Government Contract Types:

Transcription

1 : the U.S. Government's Use of Different Contract Vehicles to Acquire Goods, Services, and Construction 16 Contract Management December 2010

2 BY Brian A. Darst and Mark K. ROberts Practical implications of selecting different contract vehicles and an examination of the impact these choices have on contract execution. Contract Management December

3 Federal agencies acquiring services, supplies, or construction have the ability to choose from a variety of contract types. Selecting the most useful contract vehicle for a procurement is determined through an allocation of cost and performance risks assumed by the contractor and government, as well as the financial incentives that the contractor can achieve by performing the services or delivering the end item(s). The Federal Acquisition Regulation (FAR) states that the objective of any negotiation of contract type is to choose a contract vehicle 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. 1 The FAR identifies many different possible contracts types, and the success of any procurement depends on the negotiation of the most appropriate vehicle. Indeed, as a recent Memorandum for Acquisition Professionals issued by Ashton B. Carter, Under Secretary of Defense for Acquisition, Technology, and Logistics, states, Choosing contract type is an important way of aligning the incentives of the government and the contractor. One size does not fit all. 2 However, remember that agreement by both parties on the contract vehicle is only a means to an end. The ultimate goal of any acquisition must be to achieve the desired result and ensure that a useful item or service is delivered in a timely manner. Failure to allocate the performance risks and benefits fairly or to provide for adequate payment/financing arrangements could result in a contractor s inability to complete performance without significant losses, failure to deliver a useful end item or deliver service without an adequate remedy, or an unwarranted windfall profit. Contract vehicles that impose too much risk on one party or which do not offer sufficient incentives to a contractor to complete the project have the potential to thwart this underlying goal. While it is important for government officials to understand the requirements and flexibilities available to them, it is equally important for contractors to understand the risks and benefits that they can achieve under each contract type to ensure that they can complete a project successfully and make a reasonable profit. Choice of the wrong contract type can have devastating consequences for the contractor. To quote the Court of Appeals for the Federal Circuit s June 2009 decision in the A-12 default termination (one of the longest-running disputes in government contracts): We also observe that the CEOs of both [appellants], in a letter dated June 27, 1990, stated that it was a mistake for the U.S. Navy to stipulate this type of contract and it was a mistake for the contractors to accept it. Both are at fault. Alas, the law of contracts does not allow us to deviate from established principles of law and equity. We therefore hold that the default termination of the A-12 contract is justified. 3 In short, understanding the different contract types available; the flexibilities and 18 Contract Management December 2010

4 limitations that the regulations, statutes, and case law provide; and the resulting implications to both parties is critical to successful execution of a project. This article will provide an overview of these topics. Factors Affecting Choice of Contract Type Many factors must be considered when negotiating the contract type. Some of these factors are dependent upon the procuring agency s needs and abilities; some factors are dependent upon the prime contractor s capabilities; and some factors are dependent upon the extent to which one or more third parties (including Congress, other government officials, or private entities) may impact the agency s or contractor s performance. These factors include: The degree of price competition; The degree to which price analysis can be used to provide realistic pricing, in the alternative; The ability of the government to place a reasonable degree of contract responsibility upon the contractor for cost estimates associated with performance; The type and complexity of the government s requirements; The urgency of the government s need to fulfill these requirements; The contract s stated period of performance and economic uncertainties associated with longer production runs or periods of performance; The contractor s technical and financial capabilities; The adequacy of the contractor s accounting system; The existence of concurrent contracts and their impact on pricing and performance; The extent and nature of the prime contractor s use of subcontractors, including the degree of risk assumed by each; and The acquisition history of the product or service. 4 No single factor is determinative. Instead, selecting the most appropriate contract type requires the exercise of sound business judgment on the part of both parties. FAR Part 16, the Defense FAR Supplement (DFARS) Part 16, and other agency FAR supplements provide government officials with flexibility to acquire a large variety and volume of supplies and services while providing some degree of consistency among different federal agencies. 