Exploring Different Types of Government Contracts: Part One

Knowing an effort’s contract type is essential in creating a strategy that fully considers the risk, responsibilities, and incentives as a government contractor (GovCon). Contract types are on a spectrum, with fixed-price on one end, the cost-reimbursement on the other, and with time-and-materials (T&M) in the center. Although sometimes seen as a small detail, understanding these types can answer questions such as: 

• Is my accounting system setup to bid on this type of effort?  

• Will I be compensated if I need to pay my employees more due to inflation?  

• What happens if I underestimate the time it will take to perform the work?  

In this mini blog series, we will first dive into the basics of government contracts as well as the main risks to consider. Next in our series we will focus on the most common contract types and variations such as incentive type. In the last part of our series, we will provide a real-world example to show the implications of each of the main contract types and tips to avoid key issues.   

 

Decoding the Alphabet Soup 

Contracts are generally divided into two (2) broad categories or types: cost-reimbursement and fixed-price. These are the bookends of the spectrum that we will go over throughout this blog series.  There are variations of each that we will explore in further detail, where the specific variation chosen is based on individual factors of an effort such as complexity, period of performance, and competition.  Below is a summary of key contract types and variations for your reference:  

 

Fixed-Price (FAR 16.2) 

Firm-Fixed-Price (FFP) 

Firm-Fixed-Price, Level-of-Effort (FFP/LOE) 

Fixed-Price with Economic Price Adjustment (FP/EPA) 

Fixed-Price Incentive Fee (FPIF) 

 

Cost-Reimbursement (FAR 16.3) 

Cost-Plus Award Fee (CPAF) 

Cost-Plus-Fixed Fee (CPFF) 

Cost-Plus Incentive Fee (CPIF) 

 

Other  

Indefinite-Delivery, Indefinite-Quantity (IDIQ) 

Labor-Hour (LH) 

Time-and-Materials (T&M) 

 

What is a Government Contract and What Are the Main Types of Government Contracts? 

Before we dive into the different contract types, we must first understand what a government contract is. A contract is the legally binding instrument that sets the terms and conditions for the government to purchase the billions of dollars of supplies and/or services it requires annually along with the terms from the government contractors that furnish them.  

An important distinction for a contract, as defined by the Federal Acquisition Regulation (FAR) is that there is a commitment for the government to pay for the supplies and/or services. This is why a blanket purchase agreement (BPA) which solely sets forth terms and conditions is not considered a contract, while an indefinite-delivery indefinite-quantity (IDIQ) vehicle is considered a contract, since an IDIQ includes a minimum payment by the government to the contractor.  Government issued grants, cooperative agreements, and basic ordering agreements (BOAs) are also not considered contracts in the world of government contracting.  

Contracts are not one size fits all, and the government issues different forms based on the type of requirement. The key ones that any government contractor should be familiar with are: 

• “C” type contract: single, standalone contract 

• Call Order: sometimes simplified to “call”, an order stemming from a BPA for supplies or services 

• Delivery Order (DO): order for supplies placed against an established contract 

• IDIQ: a contract vehicle that allows for DOs (usually for supplies) or Task Orders (TOs) (usually for services) to be issued off it at undetermined times and in undetermined quantities. We will go into this one in more detail 

• Letter Contract: preliminary, temporary document that authorizes work to start, but does not define all terms and conditions 

• Purchase Order: for supplies/services under the simplified acquisition threshold (currently $250K) 

• Task Order (TO): order for services placed against an established contract  

Regardless of the contract form, a contract will include at least one (1) contract type, with the ability for the government to create a hybrid contract that allows for multiple types. It is important to pay attention to each Contract Line Item Number’s (CLIN’s) individual contract type to understand their individual requirements and risk profile.  

Understanding the Risks of each Contract Type 

The risks we will examine are 1) cost, 2) negotiation, and 3) technical performance. The government determines a contract type to mitigate their risk in these three (3) areas, so it is prudent that GovCons understand what type of risks they may incur:  

1. Cost Risk: This is the risk of exceeding projected costs such that the GovCon’s profit will be more or less than initially planned. 
2. Negotiation Risk: This is the risk of proposing costs or a technical solution during the solicitation phase that are not likely occur in performance. Conversely, presuming opportunities will arise to decrease costs that are not likely to occur in performance poses negotiation risk. In a fixed price environment, there is a higher need to predict costs accurately and annotate any necessary assumptions in your proposal than in a cost-reimbursement environment. 
3. Technical Risk: This is the risk of having to deliver a specific technical solution. In a T&M/LH environment, as well as most cost-reimbursement environments, the output of the contract is hours performed, rather than a specific deliverable, which lowers this risk. However, inability to efficiently deliver a specific technical solution in a fixed price environment can result in rework, warranty expenses, and unfavorable past performance evaluations in addition to erosion of profit.  

Based on these risks, the most preferred contract type to the government is firm-fixed-price (FFP). In this environment, the government does not have to be concerned on costs changing or about a contractor not finishing the deliverables. Conversely, this is the highest risk to a contractor and it’s not uncommon for contractors to lose significant money. Risk decreases along the continuum, with the lowest risk generally for different variations of cost-reimbursement type contracts.  

 

 

 

Outsourced Full Life Cycle Contracts & Subcontracts Support From BOOST, LLC 

Learning the intricacies of contracts is the foundation of understanding what the elements and implications of each contract type. In the next blog in our series, we will take this knowledge and apply it to contract types as defined in FAR Part 16 Types of Contracts.  

Cannot wait for the next blog to learn more? The BOOST LLC contracts, subcontracts, purchasing, and pricing team has the extensive experience necessary to provide a complete range government contracting services. Our highly skilled experts can help decode what are the implications with any contract type during all phases of the contract lifecycle. Contact our professionals at BOOST today for specialized assistance. 

 

About The Author, Megan Hand Sr. Contracts & Pricing Consultant