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Posted: Sun Jul 03, 2022 5:23 pm
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FAR Government Contract Types
The Federal Acquisition Regulation (FAR) describes severalcontract types and the circumstances in which each type may beused. In this article, we will briefly describe the most commontypes you may encounter and some of the advantages anddisadvantages of those common contract types.
Contracts are generally defined by the way they are priced. Inthis regard, there are three ways contracts are priced, i.e., fixedprice, cost reimbursement and time-and-material. There are variouscategories of fixed price and cost reimbursement contracts.
Focusing on fixed price contracts, the most commonly usedvariation is firm fixed price (FFP). As the name implies, the priceof the contract is fixed at the time of contract award. What thegovernment owes the contractor does not change based on the actualcosts the contractor incurs in performing the contract. Thiscontract type places all the cost risk on the contractor. For thisreason, these types of contracts are frequently referred to as “betthe company” contracts. On the other hand, FFP contracts generallyrequire less financial record keeping, and are generally notsubject to audit. FFP contracts can be used when the governmentuses sealed bid procedures when awarding contracts, when thegovernment is acquiring commercial products or services or when thework to be done is well defined so that the contractor can make aninformed judgment as to what it will cost to perform thecontract.
The second type of fixed price contracts that need to bediscussed are fixed price incentive (FPI) contracts. There are twotypes of FPI contracts, firm target and successive target. We willfocus on the firm target variety. When this contract type is usedthe profit the contractor receives is inversely related to thecosts it incurs. There are certain terms that must be understoodregarding a FPI firm target contract. These are target cost, targetprofit, target price and ceiling price. The target cost is thenegotiated cost at which the contractor expects to be able toperform the contract. The target profit is the profit thecontractor will receive if it performs at the target cost. Thetarget price is the sum of the target cost and target profit.Finally, the ceiling price is the limit of the government’sliability under the contract. It frequently is, but is not requiredto be, equal to the target price.
Generally, when the contract is complete, the contractor’sactual allowable costs are determined. For these purposes, the costprinciples from FAR Part 31 are used to determine the contractor’scosts that are eligible to be included in the final price. If thecontractor’s actual costs are less than the target cost, the targetprofit will be adjusted upward in accordance with an adjustmentformula stated in the contract. Conversely, if the contractor’sactual costs exceed the target cost, the target profit is reducedby the adjustment formula. There is no minimum or maximum profit acontractor can receive under a FPI contract.
The advantage of a FPI contract is that the contractor canreceive more profit if it performs in an economical manner. Somedrawbacks are that this contract type requires the contractor tokeep more detailed cost records than an FFP contract and the coststhe contractor incurs are subject to audit. This means there can bedisputes concerning the allowability of the costs the contractorhas incurred.
Turning to cost reimbursement contracts, the most commonly usedvariation of this contract type is the cost plus fixed fee (CPFF).Under this contract type, the contractor is reimbursed its actualallowable costs, as determined by the contracting officer using thecost principles of FAR Part 31, incurred up to the estimated costof the contract. The government is not usually obligated toreimburse the contractor for costs incurred in excess of theestimated cost of the contract and the contractor is not obligatedto continue performing once it reaches the estimated cost of thecontract. The costs incurred by the contractor are subject toaudit. Thus, contractors must maintain adequate records todemonstrate that the costs claimed on the contract are allowablecosts. Further, this contract type requires the contractor toestablish final indirect cost rates for each year in which somecontract performance occurred. The contractor must submit aproposal for such rates. The contractor must certify that theproposal does not contain any unallowable costs. If the proposalcontains expressly unallowable costs, the contractor may be subjectto a penalty.
As the name implies, the fee under a CPFF contract is fixed at aspecified dollar amount at the time of award. Thus, it does notchange regardless of the costs the contractor incurs. If thecontractor incurs more costs than anticipated, the effective profitrate on the contract will go down. Conversely, if the contractor’scosts are less than the estimated cost, the effective profit ratewill go up. The government is required to withhold up to 15 percentof the fee pending completion of the contract. The exact amount ofthe withholding and the basis upon which the fee will be paid.
Like FPI contracts, there is a cost reimbursement incentive fee(CPIF) contract that works similar to the FPI. That is, theincentive fee is adjusted inversely to the allowable costs incurredby the contractor. However, unlike a FPI contract, when a CPIFcontract is used, the contract must state a minimum and maximum feethat the contractor can receive.
Finally, there is a cost plus award fee (CPAF) contract. Under aCPAF contract, there usually is a base fee which is fixed and anaward fee. The award fee is derived from an award fee pool fromwhich the government awards the contractor a fee. This fee is basedon the government’s judgment of how well the contractor performedthe contract using criteria stated in an award fee plan. From thecontractor’s perspective, a major drawback of a CPAF contract isthat there is little a contractor can do to challenge the amount ofthe award fee because there are only two grounds on which the awardfee can be challenged. First, the government did not follow theaward fee plan in determining the award fee. Second, the governmentacted arbitrarily in making the award fee.