5 FAR Subparts 16.2 through describe 11 different permissible contract vehicles. These vehicles can be subdivided into three different families: Fixed-price contracts, Cost-reimbursement contracts, and Other contract vehicles that can be used when the quantity of supplies or services cannot be determined at the time of award (i.e., indefinite-delivery, time-and-materials (T&M), labor-hour (LH), and level-of-effort contracts) or where it is necessary for the contractor to begin performance before the terms and conditions of the contract can be negotiated (i.e., letter contracts). Contract types discussed in FAR Part 16 range from firm-fixed-price contracts, under which the contractor bears full responsibility for the performance costs and resulting profit (or loss), to cost-plus-fixed-fee contracts, in which the contractor has minimal risk for performance costs and the negotiated fee is fixed. Between these two extremes are various price/cost redeterminable, economic price adjustment (EPA), and incentive fee/award fee contract types in which the contractor s risks and responsibility for performance costs and any profit or fee incentives offered by the government are tailored to the uncertainties involved in contract performance. Understanding the different contract types available; the flexibilities and limitations that the regulations, statutes, and case law provide; and the resulting implications to both parties is critical to successful execution of a project. Although the FAR, DFARS, and other agency FAR supplements give the parties much needed flexibility in choosing which types of contracts to rely upon during an acquisition, this flexibility is not without limitations. Certain types of contracts are prohibited by statue or regulation. For example, since 1940, Congress has prohibited the use of cost-plus-a-percentage-of-cost contracts at both the prime contract and subcontract levels. 7 FAR Part 12 also prohibits the use of any cost-reimbursement contract when acquiring commercial items under FAR Part In addition, the FAR imposes other limits or preferences on the use of different contract vehicles, depending on the nature of the product or service being acquired or the maturity of the system/product being acquired. Some of these limitations and preferences appear in FAR Part 16. Other preferences and limitations can be found in other parts and subparts of the FAR and DFARS, including: FAR Part 12 ( Commercial Item Acquisitions ), 9 FAR Part 34 ( Major System Acquisitions ), 10 FAR Part 35 and DFARS Part 235 ( Research and Development Contracting ), 11 FAR Part 36 ( Construction ), 12 and Contract Management December

5 The most common type of contract used by the government is the firmfixed-price contract. FAR Subpart 37.6 ( Performance-Based Acquisitions ). 13 The Fixed-Price Contract Family The most common type of contract utilized by the government is the firm-fixed-price contract. According to USAspending.gov, in fiscal year 2010 alone $226.9 billion worth of services and supplies were acquired using firm-fixed-price contracts compared to $57.9 billion in cost-plus-award-fee contracts and $48.4 billion in cost-plus-fixed-fee contracts. 14 This represents approximately 51 percent of all federal prime contract dollars for fiscal year Firm-fixed-price contracts provide for a firm price that is not subject to adjustment based on the contractor s cost experience in performing the work. The FAR also permits the parties to agree to price redetermination provisions (either upward or downward) where it is not possible to provide a firm-fixed-price for the entire period of performance. These fixed-price redetermination contracts may be either fixed-price contracts with prospective price redeterminations or fixed-ceiling-price contracts with retroactive price redetermination after completion of the contract, based on actual, audited performance costs at the time of price revision. 15 In addition, FAR Part 16 allows the use of EPA provisions in fixed-price contracts, allowing for an upward or downward adjustment to the stated contract price upon the occurrence of specified contingencies. 16 However, there are limitations on the use of any such provisions, and procurement agencies rarely rely on them to acquire goods or services. 17 Firm-fixed-price contracts place the maximum amount of risk and full responsibility for all cost and profit upon the contractor and, thus, provide maximum incentives for the contractor to control its costs and perform efficiently. 18 This requires the contractor to be able to project future costs of performance accurately when establishing the fixed price. The contractor s trade-off for assumption of this risk is that firmfixed-price contracts impose a minimum administrative burden upon the contractor and restrict the government s ability to direct performance by the contractor. Any additional costs or schedule delays caused by such actions could result in a claim for an equitable adjustment under the applicable Changes clause, or other remedy-granting provisions in the contract. The Cost-Reimbursement Contract Family By contrast, a cost-reimbursement contract provides for reimbursement to the contractor of its allowable costs incurred in performance of the contract through the payment of cost vouchers. The allowability of the contractor s costs is governed by the contract cost principles set forth in FAR Part 31. These contract cost principles are applicable to: The pricing of contracts, subcontracts, and modifications to contracts and subcontracts whenever cost analysis (as defined in FAR Part 15) is performed; The determination, negotiation, or allowance of costs when required by a contract clause; All cost-reimbursement contracts; and Contracts terminated for the convenience of the government. 19 Also, a cost is considered allowable only when the cost complies with all of the following requirements: Reasonableness; Allocability; The Cost Accounting Standards, as promulgated by the Cost Accounting Standards Board, if applicable otherwise, generally accepted accounting principles and practices appropriate to the circumstances; 20 Contract Management December 2010

