North Carolina Military Business

Center

Types of ContractsAugust 9, 2011

•U.S. federal government contracts fall into three main types: •fixed price, cost reimbursement, and time and materials.

You can choose any federal government contract type, depending on the nature of your business. The focus should be mutual financial performance, both for the contractor and for the federal government. Even though the profit margin of contracting with the federal government can be lower than contracting with private business, the payoff in terms of consistency is high. Work is consistently available and if the contractor's record, service and integrity are above reproach, contracts are continually refreshed.

Fixed Price

• The fixed-price contract allows a contractor to provide services for a non-negotiable price. Usually this type of contract is not adjusted unless provisions such as change in contract, economic, or defective pricing are stipulated in the agreement.

• The government only negotiates fixed-price contracts when reasonably accurate specifications and accurate cost estimations are available. When the federal government enters into a fixed-price contract, the contractor has to bear any risks that arise from escalating costs. Fixed-price contracts separate cost and revenue.

Cost Reimbursement

• A cost reimbursement contract allows the reimbursement of certain costs incurred by a contractor while performing the contract. The reimbursed costs depend on the specific terms stipulated in the contract. Unlike fixed-price contract, cost reimbursement contracts directly link cost and revenue. The contractor will need to maintain accounts of all costs incurred during the execution of the project. The federal government provides specific forms in which costs and reasons for incurring them are maintained by contractors.

Time and Materials

The time and materials contract allows the federal government to purchase the contractor's direct labor itself, instead of purchasing the result of such labor. This translates to the actual hours that the contractor puts into the contracted service. The time and materials contract poses the lowest risk on the government, when compared to the other two contract types. If the contractor is capable of providing the required skills at the agreed upon rate, only then the contract is in effect.The contractor cannot invoice the government during any interruptions to the contracted project, which results in loss of revenue for the contractor. Possible loss of revenue is a downside that a contractor has to face while signing the time and materials contract with the federal government.

Sealed Bidding

• Once a federal agency identifies a need, and decides to proceed with an acquisition, it must solicit sealed bids if (1) time permits the solicitation, submission and evaluation of sealed bids; (2) the award will be made on the basis of price and other price-related factors; (3) it is not necessary to conduct discussions with the responding offerors about their bids; and (4) there is a reasonable expectation of receiving more than one sealed bid. FAR 6.401(a).

• The agency's Contracting Officer (CO) initiates a sealed bidding acquisition by issuance of an Invitation for Bids (IFB). The IFB must describe the Government's requirements clearly, accurately and completely. The FAR and case law prohibit the use of unnecessarily restrictive specifications that might unduly limit the number of bidders.

Sealed Bid

• The agency publicizes the IFB through display in a public place, announcement in newspapers or trade journals, publication in the federal government's Commerce Business Daily (CBD), and by mailing the IFB to those commercial organizations (contractors) on the agency's solicitation mailing list. FAR 14.204; FAR 14.205.

• It is critical that contractors submit their bids by the deadline stated in the IFB. A late bid will not be considered for award except where: (1) the bid was sent to the CO by registered or certified mail at least five days before the bid receipt date; (2) the Government mishandled the bid after receipt; (3) the bid was sent to the CO by "Postal Service Next Day Service" two days prior to the bid receipt date; or (4) the bid was transmitted electronically and received by 5:00 p.m. one working day prior to the bid receipt date. FAR 14.304-1 (a).

Sealed Bid

• All bids received by the time and at the place set for opening are publicly opened and read aloud by the CO. The bids are then recorded on an "Abstract of Offers" (Standard Form 1049) and examined for mistakes. If no mistakes are found, after certain other administrative steps, the CO awards the contract to that responsiblebidder who submitted the lowest responsive bid. A responsive bid is one that contains a definite, unqualified offer to meet the material terms of the IFB. FAR 14.301(a). Conditions, informalities, or defects in the bid that affect the price, quantity, quality, or delivery of the items being acquired by the agency will result in rejection of the bid.

The FAR also requires an affirmative finding of responsibilityprior to awarding the contract to the lowest bidder. FAR 14.408-2. To be determined responsible, the prospective awardee must havethe ability and capacity to perform the contract.

