16 Chapters
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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 5: Fixed-Price-Level-of-Effort Contract

Segel, Kenneth R. Berrett-Koehler Publishers ePub

When a budget is limited to $150,000 and it is not possible to develop a clear statement of work or to assess the number of hours required to complete a task, a fixed-price-level-of-effort (FPLOE) contract may be the appropriate contract type. Understanding this contract type’s definition, use, performance requirements, and financial elements will aid the CO in making an informed decision on whether an FPLOE is the appropriate contract type for the proposed work.

“A firm-fixed-price, level-of-effort term contract requires (a) the contractor to provide a specified level of effort, over a stated period of time, on work that can be stated only in general terms and (b) the Government to pay the contractor a fixed dollar amount.” FAR 16.207-1. An FPLOE contract “is suitable for investigation or study in a specific research and development area. The product of the contract is usually a report showing the results achieved through application of the required level of effort. However, payment is based on the effort rather than the results achieved.” FAR 16.207-2.

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Chapter 8: Cost-Plus-Fixed-Fee Contract

Segel, Kenneth R. Berrett-Koehler Publishers ePub

The cost-plus-fixed-fee (CPFF) contract is the most widely used of the cost-reimbursement contracts. Like other cost-reimbursement contracts, it enables the government and the contractor to engage in a contract containing an undefinitized performance work statement (PWS). Unlike other cost-reimbursement contracts, however, it allows for payment of fee up to the ceiling cap, at which point any cost overrun is paid to the contractor at cost, minus fee (provided that the added expenditure is formally authorized by the CO in writing).

A CO will likely manage many CPFF contracts. Because this contract type is so common, the CO must have a thorough understanding of its definition, purpose, use, performance requirements, financial elements, incentives, and associated risk to achieve maximum benefits while remaining contractually compliant.

Part of the family of cost-reimbursement contracts, a CPFF contract is used when the PWS contains uncertainties. The fixed fee does not vary with actual cost, regardless of whether or not the work is completed at contract conclusion; however, the fee may be adjusted with changes in the scope of work or the services to be performed.

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Chapter 10: Cost-Plus-Award-Fee Contract

Segel, Kenneth R. Berrett-Koehler Publishers ePub

Cost-plus-award-fee (CPAF) contracts are ideal for driving down costs and improving performance because they incentivize the contractor to perform to its maximum capability and efficiency. Before engaging in a CPAF contract, however, the CO should determine if another contract type is better suited for the effort, as surveillance of a CPAF contract is administratively burdensome and expensive. The CO should perform a cost-benefit analysis to ensure the benefits (e.g., tighter cost control, enhanced technical capability) outweigh the costs. If that is determined to be the case, a CPAF contract is an excellent vehicle for motivating the contractor to perform.

A CPAF contract is “a cost-reimbursement contract that provides for a fee consisting of (1) a base amount fixed at inception of the contract, if applicable and at the discretion of the contracting officer, and (2) an award amount that the contractor may earn in whole or in part during performance and that is sufficient to provide motivation for excellence in the areas of cost, schedule, and technical performance.” FAR 16.405-2.

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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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