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7 The terms of the contract; and In the case of contracts with commercial (for profit) organizations, any limitations set forth in FAR Part To be considered allowable, and thus, reimbursable, the contractor must be able to demonstrate that its costs meets all five of these requirements. The Cost Accounting Standards (CAS) referenced above serve as an appendix to the FAR and are set forth in Title 48 of the Code of Federal Regulations at Chapter The CAS can be particularly important to cost reimbursement contracts and subcontracts, although some cost reimbursement contracts are exempted. The CAS provide guidance around: The definition of cost, The measurement of cost, The assignment of cost to cost accounting periods, and The allocation of cost to final cost objectives (normally contracts). The CAS may be applicable to other types of contracts as well. However, generally they are only applicable to negotiated contracts in excess of $650,000, in which the affected business unit of the contractor or subcontractor is currently performing a CAS-covered contract or subcontract valued at $7.5 million or more (sometimes referred to as the trigger contract ). 22 In addition, the regulations set forth a number of exemptions from CAS coverage altogether or limit the number of those CAS to which the contractor s accounting system must adhere. Unlike fixed-price contracts, cost-reimbursement contracts only establish estimates of the total cost for performance, the purpose of which is for obligating funds and establishing a ceiling that the contractor may not exceed without the approval of the contracting officer, except at its own risk. 23 Cost-reimbursement contracts are particularly useful when uncertainties involved in performance are so great that they preclude the parties from accurately estimating future costs of successful performance. As such, they are used frequently when acquiring research and development, the principal purpose of which is to advance scientific and technical knowledge and apply that knowledge to achieve agency and/or national goals. 24 Much like fixedprice contracts, there are different types of cost-reimbursement contracts, including cost-sharing contracts, under which the contractor is reimbursed only for an agreed upon portion of its allowable costs. Because the cost estimate or ceiling set forth in the contract is only an estimate and the government is obligated to reimburse the contractor its actual, allowable, allocable costs in accordance with the FAR cost principles and the CAS, cost-reimbursement contracts allow for maximum government direction and surveillance during contract performance. Any contractor performing work under a cost-reimbursement contract must have an adequate cost accounting system to record both direct and indirect costs 22 Contract Management December 2010

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9 associated with the contract and segregate allowable from unallowable costs. 25 The trade-off for a contractor performing work under a cost-reimbursement contract is that unless otherwise specified, cost-reimbursement contract vehicles are only best efforts contracts. Specifically, the Limitations of Cost clause (used in fully-funded cost-reimbursement contracts) and Limitations of Funds clause (used in incrementally-funded cost-reimbursement contracts) state that the contractor is not obligated to continue performance, including any actions under the contract s termination clause, or otherwise incur any costs in excess of the estimated costs specified unless and until the contracting officer notifies it that the total estimated cost has been increased. 26 In other words, unless the government continues to fund the effort, the government bears the risk that it will receive nothing for the costs expended to date, except the contractor s best efforts. The most common type of cost-reimbursement contract is the cost-plus-fixed-fee contract, which provides for the payment of a fixed-fee to the contractor, regardless of the allowable or allocable costs incurred by the contractor. The fee is fixed through negotiation at the inception of the contract. It includes an allowance for profit, as well as other unallowable, albeit legitimate business costs that otherwise cannot be recovered from the government as an allowable cost. This fee may only be changed when the scope of work under the contract changes or there is a government termination. Incentive-Type Contracts To encourage innovation and efficient effective performance, FAR Subpart 16.4 allows federal agencies to enter into contracts, which gives contractors the opportunity to earn monetary or other incentives if the contractor meets or exceeds certain performance criteria established at the outset of the contract. These incentives can be based on cost savings, early deliveries, or enhanced performance capabilities. There are two basic categories of incentive contracts: 1) fixed-price incentive type contracts and 2) cost-reimbursement incentive type contracts. Within these two categories, the FAR recognizes four types of incentive contracts: Fixed-price incentive contracts (FPI), Cost-plus-incentive-fee contracts (CPIF), Fixed-price contracts with award fees (FPAF), and Cost-plus-award-fee contracts (CPAF). 27 There has been a steady increase in the use of FPAF and CPAF contracts since Since 2000, the government has awarded $560.8 billion in CPAF contracts and $21 billion in FPAF contracts. Indeed, CPAF contracts have been the second-most widely used contract vehicle each fiscal year during the last decade representing approximately 13 percent of all prime contract dollars spent by the government. 