– Installment 1 – Fixed Price
Vendors who engage with the Federal government must be on top of their game in just about every area. The regulations governing how the government conducts its business are vast and often can be challenging to understand, let alone implement. As a result, the government will issue RFPs and award contracts that usually do not align with the requirement for issuing the RFP or awarded the contract in the first place. Sometimes the mistakes are inadvertent and easily overcome, but sometimes the errors can be severely detrimental to the contractor, the government, or both.
These blog posts aim to help vendors get a glimpse of the “other side.” As FP&C consultants are former Federal government contracting officers, it is helpful to our clients to have our perspective as they form decisions on opportunities and interactions with the Federal government. Whether you seek the unique insight of our consultants, or you try to leverage your own experience and understanding of the procurement process, one essential item any business should have an acute awareness of is contract types.
FAR Part 16 explains the contract types used in Federal procurements. To include them all in one blog post would lead to an extremely long blog post. Therefore, this will be another one of our multi-part installment blogs. Hopefully, breaking this up into chunks will help readers quickly navigate the contract type they most often encounter or the one they need to learn a bit more about. There are three main “types” of contracts, all with some number of variants underneath the broad category. Some contracts allow for different incentive structures to be used (incentive contracts) and contracts that enable delivery around uncertain requirements (indefinite delivery contracts). Lastly, agreements are instruments used extensively in the Federal government. These have some unique properties that must be understood by vendors who enter into an agreement with the government. All of these will be covered in this series of blog posts.
This first installment will go through the various types of Fixed Price contracts. On the surface, this should be the most straightforward, easy-to-understand contract type. However, within the “fixed price” category, the FAR outlines five different “types” of fixed-price contracts; and another one that is more in the incentive contract category, but has fixed price characteristics to it. Is it all that important to know this information? Isn’t a fixed price contract just a set price for a given good or service? Kinda…as always, it depends.
Þ Listed in the order shown in FAR 16.2, Firm-fixed-price contracts are generally as the title states, fixed. FAR 16.202-1 describes firm-fixed-price contracts that do not allow for price adjustment based on the contractor’s cost experience during contract performance. This essentially places the risk squarely in the contractor’s corner. Contractors can profit greatly from these, or take a severe hit to cash flow. The contractor must be careful when negotiating the initial contract because the
government is not going to allow a price adjustment unless they change the contract requirements.
Þ FAR 16.203 provides another type of fixed-price contract, fixed-price contracts with economic price adjustment. This type of fixed-price contract allows for an adjustment to the negotiated price, provided that there was a cost impact because of contingencies specified in the contract. These are typically found where requirements are subject to volatile market pressures. While this does mitigate contractor risk as it pertains to the areas of volatility, the EPA portion does not represent a “get out of jail free” card. Be careful to manage costs in this environment carefully as you are not likely to have a shot at going after additional costs outside of the specified contingencies.
Þ Similar in nature to fixed-price with economic price adjustment, fixed-price with prospect price redetermination is another fixed-price contract that does allow some wiggle room during performance. Initially, the requirements are reasonably certain and known. However, as performance goes into the future, things become more cloudy and more challenging to price with certainty. The government may allow this type of contract to mitigate excessive prices in the later period of performance. Any periods subject to price adjustment, and the process by which it happens, will be specified in the contract.
Þ Fixed-price with retroactive price redetermination allows the government to set a ceiling price, or also known as a not-to-exceed price, in the contract. Once the performance is complete, a price will be retroactively redetermined. This is not something often used in the government. FAR 16.206-2 limits its use to R&D contracts under $150K.
Þ Firm-fixed-price, level of effort term contracts require 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…” FAR 16.207-2 states that these contracts should be limited to use for R&D efforts. FAR 16.207-3 limits them to contract price under $150K. Contractors should be on guard if they are approached with this type of contract outside these parameters. If the contracting officer incorrectly chooses the contract type, it can create all sorts of headaches for the contractor.
The above is simply a description of contract types for the fixed price category. Knowing when and how they are applied is just as important as knowing what they are. Do not assume the contracting officer made the correct choice when choosing the contract type. When you understand all the different types, the contractor has just as much right to suggest a different contract type. This may result in a negotiation, but aligning risk to the requirement should be the first part of any negotiation.
FP&C stands ready to help our clients manage these negotiations. The government is usually open to these suggestions, but there is a way to approach the idea. There is also definitely a way to not approach it. Let us help you through the process and increase your likelihood of success. Give us a call!