Government Contract Vehicles: The Ultimate Guide

Several types of government contracts exist. The contracts are different since each encompasses a unique approach to bidding and the subsequent performing of the work. Most government contracts, particularly the ones that exceed $150,000, undergo intense competitive bidding that is supervised by a contracting officer (Never & de Leon, 2014). The process is often through negotiated procurement or sealed bidding. Government tenders belong to two general categories, namely the fixed-price and the cost-reimbursement. The type of contract defines the obligations, expectations, rewards, and incentives for both the contractors and the government. The type of contract dictates the level and timing of the responsibility that the contractor assumes for the costs of performance (Solloway, 2013). Furthermore, the contract type determines the nature and the amount of profit that incentive offered to the contractor for fulfilling the obligations set therein or exceeding the goals or the specified standards of the contract (Never & de Leon, 2014). Deciding to offer goods, services, and supplies to the government can be challenging; however, knowing the type of government contract vehicle to use can make things easier when bidding for contracts with the U.S. Government.  

Fixed-Price Contracts 

Overview 

            Fixed-price contracts generally provide a firm price and are generally applicable by the federal government. At times, the contracts use an adjustable-price level for a target price, a ceiling price, or both. The target or the ceiling price is often adjustable through the contract clauses unless specified in the contract otherwise. Adjustments are to ensure equitability or revision of the price in the contract under the prevailing or stated circumstances. The contracting officer normally utilizes fixed-price or the firm-fixed-price, together with economic price adjustment contracts for the acquisition of commercial items.  

            Under the terms and conditions of the fixed-price contract, the contractor enters into a formal agreement to deliver the service or the product at a price that does not exceed the agreed-to-maximum. It is advisable to use the fixed-price contract when the risk of the contract is comparatively low (Solloway, 2013). Moreover, the fixed-price should be applicable when the price is defined within acceptable limits, meaning that the government and the contractor can look realistically at the maximum possible price. An example of a high-risk contract is a contract in which the fixed price would not be applicable. On the other hand, an example of a low-risk contract is one that entails a follow-on production. It is worth noting that all federal agencies use fixed-price agreements, meaning that the opportunities and avenues for contractors are relatively widespread and numerous. Additionally, fixed-price contacts are the most common ones use by both the local and state agencies for procurement purposes. It is, therefore, safe to infer that fixed-price contracts portend a high level and more opportunities than any other form of contract.  

Types of Fixed-Price Contracts 

Firm-Fixed Price (FFP) Contracts 

            FFP contract provides the price that is not adjustable or subject to adjustment under any circumstances, particularly on the ground of the costs incurred by the contractor in the course of supplying products or delivering services. The contract places the full responsibility and risk as regards to cots on the contractor. It means that once the government and the contractor enter into an agreement, the terms of that agreement regarding the price of items are binding and are not dictated by the prevailing circumstances. If the prices of the items or the product to be procured go up after the contract is signed, then the contractor will bear the loss necessitated by the increase in price (Darst & Roberts, 2010). The government will not make any adjustments to accommodate the change in the price levels.  

FFP provides full incentives for the contractor to manage cost and then perform effectively as per the initial conditions set out in the contract. It also imposes a minimum burden of administration on the parties under contract. An FFP conjunction is often used by the contracting officer together with an incentive or award fee, based mainly on factors that do not constitute cost (Never & de Leon, 2014). It means that the contract price is the price as set during bidding with no extra fees or incentives. The responsibility for cots falls directly and squarely on the contractor. The prediction of cots, therefore, relies on a given degree of certainty (Darst & Roberts, 2010). Noteworthy is the fact that government contractors use FFP for the acquisition of commercial items or when purchasing items that result from sealed bidding procedures.  