28 The principal difference between these contracts is that, under incentive-fee contracts, the contractor s profit or fee is adjusted upward or downward by application of a formula, based on the relationship of the total final negotiated cost to the total target cost. That formula is incorporated into the contract itself. Application of the formula under both the FPI and CPIF contract types is, for the most part, a mathematical exercise. These contracts are commonly referred to as objective incentive type contracts. By contrast, the amount of profit or fee that the contractor can earn under FPAF and CPAF contracts is established by a fee determination official within the agency based on an assessment of how well an agency award fee board (which meets at periodic intervals) believes that the contractor has achieved or exceeded performance criteria established in an award fee plan. Under a FPAF contract, a fixed price (which includes a nominal profit) is established for the effort, and this price will be paid for satisfactory performance. The award fee is earned if the contractor exceeds the expectations set forth in the award fee plan. 29 Under a CPAF contract, the contractor is reimbursed its allowable costs, as with any other costreimbursement effort, but the fee is based on a combination of: 1) a base amount fixed at the inception of the contract; and 2) an award amount that the contractor may earn, in whole or in part, during performance. 30 Based on how well a contractor has met or exceeded the stated goals in the award fee plan, the contractor is awarded all, a portion, or none of an award fee pool for the performance period in question. Because this award fee is not based on a contractual formula, CPAF and FPAF contracts are commonly referred to as subjective incentive type contracts. The contractor has only limited ability to challenge a fee determination official s decision as to what portion of the award fee the contractor will receive. Another important distinction between fixed-price and cost-reimbursement incentive contracts is that, because FPI and FPAF contracts are based on a fixed price, a ceiling amount known as the point of total assumption (PTA) is incorporated. Like any other fixed-price type contract, once the PTA is reached, the contractor is not entitled to any additional compensation. Even if the contractor s costs of performance exceed the PTA, the contractor must still complete performance and deliver those end item(s) required by the contract. By contrast, the cost ceilings set forth in CPIF and CPAF contracts are only estimates and are subject to the same Limitations of Cost and Limitations of Funds clauses previously discussed. CPIF and CPAF contracts, like other costreimbursement contract vehicles, are only best effort contracts, and the government must continue to fund the contractor s effort if it wants to complete performance. Many incentive type contracts are based on the degree of cost savings a contractor is able to achieve from those estimated at the time of award. However, it is not uncommon for the government to mix and match cost, delivery, and performance criteria against which a contractor s performance will be judged. This is particularly true in the case of FPAF and CPAF contracts. The more complex the formula or award fee plan is, the more careful consideration an agency must make of the trade-offs among the different incentive 24 Contract Management December 2010

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11 factors, consistent with the procuring agency s overall objectives. 31 Of all the contract types discussed in this article, incentive type contracts have undergone the most significant changes in recent years. As their popularity has increased among government officials and contractors, these contract types have come under increasing criticism by Congress and the Government Accountability Office. 32 In response, in 2007, the Office of Management and Budget s Office of Federal Procurement Policy and the Department of Defense issued guidance on structuring and using award fee contracts and award fee plans. This guidance was designed to minimize the use of rollovers of unused award fee pools to the next award fee period to achieve more uniform determinations of the portion of award fee to which a contractor should be entitled for achieving or exceeding stated criteria, and to require agencies to establish more objective/measurable criteria that demonstrate some real benefit to the government. 33 More recently, on September 29, 2010, FAR was amended to require determinations and findings, signed by the head of the contracting activity, for all incentive-fee and award-fee contracts justifying that the use of this type of contract is in the best interest of the government. 34 These new regulations now require that agencies: Link award fees to acquisition objectives in terms of cost, schedule, and technical performance; Clarify that a base fee of greater than zero may be included in CPAF contracts at the contracting officer s discretion; Prescribe narrative ratings to be used in award-fee evaluations; Prohibit the issuance of award fees for any rating period in which the contractor s performance is judged to be below satisfactory; Conduct risk and cost-benefit analyses in determining whether to use an incentive type contract for a particular acquisition; Include specific content in award-fee plans; and Prohibit the rolling over of unearned fees to subsequent rating periods. The FAR now prescribes the use of Table 16-1 in award fee plans, which sets forth adjectival ratings and associated descriptions, as well as the award-fee pool earned percentages that may be earned by a contractor that achieve these ratings. 