Not all contracts are the same. And no, we're not talking about what's actually being purchased. We're talking about how the contract itself functions and how you get paid. There are different types of government contracts for different purposes. You can learn about them by digging through the dense government language of FAR Part 16 or...you can use this simple guide written in plain English.
Here are the major types of government contracts we're going to cover:
- Fixed-Price Contracts
- Cost-Reimbursement Contracts
- Time and Materials Contracts
- Indefinite-Delivery Contracts
* * *
Fixed-Price Contracts
For this family of government contracts, the price will not change. However, there are instances in which there may be a ceiling price, target price, or even both. What you should also know is that with fixed-price contracts, the risk is put on the contract. This is because these types of government contracts are not reliant on time or resources expended. Essentially, you're working with what they put out in front of you.
Firm-Fixed Price (FFP)
Common Application(s): Commercial supplies and services (things that any average consumer can buy).
Payment: Price is not adjustable aka "firm."
Gov't Purpose: FFPs are issued when the requirements are well-defined and industry market conditions are stable. Another factor for their issuing is when an agency is working with contractors who are experienced in meeting the given requirements.
Risk(s): All the risk is placed on the contractor's side. If their costs exceed the FFP price, then too bad. However, FFPs are only issued when its determined that the financial risks are determined to be too insignificant.
Fixed-Price Economic Price Adjustment (FPEPA)
Common Application(s): Long-term contracts for commercial supplies during a period of high inflation rates.
Payment: There is a fixed price with a ceiling for upward adjustment and a limit to downward adjustment. Downward adjustment is based on established prices, actual labor and material costs, along with labor or material indices.
Gov't Purpose: FPEPAs are useful when there are predictions of unstable market prices for labor or materials over the life of the contract.
Risk(s): The risk is on the contractor's side, however, the potential for adjustments helps handle the risk.
Fixed-Price Incentive Firm (FPIF)
Common Application(s): Productions of major systems based on a prototype.
Payment: A ceiling price can be established that covers the most probable risks for the nature of the work. If the contractor meets their obligations beneath the ceiling price, they can make a profit.
Gov't Purpose: FPIFs are issued when there are uncertainties about the contract labor or material requirements.
Risk(s): Although there is the incentive put in place for making a profit, there's also no limit on how much the contractor can lose on this type of opportunity.
Fixed-Price Award-Fee (FPAF)
Common Application(s): Service-based contracts such as janitorial services, equipment maintenance, etc.
Payment: There is a firm-fixed price with standards to evaluate the contractor's performance, along with procedures for creating a fee based on performance vs. standards. The award fee will be added to the firm-fixed price upon satisfactory performance.
Gov't Purpose: To motivate the contractor with incentives when it's difficult to form an objective gauge for contractor performance.
Risk(s): The risk is on the contractor if they cannot work within the fixed-price or within the award fee (if they provided satisfactory performance).
Fixed Price Prospective Redetermination (FPRP)
Common Application(s): When there is a need for the long-term production of spare parts for any major system.
Payment: There will be a fixed-price for the first period and then proposed pricing for the following periods that are at least 12 months apart.
Gov't Purpose: When an agency cannot determine the cost of performance after the first year of a contract.
Risk(s): Falls on the contractor.
* * *
Cost-Reimbursement Contracts
Like fixed-price contracts, cost-reimbursement contracts are another major family. However, these types of government contracts are more unified in how they get paid out. The contract will get paid for all allowed expenses plus an additional payment for profit.
Cost-Plus Incentive-Fee (CPIF)
Common Application(s): Research and development of a prototype for a major system.
Payment: The contractor's payment will be based on the actual cost and/or performance. A minimum and maximum range for payment will be set along with a target fee.
Gov't Purpose: When an objective relationship can be established between the fee and measures such as costs, delivery dates, etc.
Risk(s): On the government's end.
Cost-Plus Award-Fee (CPAF)
Common Application(s): Generally used in large-scale research studies.
Payment: CPAFs feature a target cost along with a base and maximum fee. The fee is determined on performance matched up against standards.
Gov't Purpose: When the level of effort required for research, preliminary exploration, or study is unknown.
Risk(s): On the government's end.
Cost-Plus Fixed Fee (CPF)
Common Application(s): Research studies.
Payment: The contractor is paid for the expenses of performance along with an additional fixed fee.
Gov't Purpose: When using a CPIF is deemed to be impractical.
Risk(s): On the government's end.
Cost/Cost Sharing (C/CS)
Common Application(s): Joint research with educational institutions or vendors who are nonprofit entities.
Payment: There's a target cost and an agreement of what share is the government's cost, but there's no fee.
Gov't Purpose: For when it's anticipated that the contractor would expect compensating benefits for handling parts of the cost and the lack of a fee.
Risk(s): On the government's end.
* * *
Time and Materials Contracts
The name says it all. Time and materials contracts are based on the time spent by the contractor's employees, subcontractors, and the materials used.
Common Application(s): Construction and emergency repairs.
Payment: There's a ceiling price, a per-hour labor rate (which also covers overhead and profit), and provisions for reimbursing direct materials costs.
Gov't Purpose: When no other type of contract is suitable because costs are too low to justify an audit of the contractor's indirect expenses.
Risk(s): Government assumes all risk.
Labor Hour
Common Application(s): Construction and emergency repairs, but the contractor does not provide materials.
Payment: "
Gov't Purpose: "
Risk(s): "
* * *
Indefinite-Delivery Contracts
These types of government contracts are the most flexible. They're awarded under circumstances in which the government might not know how much of an item or service they need or when they need it. Sometimes they are called Delivery Order Contracts or Task Order Contracts.
Indefinite-Delivery Indefinite Quantity (IDIQ)
Common Application(s): Most of the time, they are used for service contracts, and especially architect-engineering services.
Payment: Although there's an indefinite quantity, a minimum amount and a maximum amount of dollars spent are established. They can be fixed price or cost-reimbursement.
Gov't Purpose: When they need an indefinite amount of services over a fixed amount of time.
Risk(s): Depends if it's fixed-price or cost reimbursement.
Indefinite-Delivery Definite Quantity (IDDQ)
Common Application(s): For goods that are always generally available.
Payment: "
Gov't Purpose: Provides a definite amount of supplies or services for a fixed period of time.
Risk(s): "
Requirements
Common Application(s): "
Payment: There is no minimum guarantee for this type of contract.
Gov't Purpose: For fulfilling all purchase requirements of designated government activities during a specified contract time.
Risk(s): "
