Choosing the Right Contract Type€¦ · Factors in Selecting Contract Types Price Competition Type of proposal analysis: Price analysis Cost analysis Type and complexity of the requirement

Choosing the Right Contract Type

Anthony Nicolella

Professor of Contract Management

DAU

10 May 2016

2

Topics for Discussion

Contract Type Policy

Cost Risk and Contract Type

Families of Contracts

Factors in Selecting Contract Type

Incentive Contracts

3

Contract Type Policy

The objective is to negotiate a contract type and

price (or estimated cost and fee) that will result in a

reasonable contractor risk and provide the

contractor with the greatest incentive for efficient

and economical performance. FAR 16.103(a)

FAR 16.103(a) Selecting the contract type is

generally a matter for negotiation and requires the

exercise of sound judgment.

4

Dr. Carter Memo, Sep 14, 2010 BBP Focus Area: Incentivize Productivity and

Innovation in Industry

Principle: Increase use of Fixed Price Incentive Firm (FPIF)

Contracts:

– One contract size does not fit all.

– CPAF Contracts with subjective measures not

conducive to controlling costs.

– Incentive is important since it shares costs of overruns and reward underruns, giving both sides an incentive

for good performance.

– FPIF should be contracting officer’s point of departure

when appropriate.

– FPIF appropriate for early production and single-source

production where price improvement can be

rewarded.

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Cost Risk and Contract Type

VAGUE WELL

DEFINED

Concept Refinement

Technology

Development

VARIED

System

Development &

Demonstration

CPFF - CPIF –

FPIF

Production &

Deployment

CPIF – FFP –

FPIF

Operations &

Support

FFP – FPIF

Cost Risk Line

Higher Risk of

Cost Performance

Lower Risk of

Cost Performance

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Contract Type Family Characteristics

Best Effort Shall Deliver

Low High

High Low

As Incurred On Delivery

None % of Actual

Max Gov’t Min Gov’t Surveillance Surveillance

Fee limitations No limit

7

Basic Contract Review

Cost Plus Fixed Fee

(CPFF)

Firm Fixed Price

(FFP)

8

Factors in Selecting Contract Types

Price Competition

Type of proposal analysis:

Price analysis

Cost analysis

Type and complexity of the requirement

Combining contract types

Urgency of the requirement

Contractor’s technical capability and

financial responsibility

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Factors in Selecting Contract Types

Continued

Contractor’s accounting system

Length of contracting period

Cost, schedule, performance, other

incentives may be added, such as award

fee

Extent and nature of subcontracting

Acquisition history

* See FAR 16.104 for a complete list of factors

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FPIF vs. CPIF

FPIF Contract (52.216-16) vs. CPIF Contract (52.216-10)

Target Cost Target Cost

Target Profit Target Fee

Profit Adjustment Formula Fee Adjustment Formula

Ceiling Price Minimum Fee

Maximum Fee

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Basic Contract Review

12

Contract Incentives

FAR 16.4 addresses incentive contracts and

types of incentives:

Cost incentive (FAR 16.402-1)

Performance incentive (FAR 16.402-2)

Delivery incentive (FAR 16.402-3)

Multiple incentives (FAR 16.402-4)

There are 2 major types of incentive

contracts:

Formula Type Incentive (FAR 16.402)

Award Fee (FAR 16.404)

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Delivery Incentive Example Positive Incentives

– 20% of incentive for completion of Critical Design Review (CDR) at least two (2) weeks

ahead of schedule ($20,000)

– 20% of incentive for passing Design Qualification Test at least two (2) weeks ahead of

schedule ($20,000)

– 15% of incentive for passing site acceptance test at least two (2) weeks ahead of

schedule ($15,000)

– 45% of incentive for achieving Initial Operational Capability at least two (2) weeks

ahead of schedule ($45,000)

Negative Incentives

– 20% of incentive for not achieving completion of CDR on schedule (-20,000)

– 45% for not achieving IOC on schedule (-$45,000)

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Award Fee Contract Award fee can be an added incentive on any

type contract

Establish separate fee consisting of:

Base Fee (0 - 3%)

Award fee pool which contractor may earn for superior performance

Amount of fee to be paid is a judgmental decision

decision is made in accordance with criteria in award fee

plan

Fee determination is a unilateral Government

decision that can be protested under the Disputes

Act

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Summary

Selecting the contract type is generally a matter for

negotiation and requires the exercise of sound

judgment.

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Questions