More specifically, the FAR requires a prospective contractor to(1) have adequate financial resources to perform the contract; (2) be able to comply with the required or proposed delivery or performance schedule; (3) have a satisfactory performance record; (4) have a satisfactory record of integrity and business ethics; (5) have the necessary organization, experience, accounting and operational controls, and technical skills;(6) have the necessary production, construction and technical equipment and facilities; and(7) be otherwise qualified and eligible to receive an award under applicable laws and regulations. FAR 9.104-1.

Fixed Price Contracts

• Fixed-price types of contracts provide for a firm price or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both. Unless otherwise specified in the contract, the ceiling price or target price is subject to adjustment only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances. The contracting officer shall use firm-fixed-price or fixed-price with economic price adjustment contracts when acquiring commercial items.

Firm-fixed-price contracts

A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties. The contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive and performance or delivery incentives when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives.

A firm-fixed-price contract is suitable for acquiring commercial items or for acquiring other supplies or services on the basis of reasonably definite functional or detailed specifications when the contracting officer can establish fair and reasonable prices at the outset, such as when—

• (a) There is adequate price competition; • (b) There are reasonable price comparisons with prior purchases of

the same or similar supplies or services made on a competitive basis or supported by valid cost or pricing data;

• (c) Available cost or pricing information permits realistic estimates of the probable costs of performance; or

• (d) Performance uncertainties can be identified and reasonable estimates of their cost impact can be made, and the contractor is willing to accept a firm fixed price representing assumption of the risks involved.

Cost-Reimbursement Contracts

Cost-reimbursement types of contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed (except at its own risk) without the approval of the contracting officer. Cost-reimbursement contracts are suitable for use only when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use any type of fixed-price contract.

Cost-Reimbursement Contracts

• Limitations. • (a) A cost-reimbursement contract may be used only when—

(1) The contractor’s accounting system is adequate for determining costs applicable to the contract; and

(2) Appropriate Government surveillance during performance will provide reasonable assurance that efficient methods and effective cost controls are used. (b) The use of cost-reimbursement contracts is prohibited for the acquisition of commercial items.

Indefinite-Delivery Contracts

• “Delivery order contract” means a contract for supplies that does not procure or specify a firm quantity of supplies (other than a minimum or maximum quantity) and that provides for the issuance of orders for the delivery of supplies during the period of the contract.

• “Task order contract” means a contract for services that does not procure or specify a firm quantity of services (other than a minimum or maximum quantity) and that provides for the issuance of orders for the performance of tasks during the period of the contract.

Indefinite-Delivery Contracts

There are three types of indefinite- delivery contracts:definite-quantity contracts, requirements contracts, and indefinite-quantity contracts.

The appropriate type of indefinite-delivery contract may be used to acquire supplies and/or services when the exact times and/or exact quantities of future deliveries are not known at the time of contract award.

Definite-quantity contracts

A definite-quantity contract provides for delivery of a definite quantity of specific supplies or services for a fixed period, with deliveries or performance to be scheduled at designated locations upon order. A definite-quantity contract may be used when it can be determined in advance that—(1) A definite quantity of supplies or services will be required during the contract period; and (2) The supplies or services are regularly available or will be

available after a short lead time.

Requirements contracts

A requirements contract provides for filling all actual purchase requirements of designated Government activities for supplies or services during a specified contract period, with deliveries or performance to be scheduled by placing orders with the contractor. A requirements contract may be appropriate for acquiring any supplies or services when the Government anticipates recurring requirements but cannot predetermine the precise quantities of supplies or services that designated Government activities will need during a definite period.

No requirements contract in an amount estimated to exceed $100 million (including all options) may be awarded to a single source

Indefinite-quantity contracts

• An indefinite-quantity contract provides for an indefinite quantity, within stated limits, of supplies or services during a fixed period. The Government places orders for individual requirements. Quantity limits may be stated as number of units or as dollar values.