FAR Government Contract Types
The Federal Acquisition Regulation (FAR) describes severalcontract types and the circumstances in which each type may beused. In this article, we will briefly describe the most commontypes you may encounter and some of the advantages anddisadvantages of those common contract types.
Contracts are generally defined by the way they are priced. Inthis regard, there are three ways contracts are priced, i.e., fixedprice, cost reimbursement and time-and-material. There are variouscategories of fixed price and cost reimbursement contracts.
Focusing on fixed price contracts, the most commonly usedvariation is firm fixed price (FFP). As the name implies, the priceof the contract is fixed at the time of contract award. What thegovernment owes the contractor does not change based on the actualcosts the contractor incurs in performing the contract. Thiscontract type places all the cost risk on the contractor. For thisreason, these types of contracts are frequently referred to as “betthe company” contracts. On the other hand, FFP contracts generallyrequire less financial record keeping, and are generally notsubject to audit. FFP contracts can be used when the governmentuses sealed bid procedures when awarding contracts, when thegovernment is acquiring commercial products or services or when thework to be done is well defined so that the contractor can make aninformed judgment as to what it will cost to perform thecontract.
The second type of fixed price contracts that need to bediscussed are fixed price incentive (FPI) contracts. There are twotypes of FPI contracts, firm target and successive target. We willfocus on the firm target variety. When this contract type is usedthe profit the contractor receives is inversely related to thecosts it incurs. There are certain terms that must be understoodregarding a FPI firm target contract. These are target cost, targetprofit, target price and ceiling price. The target cost is thenegotiated cost at which the contractor expects to be able toperform the contract. The target profit is the profit thecontractor will receive if it performs at the target cost. Thetarget price is the sum of the target cost and target profit.Finally, the ceiling price is the limit of the government’sliability under the contract. It frequently is, but is not requiredto be, equal to the target price.
Generally, when the contract is complete, the contractor’sactual allowable costs are determined. For these purposes, the costprinciples from FAR Part 31 are used to determine the contractor’scosts that are eligible to be included in the final price. If thecontractor’s actual costs are less than the target cost, the targetprofit will be adjusted upward in accordance with an adjustmentformula stated in the contract. Conversely, if the contractor’sactual costs exceed the target cost, the target profit is reducedby the adjustment formula. There is no minimum or maximum profit acontractor can receive under a FPI contract.
The advantage of a FPI contract is that the contractor canreceive more profit if it performs in an economical manner. Somedrawbacks are that this contract type requires the contractor tokeep more detailed cost records than an FFP contract and the coststhe contractor incurs are subject to audit. This means there can bedisputes concerning the allowability of the costs the contractorhas incurred.
Turning to cost reimbursement contracts, the most commonly usedvariation of this contract type is the cost plus fixed fee (CPFF).Under this contract type, the contractor is reimbursed its actualallowable costs, as determined by the contracting officer using thecost principles of FAR Part 31, incurred up to the estimated costof the contract. The government is not usually obligated toreimburse the contractor for costs incurred in excess of theestimated cost of the contract and the contractor is not obligatedto continue performing once it reaches the estimated cost of thecontract. The costs incurred by the contractor are subject toaudit. Thus, contractors must maintain adequate records todemonstrate that the costs claimed on the contract are allowablecosts. Further, this contract type requires the contractor toestablish final indirect cost rates for each year in which somecontract performance occurred. The contractor must submit aproposal for such rates. The contractor must certify that theproposal does not contain any unallowable costs. If the proposalcontains expressly unallowable costs, the contractor may be subjectto a penalty.
As the name implies, the fee under a CPFF contract is fixed at aspecified dollar amount at the time of award. Thus, it does notchange regardless of the costs the contractor incurs. If thecontractor incurs more costs than anticipated, the effective profitrate on the contract will go down. Conversely, if the contractor’scosts are less than the estimated cost, the effective profit ratewill go up. The government is required to withhold up to 15 percentof the fee pending completion of the contract. The exact amount ofthe withholding and the basis upon which the fee will be paid.
Like FPI contracts, there is a cost reimbursement incentive fee(CPIF) contract that works similar to the FPI. That is, theincentive fee is adjusted inversely to the allowable costs incurredby the contractor. However, unlike a FPI contract, when a CPIFcontract is used, the contract must state a minimum and maximum feethat the contractor can receive.
Finally, there is a cost plus award fee (CPAF) contract. Under aCPAF contract, there usually is a base fee which is fixed and anaward fee. The award fee is derived from an award fee pool fromwhich the government awards the contractor a fee. This fee is basedon the government’s judgment of how well the contractor performedthe contract using criteria stated in an award fee plan. From thecontractor’s perspective, a major drawback of a CPAF contract isthat there is little a contractor can do to challenge the amount ofthe award fee because there are only two grounds on which the awardfee can be challenged. First, the government did not follow theaward fee plan in determining the award fee. Second, the governmentacted arbitrarily in making the award fee.