Firm-Fixed-Price Level-Effort Term Contract 

            The terms of this contract require the contractor to set aside a specified degree of effort for a particular period for a fixed dollar amount. It is an important type of contact that is applicable in research or the investigation and the subsequent development of a given area. This type of contract has strict limitations. It specifies the level of effort that a contractor should devote to accomplish or deliver a given service or product over a specified time. The price is based on the effort invested and not the achievement or the results. The contract is mainly applicable when the work to be accomplished is not well defined. Additionally, the contract is relevant when the amount involved does not go beyond $100,000, but may exceed on the direction of the chief contracting office (Darst & Roberts, 2010). The norm is that the desired level of effort forms part of the negotiations and, subsequently, the contract. It is highly possible that an amount les that the quoted sum will not be sufficient to accomplish the task or supply the service or the product in question.  

FFP Materials Reimbursement Contract 

            It is a contract type that is mostly applicable in the overhaul and repair services to ensure that the firm undertaking the service is reimbursed or refunded the amount they used in purchasing materials that it used to accomplish the task (Darst & Roberts, 2010). The objective is to reimburse the firm on the number of materials that they used to ensure the completion of the contract.  

FFP contract with Award Fees 

            The parties involved in a contract normally use objective criteria to determine the performance of the contract. Nevertheless, there are certain situations in which the government intends to motivate a contractor. Still, it is challenging to apportion appropriate incentives because the measurement of the performance is not sufficiently objective due to the subjective nature of the criteria to be used. The subjective criteria may include but not limited to appearance, quality, technical ingenuity, and adhering to scheduling or handling delays. In the mentioned case, the government uses award fee provisions, specifically in cost-reimbursement and fixed-price contracts (Solloway, 2013). The award fees are always connected to interim outcomes, milestones, or events that are identifiable as much as possible. The structure of the vents, milestones, or the outcomes should be such that they ensure that the effort by the contractor and the government focus solely on surpassing or meeting cots, performance, and the schedule requirements.  

            The contracts often establish a fixed price that entails profits that is mainly paid when the performance id deemed satisfactory by the government. Under the contract, the contractor is entitled to an award fee that is to be paid together with the fixed price (Never & de Leon, 2014). An award-fee plan exists that is reviewed or evaluated based on the periodic assessment of the contractor’s performance. The function of the award fees is to provide the contracting officers with the avenue to motivate the contractor by objectively measuring the performance. The government evaluation of the contractor’s performance is essential in determining the amount of award fees that the contractor receives. The evaluation criteria are usually specified, as it forms part of the contract. Notably, the government unilaterally determines the criteria for evaluation and the provision of the award fee, which is not subject to the disputes clause. The government pays the ward fee on an incremental basis of the specified period based on the contractor’s performance. Attaining the desired program outcome has a direct bearing on the contractor’s ability to earn the award fees.  

FFP Contact with Economic Price Adjustment 

            The stated contract provides for a possible downward or upward revision of the determined contract price in case certain contingencies occur. The price adjustment may be based on established prices, which may be because of increases or decreases from the level initially agreed upon during the contract (Never & de Leon, 2014). Moreover, the adjustment may be based on the actual costs of labor, which are based on the increase or decrease in the cost of labor that accrues to the contractor during the performance. Finally, the adjustment may be based on the cots indices of material and labor. The cost adjustments are based on the increase of decrease of material or labor cots standards that are particularly identified in the initial contract.  

            The contracting officers may only use fixed-price contracts with price adjustments, delivery incentives, or economic price adjustments when factors other than cost are involved. Nevertheless, the term of the contract remains fixed. The fixed-price contracts are viable or are extensively a preference in government contracting officers for the acquisition of commercial items. Additionally, the contracts are applicable when the officers are awarding contracts that result from sealed bidding procedures. A FFP with an adjustable economic price is applicable when serious doubt lingers about the stability of the labor or market conditions that may persist during the entire period or formidable fraction of the period of the actualization of the contract (Never & de Leon, 2014). It is worth noting that other contingencies are identified and included separately in the contract. The industry-wide contingencies are the main determinants of the prices and not just the narrow circumstances experienced by a single firm. The labor and materials are only effective if the contingencies that cause the fluctuations and the subsequent adjustments are factors beyond the contractor’s control.  