• A solicitation and contract for an indefinite quantity must—• (1) Specify the period of the contract, including the number of

options and the period for which the Government may extend the contract under each option;

• (2) Specify the total minimum and maximum quantity of supplies or services the Government will acquire under the contract;

• (3) Include a statement of work, specifications, or other description, that reasonably describes the general scope, nature, complexity, and purpose of the supplies or services the Government will acquire under the contract in a manner that will enable a prospective offeror to decide whether to submit an offer

Multiple award preference

• Except for indefinite-quantity contracts for advisory and assistance services, the contracting officer must, to the maximum extent practicable, give preference to making multiple awards of indefinite-quantity contracts under a single solicitation for the same or similar supplies or services to two or more sources.

Time-and-materials contracts

• “Direct materials” means those materials that enter directly into the end product, or that are used or consumed directly in connection with the furnishing of the end product or service.

• “Hourly rate” means the rate(s) prescribed in the contract for payment for labor that meets the labor category qualifications of a labor category specified in the contract that are—

(1) Performed by the contractor; (2) Performed by the subcontractors; or (3) Transferred between divisions, subsidiaries, or affiliates of the

contractor under a common control.

Time-and-materials contracts

• “Materials” means—• (1) Direct materials, including supplies transferred between

divisions, subsidiaries, or affiliates of the contractor under a common control;

• (2) Subcontracts for supplies and incidental services for which there is not a labor category specified in the contract;

• (3) Other direct costs (e.g., incidental services for which there is not a labor category specified in the contract, travel, computer usage charges, etc.); and

• (4) Applicable indirect costs.

Time-and-materials contract

• A time-and-materials contract provides for acquiring supplies or services on the basis of—

(1) Direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, and profit; and

(2) Actual cost for materials

Labor-hour contracts

A labor-hour contract is a variation of the time-and-materials contract, differing only in that materials are not supplied by the contractor

Letter contracts

• A letter contract is a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services.

• (a) A letter contract may be used when(1) the Government’s interests demand that the contractor be given a

binding commitment so that work can start immediately and(2) negotiating a definitive contract is not possible in sufficient time to

meet the requirement. However, a letter contract should be as complete and definite as feasible under the circumstances.

Source selection objective

• The objective of source selection is to select the proposal that represents the best value.

• Agency heads are responsible for source selection. The contracting officer is designated as the source selection authority, unless the agency head appoints another individual for a particular acquisition or group of acquisitions.

Source Selection

• Price or cost to the Government shall be evaluated in every source selection

• The quality of the product or service shall be addressed in every source selection through consideration of one or more non-cost evaluation factors such as past performance, compliance with solicitation requirements, technical excellence, management capability, personnel qualifications, and prior experience

• The extent of participation of small disadvantaged business concerns in performance of the contract shall be evaluated in unrestricted acquisitions expected to exceed $550,000 ($1,000,000 for construction) subject to certain limitations

Simplified Acquisition Methods

• The Government wide commercial purchase card is authorized for use in making and/or paying for purchases of supplies, services, or construction

• The Government wide commercial purchase card may be used to—• (1) Make micro-purchases; • (2) Place a task or delivery order (if authorized in the basic contract,

basic ordering agreement, or blanket purchase agreement); or • (3) Make payments, when the contractor agrees to accept payment

by the card

Purchase guidelines

Solicitation, evaluation of quotations, and award. (1) To the extent practicable, micro-purchases shall be distributed

equitably among qualified suppliers. (2) Micro-purchases may be awarded without soliciting competitive

quotations if the contracting officer considers the price to be reasonable.

(3) The administrative cost of verifying the reasonableness of the price for purchases may more than offset potential savings from detecting instances of overpricing.

Blanket purchase agreements (BPAs)

• A blanket purchase agreement (BPA) is a simplified method of filling anticipated repetitive needs for supplies or services by establishing “charge accounts” with qualified sources of supply

BPAs should be established for use by an organization responsible for providing supplies for its own operations or for other offices, installations, projects, or functions. Such organizations, for example, may be organized supply points, separate independent or detached field parties, or one-person posts or activities.

The use of BPAs does not exempt an agency from the responsibility for keeping obligations and expenditures within available funds.

