Exploring Different Types of Government Contracts: Part Two

In the first part of our series on contract types, we went into the fundamentals of contract as well as an overview on risk. With this foundation, we will go into the three (3) most common types: fixed-price, cost-reimbursement, and time-and-materials (T&M). We will also go into other contract types to. We will also help decode some of the many acronyms you might have heard of regarding contract type, such as an indefinite-delivery, indefinite-quantity (IDIQ) or a Blanket Purchasing Agreement (BPA) vehicle.  

With this more thorough understanding, we will then go into contract risks.  

What Is a Fixed-Price Contract? 

Under FAR Subpart 16.2, a fixed-price contract is the preferred contract type by the government as it creates the lowest risk to them regarding both cost and requirement delivery. As FFP carries the highest negotiation risk, it’s incredibly important to ask questions to the government if the requirements are not clearly stated. Once awarded, an opportunity to modify a FFP award amount is exceedingly rate. 

Although it’s common to award a straight FFP contract, there are different variations to include firm-fixed-price, level-of-effort (FFP/LOE), fixed-price with economic price adjustment (FP/EPA), and fixed-price incentive fee (FPIF), which we will go into later.  FFP/LOE is fixed based on the level of effort to be performed. In this way it’s sometimes used as an alternative to T&M, although based on the FAR is only supposed to be used for specific purposes.  

A FP/EPA contract allows for prices to change based on economic factors beyond the GovCon’s control. This feature can be applied to federal contracts for commodities where prices fluctuate frequently, and sometimes widely, such as fuel or precious metals.   

What Is a Cost-Reimbursement or Cost-Plus Contract? 

A cost-reimbursement contract, under FAR Subpart 16.3, is one in which reasonable, allocable, and allowable expenses are reimbursed by the government, subject to any contract restrictions. It is imperative to read the contract fully as specific clauses may not allow reimbursement of costs that you might normally bill – for example, you may apply a materials handling rate on your materials, yet the contract states materials will only be reimbursed at direct cost.  

These contracts can be complex to administer, and a contractor must have a government determined adequate/acceptable accounting system to be awarded one. If you think you might pursue a cost-reimbursement contract, contact BOOST Contracts so we can help you prepare.  

The most common type is cost-plus-fixed-fee (CPFF). In a CPFF environment a fee is determined at award and does not change regardless of costs incurred.  

What Is an Incentive Contract? 

An incentive contract is a variation of a cost-reimbursement or fixed-price type contract that adds in government prescribed performance and/or cost goal(s) in exchange for a benefit to the contractor – typically profit. Incentive contracts are highly encouraged under FAR Subpart 16.4 if a FFP contract is not appropriate, but not as utilized due to the high administrative burden from both the government and contractor to manage them. Although usually this is termed for contracts varying in fee structure, sometimes an incentive is even additional option years. 

For performance-based incentives, the most common type of contracts is an award fee, either as a fixed price award fee (FPAF) or a cost-plus award fee (CPAF). In an award fee contract, the government will provide an award fee plan which outlines the different elements that span cost, schedule, and technical performance. How well a contractor performs based on the plan, determines the fee received.  

The common theme among all incentive contracts is that the government and contractor share in the risks. For example, in an incentive fee contract, there is a ceiling price and a target price. If the contractor completed the contract closer to the target price, there is a share ratio in which the remaining amount up to the ceiling is shared between the government and contractor.  

Sound confusing? Incentive contracts are some of the most complicated and administratively burdensome to win and manage, but the BOOST Contracts team is here to help. 

What Is a Time-and-Materials Contract? 

A time-and-materials (T&M) contract is neither a fixed-price contract nor a cost-reimbursement contract. Fully burdened labor rates are negotiated for each hour and then materials are paid for separately at cost. T&M contracts are not preferable to the government as there is no incentive to lower costs or produce high caliber work. In fact, government contracting officers must justify this contract type, obtain approval from agency leadership, and are only authorized if it is unreasonable to determine the extent or duration of work necessary prior to award. FAR 16.601 goes further into these limitations.  

T&M contracts are attractive to contractors as it is typically the lowest risk type of contract available, without requiring a government reviewed adequate accounting system. The highest risk is negotiating too low of an hourly rate, and the resulting inability to staff to that rate and be profitable.  

A similar contract is labor hour (LH). In both risk and application, a LH contract is like a T&M contract, except there are no materials, only labor. 

These are only a few of the major contract types you may encounter. In the next part of our series on contract types, we will go into other types such as incentive types and indefinite-delivery, indefinite-quantity (IDIQ), as well as a look into the risks of each of these types.  

What Is an Indefinite-Delivery Contract? 

Under FAR Subpart 16.5, an IDIQ contract is a commonly used contract vehicle, allowing for ultimate flexibility when the quantity of supplies and/or services aren’t known. An IDIQ award on its own does not create a requirement for a contractor to provide any supplies or services, but instead order(s) are issued for the specific work.  

Unlike a standard period of performance, an IDIQ has an extended ordering period that is typically up to five (5) years, and has a minimum purchase guarantee and a ceiling dollar amount. It typically also includes a minimum and maximum quantity allowed under the IDIQ. The minimum guarantee is what makes an IDIQ a contract versus an agreement because an awardee receives this amount of money even if no orders are placed under the IDIQ.  

Throughout the entire ordering period, the government may issue order(s) from an IDIQ contract to procure individual requirements, either as a TO (services) or a DO (supplies). Orders are treated as individual contracts and can be any contract type. They can also reflect different contract types within a single order. Orders will automatically invoke applicable terms and conditions from the base IDIQ, and may contain additional terms and conditions specific to the order. Prices for the order must be at or below the rates negotiated at the IDIQ level. 

Other Contract Types 

Government contracting is complex, so it should come as no surprise that there are other variations or names of contracting vehicles that you may encounter. To help you navigate and understand, here are a few along with some key details: 

GWAC – Governmentwide Acquisition Contract – these are contract vehicles that multiple government agencies can use for orders, typically with multiple contractors holding prime contracts to foster competition on each order. GWACs provide innovative and cost-effective solutions to each agency issuing its own order under the vehicle for the purchase of Information Technology (IT) purchases. Common GWACs include: 8(a) STARS, Alliant, and VETS. 

MAC – Multi-agency Contract– similar to GWACs except that they are open to all types of supplies and services, not just IT. OASIS+ is an example of a MAC, covered by BOOST Contracts in a webinar series available here. Note: Sometimes MAC can also refer to a Multiple Award Contract which is where one solicitation results in awards to multiple vendors, but not necessarily in support of multiple agencies. 

BPA – Blanket Purchase Agreement – this is a method to simplify the ordering of open market, lower dollar value supplies and services by agreeing to terms and conditions, but not setting forth exact prices or authorizing work to be performed. Call Orders are then placed off of the BPA that set forth the price, quantities, and any other specific terms for an individual procurement which constitute a contract.  

Outsourced & SME Level Contracts & Subcontracts Support From BOOST, LLC 

With a more thorough understanding of contract types and risks, our next and final blog in this series will focus on a real-world example demonstrating how different contract types may change what you get paid. 

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 BOOST today for specialized assistance. 

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