Fixed Price Incentive (FPI) Contacts 

            The FPI contract is a type of fixed-price contract that contains the provision for the adjustment of profits. It reconciles the total negotiated cost with the total target cost, which determines the formula for adjustment. The final price applicable in the contract is based on the correlation between the total target cots and the total negotiated cost (Never & de Leon, 2014). The FPI contract is relevant in case when the FFP is not applicable. Moreover, it is appropriate in a procurement process in which the assumption of a level of responsibility by the contractor will lead to a positive profit incentive for effective performance and cost.  

FP Contract with Prospective Price Redetermination 

            The contract provides for possible price redetermination of a contract over a specified period and subsequent periods of the contractor’s performance. The type of contract is relevant in a situation where the parties intend to acquire quantity services or products. Such a situation means that it is possible to negotiate a reasonable and fair fixed price for the initial period. Nevertheless, the firm may find it difficult to negotiate such favorable terms in the subsequent periods of performance (Knowles, 2015). The evaluation of the uncertainties leads to the setting of the ceiling price for the contract. The ceiling price is important because it provides the basis for the adjustment that is only possible when the contract clauses are applied.  

Cost-Reimbursement Contracts 

            Cost-plus or cost-reimbursement contracts are a type of contract where the contractor receives payment for all the permitted expenses (Never & de Leon, 2014). The objective of the payments is to make the company or the firm that has entered into a contract with the government to make profits. It means that the reimbursement is to safeguard firms against losses. Under the contract, the contractor agrees to input the best possible effort to ensure the completion of the contract. It contains the approximate cost that will enable the contractor to complete the contract obligation (Knowles, 2015). The contract set up a cots ceiling that the contractor should not exceed regardless of the circumstances, especially without the approval and the permission of the contracting officer. Cost-reimbursement contracts are ideal in situations where the uncertainties that may arise in the course of actualizing the contract cannot be estimated with the level of accuracy that warrants the application of fixed-price contracts ( SC&H Capital, 2020). The agencies that use this type of contract include National Weather Service, Department of Defense, and the Federal Transit Administration.  

Advantages and Disadvantages of Cost-Reimbursement Contracts 

            Cost-reimbursement contracts are ideal in situations where the quality is a long-term concern than cost. For instance, it is ideal in the Space Program. Unlike the fixed-price contracts, the costs-reimbursement contractor has no time for shortcuts. The final cost of the contract is usually less than the fixed-price contract because this type of contract has not time to inflate the cost. On the flipside, cost-plus contracts have limited certainty on the exact value of the final cost (Schooner, 2020). The contract may require improved levels of administration and oversight to ensure the admissible payment costs. The objective of the oversight is to ensure that the contractor excises sufficient cost controls.  

Types of Cost-Plus Contracts 

Cost Contracts 

              Under such contracts, the contractor is not entitled to or does not receive any fee. The contractor only pays the cots that are incurred in the performance of the contract. Such a contract is commonly applicable in projects that require research and development, especially in facilities contract and non-profit organizations.  

Cost-Plus- Incentive Contracts 

            The type of contract entails two types of contracts. Cost-Plus-Incentive-FEE (CPIF) is a type of contract that provides fee allowance based on the correlation between the target costs and the total allowance cost. It worth noting that the contractor and contracting officers negotiate the target fee, the maximum fee, the minimum fee, and the adjustment fee before entering into a contract. The mentioned contract parameters are negotiated beforehand. The other type is the Cots-Plus-Award-Fee (CPAF), which is a type of contract that the government uses to motivate the contractor (Hansen, 2014). Towards this end, the contracting officer will establish a connection between the award fee and the identifiable parameters such as schedule, exceeding cost, performance requirements.  