35 While these new regulations continue to provide contracting officials some flexibility in utilizing incentive type contracts, establishing viable award fee plans, and determining the amount of award fee, if any, to which the contractor will be entitled, the new limitations imposed by the October 2009 and September 2010 amendments may make CPAF and FPAF contracts less desirable from the contractors perspective and less useful for their government customers. At the same time, while FPI and CPIF contracts have been used to a lesser extent, a September 14, 2010, Memorandum for Acquisition Profession, issued by the Under Secretary of Defense for Acquisition, Technology, and Logistics, encourages contracting officers to rely more on FPI contracts where a firm-fixed-price or CPAF vehicle was not appropriate. This memorandum suggests a 50/50 share line and a 120 percent target ceiling as a point of departure for negotiating these FPI contract vehicles. 36 Additional Contract Types & Agreements In some cases, it may not be possible for a procuring agency to describe its requirements except in general terms. In these cases, the contracting parties have the ability to agree to indefinite-delivery type contracts that do not procure or specify a firm quantity of goods or services other than a minimum or maximum quantity, and which provide for the issuance of orders for delivery of needed supplies or services during the period of the contract. 37 Supplies or services are purchased through the issuance of delivery orders or task orders as the end user s needs arise. 38 Most, although not all, indefinite-delivery contracts are based on fixed-unit prices. There are three different types of indefinitedelivery type contracts: 26 Contract Management December 2010

12 Definite-quantity contracts, Indefinite delivery/indefinite quantity (IDIQ) contracts, and Requirements contracts. All three types are designed to allow the government to maintain its stock of supplies or services at minimum levels and permit direct shipment to the end-users. They generally promote faster deliveries by avoiding delays and unnecessary administrative costs associated with the negotiation of individual purchase orders or contracts. 39 A requirements contract obligates the government to fill all of its actual requirements for supplies or services that are specified in the contract, during the contract period, by purchases from the contract awardee. 40 Conversely, while an IDIQ contract provides that the government will purchase an indefinite quantity of supplies or services from a contractor during a fixed period of time, it requires the government to order only a stated minimum quantity of supplies or services. 41 That is, under an IDIQ contract, the government is obligated to purchase the minimum and only the minimum quantity specified. It is common for government officials to provide estimates of the agency s total requirements under an IDIQ or requirements contract during the solicitation process to allow offerors to develop unit prices for the goods or services. One potential pitfall of which contractors must be aware is that typically, the government is only obligated to order the stated guaranteed minimum set forth in the contract. Indeed, in requirements contracts, there is no need to specify a minimum quantity since those contract vehicles presume that the government will order all of its requirements for a product or service at stated installations from a single contractor. Because fixed unit prices are based upon a combination of direct and indirect costs, including overhead and general and administrative expenses, contractors should not simply rely on the government s estimated quantity to develop their prices. 42 It may be necessary to attempt to negotiate stepladder quantities or multiple estimated quantities in which the unit prices for each item of supply or hour of service is reduced the more the government orders under the contract. Such negotiations may be easier in sole-source settings than competitive procurements. Nonetheless, vendors must be aware that failure to order any quantity beyond a stated minimum guarantee could result in erosion of the contractor s profit margin and even result in a loss since indirect costs tend not to fluctuate and must be absorbed by the total quantity of items or services actually ordered by the procuring agency. T&M and LH contracts are varieties of indefinite-delivery contracts and provide procuring agencies with the flexibility to acquire recurring services or when the amount of effort required to deliver an end-item is uncertain. T&M and LH contracts typically cover a broad range of services, including administrative support, maintenance and repair, and intelligence analysis. Under these contracts, payments to contractors are based on the number of labor hours or days expended. The unit prices or fixed hourly/ daily rates include wages, overhead, general and administrative expenses, and profits. As such, like any other indefinite-delivery contract, T&M and LH contracts resemble both fixed-price and cost-reimbursement type procurement vehicles. T&M contracts also include a reimbursable line item for costs of materials, where applicable. Despite the flexibility afforded by T&M and LH contracts, these vehicles are considered high-risk contracts for the government. 