Purchase priorities

• The Javits-Wagner-O’Day Act requires the Government to purchase supplies or services on the Procurement List, at prices established by the Committee, from AbilityOne participating nonprofit agencies if they are available within the period required. When identical supplies or services are on the Procurement List and the Schedule of Products issued by Federal Prison Industries, Inc., ordering offices shall purchase supplies and services in the following priorities:

• Supplies: • (1) Federal Prison Industries, Inc. • (2) AbilityOne participating nonprofit agencies. • (3) Commercial sources. • (2) Services: • (1) AbilityOne participating nonprofit agencies. • (2) Federal Prison Industries, Inc., or commercial sources

Federal Supply Schedules

The Federal Supply Schedule program is also known as the GSA Schedules Program or the Multiple Award Schedule Program. The Federal Supply Schedule program is directed and managed by GSA and provides Federal agencies with a simplified process for obtaining commercial supplies and services at prices associated with volume buying. Indefinite delivery contracts are awarded to provide supplies and services at stated prices for given periods of time. GSA may delegate certain responsibilities to other agencies ( GSA has delegated authority to the VA to procure medical supplies under the VA Federal Supply Schedules program).GSA offers an on-line shopping service called “GSA Advantage!” through which ordering activities may place orders against Schedules

Opportunities

• Sources Sought

– (https://www.fbo.gov/index?s=opportunity&mode=form&id=d65a50f9

7bd74f2346233dcf81a168ee&tab=core&_cview=0)

– http://www.fbo.gov/spg/DLA/J3/DRMS/J33%2D002/listing.html)

Opportunities

• Sources Sought

– (https://www.fbo.gov/index?s=opportunity&mode=form&id=d65a50f9

7bd74f2346233dcf81a168ee&tab=core&_cview=0)

– http://www.fbo.gov/spg/DLA/J3/DRMS/J33%2D002/listing.html)

• Pre-Solicitation Notice:

– (https://www.fbo.gov/index?s=opportunity&mode=form&id=eb10558

10f8b8c8463b4520b1e099f01&tab=core&_cview=1)

– (https://www.fbo.gov/index?s=opportunity&mode=form&id=0e0f78d7

9fe5786cb8c82a9fe503c271&tab=core&_cview=0)

Opportunities

• Combined Synopsis/Solicitation– (https://www.fbo.gov/index?s=opportunity&mode=form&tab=core&i

d=30c7d92dd485b7cafdffca5681d003ab)

– (https://www.fbo.gov/index?s=opportunity&mode=form&id=a57a42f

e7d2214aafdae59d9d15dcf51&tab=core&_cview=0)

Opportunities

• Sole Source– (https://www.fbo.gov/index?s=opportunity&mode=form&tab=core&i

d=d30c2f17b7fb15cf9cbf40109f4fb29c&_cview=0)

– (https://www.fbo.gov/?s=opportunity&mode=form&id=4bf9f456eca5

120d69a7e068258a1f5f&tab=core&_cview=0)

Opportunities

• Solicitation– (https://www.fbo.gov/index?s=opportunity&mode=form&id=0588886

3aa466b65c77530bfc37369ee&tab=core&_cview=1)

Opportunities

• Solicitation– (https://www.fbo.gov/index?s=opportunity&mode=form&id=0588886

3aa466b65c77530bfc37369ee&tab=core&_cview=1)

• Modification/Amendment:– (https://www.fbo.gov/?s=opportunity&mode=form&tab=core&id=67e

cc8aa9fc9a56e083165cb44b328b4&_cview=0)

Opportunities

• Solicitation– (https://www.fbo.gov/index?s=opportunity&mode=form&id=0588886

3aa466b65c77530bfc37369ee&tab=core&_cview=1)

• Modification/Amendment:– (https://www.fbo.gov/?s=opportunity&mode=form&tab=core&id=67e

cc8aa9fc9a56e083165cb44b328b4&_cview=0)

• Special Notice(https://www.fbo.gov/?s=opportunity&mode=form&id=ab644f268584beb

1018c4bd938f5a2f1&tab=core&_cview=0)

Opportunities

• Award Notice– (https://www.fbo.gov/index?s=opportunity&mode=form&id=6fe8cc43

bbbcbc054f2ba9488a5decd2&tab=core&_cview=1)

Contact Information

• Scott Dorney, Executive Director, 910-678-0190, dorneys@ncmbc.us

• Bill Greuling, Business Development Manager, 910-578-2626 (Durham), greulingb@ncmbc.us

• Diana Potts, Business Development Specialist, 910-678-0192, pottsd@ncmbc.us