Cost-Sharing Contracts 

            In this kind of contract, the contractor will only receive a fraction of allowable cost as a reimbursed fee. It is relevant for research and development, especially in a situation when the government intends to enter into a contract with private companies.  

Other types of Government Contracts 

            All contracts fall into the categories discussed above (fixed cost and cots-plus contracts). There are other classifications of government contracts as well.  

Time-and-Materials (T&M) Contract 

            The government tends to avoid such kinds of contracts due to their propensity to shifting the risk from the contractor to the contracting government agency. It is proof that the contractor and the government tend to have varying interests. It presents the lowest risk to the contractor while posing the highest possible risk to the government. Currently, the federal government is working to phase out this type of contract. The T&M contracts allow the government agencies to buy supplies based on the direct labor hours at fixed rates that include wages, general expenses, administrative expenses, profits, and overhead (Hansen, 2014). The government also pays for the contract based on the prevailing cost of materials. Such kinds of contracts are generally applicable when it is difficult to estimate the duration of work and the cost of a contract with a proven degree of accuracy.  

Indefinite Quantity Contracts (IDIQs) 

            It is one of the most common types of contracts preferred by the federal government. Such types of contracts are applicable and relevant on both cost-plus and fixed-price basis. In a situation when the federal government decides to purchase an item or source for a service, it does not understand the hours that the service provider or the expert puts in to actualize the performance. Most government contracts require the contractor to list accurate quantities. The IDIQs are mostly multiple-award contracts that permit the government to select possible vendors to make bids against each other. The government then has the opportunity to select the most competitive vendor based on certain parameters such as credentials and pricing. Winning based on the criteria set out by the government makes the basis for selection.  

Conclusion 

It is imperative to understand the distinct challenges and opportunities that each government contract portends for a business to succeed as a government contractor. After the determination of a need by a government agency, it then moves to conduct program management activities and to develop strategies for acquisition. Part of the strategy evaluation encompasses the determination of the contract type that will best serve the needs of the government. The type of contract normally defines the obligations, expectations, rewards, and incentives for both the contractors and the government. The type of contract dictates the level and timing of the responsibility that the contractor assumes for the costs of performance. Moreover, the contract type determines the nature and the amount of profit that incentive offered to the contractor for fulfilling the obligations set therein or exceeding the goals or the specified standards of the contract. It is important to choose the type of contract that is suitable for the needs, demands, competence, and the objectives of the contractor. 

References 

Darst, B., & Roberts, M. (2010). Government Contract Types: The U.S. Government’s Use of Different Contract Vehicles to Acquire Goods, Services, And Construction. Contract Management, 50 (12), 16–31. 

Never, B., & de Leon, E. (2014). The effect of government contracting on nonprofit human service organizations: Impacts of an evolving relationship.  Human Service Organizations: Management, Leadership & Governance ,  38 (3), 258-270. 

Solloway, C. (2013). Managing Federal Government Contracts: The Answer Book . Tysons Corner, Virginia: Management Concepts Press. 

Hansen, M. (2014). Intelligence Contracting: On the Motivations, Interests, and Capabilities of Core Personnel Contractors in the US Intelligence Community.  Intelligence and National Security ,  29 (1), 58-81. 

Schooner, S. L. (2020, March 30). Federal Contracting and Acquisition . Retrieved from https://www.law.gwu.edu/schooner-steven-l 

Knowles, M. (2015, April 29). The Advantages of Government Contracts . Retrieved April 5, 2020, from https://govdirections.com/blog/the-advantages-of-government-contracts/ 

SC&H Capital. (Jan 2, 2020). Government contracting 2020 outlook: Companies must stay sharp and adapt to compete, experts advise. (2 nd January 2). Retrieved from https://www.bizjournals.com/baltimore/news/2020/01/02/government-contracting-2020-outlook-companies-must.html