43 This is because there is little positive incentive for the contractor to control its costs or promote labor efficiency. The more time/ hours expended in support of a project, the more the contractor can bill the government. While the FAR requires that all T&M and LH contracts include ceilings over which the contractor may not expend effort, like a cost-reimbursement type contract, almost all T&M and LH contracts are only best effort contracts. The FAR s Payment under Time-and-Materials and Labor-Hour Contract clause clearly states: the contractor shall not be obligated to continue performance if to do so would exceed the ceiling price unless and until the price has been increased. 44 Because of this, T&M and LH contracts are among the least-favored types of contract from the government s perspective. 45 Both the FAR and DFARS place limitations on the use of these contract vehicles and sometimes require approvals before they The most common type of cost-reimbursement contract is the cost-plus-fixed-fee contract, which provides for the payment of a fixed-fee to the contractor, regardless of the allowable or allocable costs incurred by the contractor. Contract Management December

13 can be used in both the commercial item acquisition and other more traditional procurement approaches. 46 Indeed, the FAR provides that T&M contracts may only be used when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. 47 In addition to the foregoing, FAR Subpart sets forth policies and procedures for using basic agreements, basic ordering agreements, and basic purchasing agreements. These agreements are not contracts themselves. 49 Instead, each order or contract issued under the agreement is a stand-alone contract that incorporates the agreement by reference. The benefit of such agreements is that they allow the parties to finalize a number of clauses, prices, and other terms and conditions in advance of execution of a contract streamlining the negotiation process and reducing the time needed for recurring purchases. that are not identified in the FAR, DFARS, or other agency FAR supplements. One of the most significant innovations is the award term contract. Award term contracts are a form of incentive contracts, but instead of providing direct monetary rewards to the contractor through additional profit or fee, contractors that meet or exceed specified performance criteria are rewarded through an extension of the contract s period of performance. Contractors that fail to achieve desired goals may have their contracts cut short. 52 Another innovative contract vehicle is the no-cost or concession type contract. Under a typical no-cost type contract, a vendor provides a service that a federal agency would otherwise perform, but instead of receiving compensation from the procuring agency, the vendor charges third parties or end users all or a portion of the fees for the services or end products. 53 Additional Flexibilities and Innovations FAR Part 16 s contract types and agreements are not the only permissible types of procurement vehicles available to the U.S. government and its prime contractors. The FAR encourages the use of innovating contracting methods by providing that, when exercising initiative, members of the government s acquisition team may assume that, if a specific strategy, practice, policy, or procedure is in the best interests of the government and is not addressed in the FAR or prohibited by statute or case law, Executive Order, or other regulation, that the acquisition strategy is a permissible exercise of the acquisition team s authority. 50 This discretion is not without its limits. FAR (b) goes on to state that contract types not described in this regulation may not be used, unless the contracting agency obtains a deviation under FAR Subpart Despite this, there has been a growing trend to develop new contract vehicles in recent years, such as new contract vehicles Of all the contract types discussed in this article, incentive type contracts have undergone the most significant changes in recent years. 28 Contract Management December 2010

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15 In addition, procuring agencies and contractors frequently rely on the use of hybrid contracts, which mix and match different contract types into a single instrument. 54 For example, under a hybrid contract, certain line items may be priced on a fixed-price basis, other line items may allow the contractor to invoice the government on a costreimbursement basis, and other line items for provisioning, spare parts, or services may be based on an indefinite-delivery type basis. Combining these different contract types into a single instrument can avoid unnecessary delays and costs associated with issuing separate contracts, while taking into account varying degrees of risk and incentives for different phases of the program. Conclusion Over time, refinements and sophistication of the government s procurement system has led to the development of many different types of fixed-price and cost-reimbursement contracts. Selecting the most appropriate vehicle to acquire goods and services is a matter of negotiation and requires the exercise of sound business judgment. As stated in American Tel. & Tel. Co, v. Untied States, 55 the regulations entrust the contracting officer with especially great discretion, extending even to [his or her] application of procurement regulations. The key to negotiating the most appropriate contract type must take into account schedule, cost, and performance risks that the contractor or government bears; the incentives that can be achieved by efficient and economical performance; and the degree of oversight needed by the procuring agency to ensure delivery of a useful product, service, or building to the end user. A thorough understanding of the uses of these vehicles and limitations set forth in the FAR, DFARS, or other agency FAR supplements is essential to accomplish this objective. CM