budget cuts over the past decade, FPI and CPIF contracts have once again become popular. CPIF contracts enable the government to drive down costs while securing high-quality products or services. These contracts offer contractors financial incentives that fluctuate depending on the quality of performance and cost control achieved.

A CPIF contract is a cost-reimbursement contract that offers a negotiated target fee that adjusts up or down depending on how well the contractor performs. These fee adjustments are computed using a formula based on an association between target cost and total allowable costs, provided in FAR 16.304. The CPIF contract type involves a target cost, actual cost, target fee, minimum fee, maximum fee, and fee adjustment formula (sharing ratio). Under FAR 16.404-1, the target fee increases when the allowable cost is less than the target cost and decreases when the allowable cost exceeds the target cost. The contractor’s risk is minimized by a fixed minimum fee, although a negative fee can be negotiated. The government pays all allocable, allowable, and reasonable costs incurred on the contract, including costs associated with overruns.

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Chapter 7: Cost-Sharing Contract

Segel, Kenneth R. Berrett-Koehler Publishers ePub

Cost-sharing contracts are excellent tools to offset some of the cost of R&D. This is particularly true for a small business that has limited resources. These contracts offer additional advantages, such as providing increased marketplace exposure, access to technology, reduced procurement expenses through economies of scale, and lower overall costs.

Cost-sharing contracts are quite different from other cost-reimbursement contracts in that both parties participate in the work and share in the cost, in anticipation of mutual benefit. For example, both the government and the contractor may receive employee training, acquire equipment, or gain enhanced technical awareness. Given the dissimilarities of this contract to others, it is necessary for the contracting officer to have a comprehensive grasp of its nuances, including methods of cost sharing, when it is an inappropriate mode of contracting, the percentage of cost sharing between the parties, limitations identified in FAR 16.301-3, ensuring that the contractor has an adequate accounting system, making certain there is appropriate surveillance during the life of the contract, and confirming that all appropriate assessments have been conducted (e.g., making sure the contract type is less expensive than other contract types or that it is infeasible to procure required supplies or services without a cost-sharing contract). 41 U.S.C. 254(b), 257(b), and 257(a).1

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Chapter 14: Time-and-Materials and Labor-Hour Contracts

Segel, Kenneth R. Berrett-Koehler Publishers ePub

The time-and-materials (T&M) and labor-hour (LH) contract types combine characteristics of the cost-reimbursement and fixed-price contract types. LH contracts are similar to fixed-price contracts in that the government pays a fixed price for labor. The hourly rate includes wages, overhead, fringe, G&A, and profit. An LH contract is identical to a T&M contract, with the exception that the contractor does not procure the material. The contract ends when specific conditions identified in the contract’s PWS are met.

Similarly, a T&M contract is a combination of a labor-hour contract and a cost-reimbursement contract. As in an LH contract, the hourly rate includes wages, overhead, fringe, G&A, and profit. A T&M contract is similar to a cost-reimbursement contract in that costs for material are reimbursed by the government. However, material handling costs are segregated in a separate indirect cost pool and are not included as part of the labor billing rate. The contractor is reimbursed for all expenses and receives profit on all labor hours worked, regardless of whether the work is completed to the government’s satisfaction.

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Chapter 15: Indefinite-Delivery Contracts

Segel, Kenneth R. Berrett-Koehler Publishers ePub

Established by DOD in 1981, indefinite-delivery (ID) contracting is designed to streamline the bidding process, generally for maintenance, repair, and construction projects. Sometimes also referred to as term contracts, ID contracts take the form of either a task order (TO) or a delivery order (DO), defined as follows in FAR 16.501:

1. “‘Delivery-order contract’ means a contract for supplies that does not procure or specify a firm quantity of supplies (other than a minimum or maximum quantity) and that provides for the issuance of orders for the delivery of supplies during the period of the contract.”

2. “‘Task-order contract’ means a contract for services that does not procure or specify a firm quantity of services (other than a minimum or maximum quantity) and that provides for the issuance of orders for the performance of tasks during the period of the contract.”

ID contracts are used to drive down costs by bundling products in a single contract vehicle. For example, a contractor with high fixed production costs is able to achieve economies of scale by spreading those fixed costs over a large volume, driving down average operating costs. Finding ways to reduce cost in a manner that is advantageous to the government wherever possible not only makes good financial sense, but is a requirement under the 1984 Federal Procurement Competition Enhancement Act. As stated in FAR 16.5, when the government will be purchasing products repeatedly over a course of a year, an ID contract should be considered.

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