About the Authors BRIAN A. DARST is of counsel to the Fairfax, Virginia, law firm of Odin, Feldman & Pittleman, PC, where he specializes in assisting clients with legal issues arising in connection with the award and performance of their government contracts and subcontracts. His practice includes bid protests, protest defenses, claims, internal investigations, matters affecting small business contracts, and ethics and regulatory compliance at both the prime contract and subcontract levels. MARK K. ROBERTS is a partner with the accounting firm of Argy, Wiltse and Robinson, PC, where he specializes in providing consulting and litigation support services involving regulatory issues relating to contract pricing, cost accounting, profitability, and administration. He also assists contractors in assessing the adequacy of their accounting, estimating, billing, and purchasing systems. Brian A. Darst and Mark K. Roberts are coinstructors for Federal Publications Seminars. They conduct various classes on government contracts related topics for federal officials and contractor personnel. See Types of Government Contracts, a comprehensive two-day course on the practical, legal, accounting, and management systems implications in the use of various contract vehicles, which is among the seminars that Darst and Roberts teach on behalf of Federal Publications Seminars. Send comments about this article to cm@ncmahq.org. Endnotes C.F.R (a) (2009). 2. Memorandum for Acquisition Professionals re: Better Buying Power: Guidance for Obtaining Greater Efficiency and Productivity in Defense Spending (September 14, 2010): McDonnell Douglas Corp. v. United States, 567 F.3d 1340 (Fed. Cir. 2009) C.F.R Note that a number of agency FAR supplements include additional guidance and limitations on the use of different contract types that may be used by agency officials to acquire goods, services, and construction C.F.R through Ibid., at (c) (citing 10 U.S.C. 2306(a) and 41 U.S.C. 254(b)). 8. Ibid., at and (b). 9. Ibid., at (encouraging the use of firmfixed-price contracts or fixed-price contracts with economic price adjustments when acquiring commercial items and requiring certain determinations and findings before using indefinite-delivery, T&M, or LH contracts). See also 75 Fed. Reg. 59,195 (Sept. 27, 2010) (proposing revisions to 48 C.F.R. Subparts 8.4, 12.2, and These newly proposed FAR rules are intended to implement recommendations in GAO Report No (June 2009), titled Minimal Compliance with New Safeguards for Time-and-Materials Contracts for Commercial Services and Safeguards Have Not Been Applied to GSA Schedules Program C.F.R through (setting forth policies on the use of different contract types and pricing approaches during concept exploration, demonstration, full-scale development, and full production phases of major systems); Ibid., at (regarding the determination of contract type for development programs under Department of Defense programs). 11. Ibid., at and (discussing the use of cost-reimbursement and fixed-price contracts in research and development efforts, as well as determination and approval requirements for each). Ibid., at (b) (encouraging the use of basic agreements with educational institutions and nonprofit organizations conducting research and development on behalf of the government). 12. Ibid., at (establishing a preference for lump-sum or fixed-price contracts when acquiring construction) and (requiring prior approval when using cost-plus-fixed-fee, price-incentive, or other contract types with cost variation or adjustment feature when other contractors are performing at the same work site on a firm-fixed-price, lump sum, or unit price basis); ibid., at (c) (which restricts the use of cost-plus-fixed-fee contracts by the Department of Defense for construction funded by annual military construction appropriations acts). 13. Ibid., at (b)(3) (encouraging the use of incentive type contracts where appropriate). 14. See (based on data reported to USAspending.gov by agencies as of November 3, 2010). USAspending.gov provides statistics showing the amount of federal dollars obligated using different types of contracts since fiscal year FAR and Ibid., at Ibid., at , , and See also DFARS (limiting the use of EPA provisions in Department of Defense contracts to those acquisitions exceeding the simplified acquisition threshold and will not be completed within six months after contract award). 30 Contract Management December 2010

16 18. Ibid., at ; Southern Dredging Co., Inc., ENG BCA No. 5843, 92-2 BCA 24,886 (denying a request for equitable adjustment due to a 50 percent increase in the price of oil following the invasion of Kuwait, on the basis that the contractor assumed the risk of fluctuations in the cost of necessary materials and supplies). 19. See, generally, 48 C.F.R through Ibid., at (a). Office of Management and Budget Circular No. A-87, titled Cost Principles for State and Local Governments, Revised, sets forth the principles for determining the allowable costs of contracts and subcontracts with state, local, and federally recognized Indian tribal governments. See 48 C.F.R and 2 C.F.R through (2010). OMB Circular No. A-21, titled Cost Principles for Educational Institutions, Revised, provides principles for determining the costs applicable to research and development, training, and other work performed by educational institutions under contracts with the government. Finally, OMB Circular No. A-122, titled Cost Principles for Nonprofit Organizations, sets forth principles for determining the costs applicable to work performed by nonprofit organizations under contracts, as well as grants and other agreements, with the government. See 48 C.F.R and 2 C.F.R through (2010). In many respects, the cost allowability provisions of these OMB Circulars are similar to the requirements in FAR Subpart 31.2, but differ somewhat due to the unique nature of these contracting parties accounting systems C.F.R through Ibid., at Tital Corp. v. West, 129 F.3d 1479 (Fed. Cir. 1997); 48 C.F.R There are some exceptions to this rule, including cases where the cost overrun is unforeseeable (RMI, Inc. v. United States, 800 F.2d 246 (Fed. Cir. 1986)), the government induces the contractor to continue working even though funding was not available (American Elec. Labs., Inc. v. United States, 774 F.2d 1110 (Fed. Cir. 1985)), and the government orders out-of-scope work causing the contractor to overrun its ceiling (DSS Serv., Inc. v. General Serv. Admin., CBCA No (April 16, 2009)). Nevertheless, the general rule is that the contractor may not recover costs above the ceiling unless and until the contracting officer authorizes the contractor to exceed that amount. See also, Advanced Materials, Inc., ASBCA No , 96-1 BCA 28, C.F.R and CrystaComm, Inc., ASBCA No , 90-2 BCA 22,692; see also 48 C.F.R C.F.R (d)(2) and (f)(2). 27. FAR , , , and The FAR also recognizes two different types of FPI contracts: 1) fixed-price-incentive (firm target) contracts and 2) fixed-price-incentive (successive targets) contracts. 28. See (based on data reported to USAspending.gov by agencies as of November 3, 2010) C.F.R Ibid., at Ibid., at See, e.g., GAO, Guidance on Award Fees Has Led To Better Practices but Is Not Consistently Applied (Washington, DC, 2009); GAO, Use of Award Fees for Achieving Program Outcomes Should Be Improved (Washington, DC, 2007); GAO, Minimal Compliance with New Safeguards for Time-and-Materials Contracts for Commercial Services and Safeguards Have Not Been Applied to GSA Schedules Program (Washington, DC, 2009). 33. See OMB Memorandum For Chief Acquisition Officers, Senior Procurement Executives re: Appropriate Use of Incentive Contracts (December 4, 2007); Memorandum for Secretaries of the Military Departments (Attn: Acquisition Executives) Directors of Defense Agencies re: Proper Use of Award Fee Contracts and Award Fee Provisions (April 24, 2007); Memorandum for Secretaries of the Military Departments (Attn: Acquisition Executives) Directors of Defense Agencies re: Award Fee Contracts (FAR 16, DFARS 215, DFARS 216) (March 29, 2006) C.F.R (d). This rule was first introduced in October 2009 as an interim revision to the FAR. See 74 Fed. Reg. 52,856 (October 14, 2009). The final rule was published on September 29, Fed. Reg. 60,248, 60,261-60,263 (September 29, 2010). This final rule made only minor changes to the interim rule C.F.R (e). 36. Memorandum for Acquisition Professionals, see note 2, at 6 7. This memorandum also suggests that defense agencies limit the use of T&M and CPAF contracts when acquiring services, and that when robust competition exists or there is recent competitive pricing history, agencies acquiring services rely more on the use of firm-fixed-price contracts. Ibid., at C.F.R See Stratos Mobile Networks U.S.A. v. United States, 213 F.3d 1375, 1380 (Fed. Cir. 2000). All General Services Administration Federal Supply Schedule contracts, as well as many agencyissued multiple award contracts, are indefinitedelivery contracts. Another, more limited type of contract that can be used to deal with uncertainties associated with the quantity of effort required are the fixed-price and costreimbursement level of effort term contracts. See 48 C.F.R C.F.R Ibid., at (a); see also Medart, Inc. v. Austin, 967 F.2d 579, 581 (Fed. Cir. 1992) C.F.R (a); see also Dot Sys., Inc. v. United States, 231 Ct. Cl. 765 (1982). 42. See, e.g., Travel Centre v. Barram, 236 F.3d 1316 (Fed. Cir. 2001) (finding no fault in the government s less than ideal contracting tactics when soliciting for an IDIQ contract with a minimum purchase threshold of $100, had figures estimating $2.5 million per year profit from contract, and then the government stopped using the contractor after $500,000 of gross sales); IMS Eng rs-architects, P.C.v. United States, 87 Fed. Cl. 541 (2009) (in which the court held that a contractor had no termination for convenience claims under its IDIQ contracts since the government had ordered more than the minimum quantities under those contracts). 43. Memorandum for Acquisition Professionals, see note 2, at 12 (T&M contracts are the least preferred contract type for understanding costs ). 44. FAR (d) and (i)(3) (ALT I). 45. GAO, Improved Insight and Controls Needed over Time-and-Materials Contracts (Washington, DC, 2007) C.F.R (b) and ; see also Memorandum for Commander, United States Special Operations Command, et al. re: Proper Use of Time-and-Materials Contract Types (March 20, 2008) and 75 Fed. Reg. 59,195 (September 27, 2010) C.F.R (c). 48. Ibid., at ; see also ibid., at (governing the placement of basic ordering agreements and the issuance of orders by the Department of Defense). 49. Ibid., at (a). 50. Ibid., at 1.102(d). 51. Ibid., at (b). 52. See generally HQ AFMC Directorate of Contracting, AFMC Award-Fee & Award Term Guide (December 2002), available at NASA Procurement Information Circular No (January 25, 2006), titled Use of Award Term Incentive, available at office/procurement/regs/pic06-02.html. 53. See, e.g., GAO, No-Cost Contracts for Event Planning Services, B (November 27, 2007), Public Comm s Servs., Inc., B ; B (July 18, 2009) C.F.R (b) states that [c]ontracts negotiated under part 15 may be of any type or combination of types that will promote the government s interest, except as restricted in this part. See also 10 U.S.C. 2306(a) and 41 U.S.C. 254(a)) F.3d 1374, 1379 (Fed. Cir. 2002). Contract Management December