choosing the right contract type€¦ · factors in selecting contract types price competition type...
TRANSCRIPT
Choosing the Right Contract Type
Anthony Nicolella
Professor of Contract Management
DAU
10 May 2016
2
Topics for Discussion
Contract Type Policy
Cost Risk and Contract Type
Families of Contracts
Factors in Selecting Contract Type
Incentive Contracts
3
Contract Type Policy
The objective is to negotiate a contract type 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. FAR 16.103(a)
FAR 16.103(a) Selecting the contract type is
generally a matter for negotiation and requires the
exercise of sound judgment.
4
Dr. Carter Memo, Sep 14, 2010 BBP Focus Area: Incentivize Productivity and
Innovation in Industry
Principle: Increase use of Fixed Price Incentive Firm (FPIF)
Contracts:
– One contract size does not fit all.
– CPAF Contracts with subjective measures not
conducive to controlling costs.
– Incentive is important since it shares costs of overruns and reward underruns, giving both sides an incentive
for good performance.
– FPIF should be contracting officer’s point of departure
when appropriate.
– FPIF appropriate for early production and single-source
production where price improvement can be
rewarded.
5
Cost Risk and Contract Type
VAGUE WELL
DEFINED
Concept Refinement
Technology
Development
VARIED
System
Development &
Demonstration
CPFF - CPIF –
FPIF
Production &
Deployment
CPIF – FFP –
FPIF
Operations &
Support
FFP – FPIF
Cost Risk Line
Higher Risk of
Cost Performance
Lower Risk of
Cost Performance
6
Contract Type Family Characteristics
Best Effort Shall Deliver
Low High
High Low
As Incurred On Delivery
None % of Actual
Max Gov’t Min Gov’t Surveillance Surveillance
Fee limitations No limit
7
Basic Contract Review
Cost Plus Fixed Fee
(CPFF)
Firm Fixed Price
(FFP)
8
Factors in Selecting Contract Types
Price Competition
Type of proposal analysis:
Price analysis
Cost analysis
Type and complexity of the requirement
Combining contract types
Urgency of the requirement
Contractor’s technical capability and
financial responsibility
9
Factors in Selecting Contract Types
Continued
Contractor’s accounting system
Length of contracting period
Cost, schedule, performance, other
incentives may be added, such as award
fee
Extent and nature of subcontracting
Acquisition history
* See FAR 16.104 for a complete list of factors
10
FPIF vs. CPIF
FPIF Contract (52.216-16) vs. CPIF Contract (52.216-10)
Target Cost Target Cost
Target Profit Target Fee
Profit Adjustment Formula Fee Adjustment Formula
Ceiling Price Minimum Fee
Maximum Fee
11
Basic Contract Review
12
Contract Incentives
FAR 16.4 addresses incentive contracts and
types of incentives:
Cost incentive (FAR 16.402-1)
Performance incentive (FAR 16.402-2)
Delivery incentive (FAR 16.402-3)
Multiple incentives (FAR 16.402-4)
There are 2 major types of incentive
contracts:
Formula Type Incentive (FAR 16.402)
Award Fee (FAR 16.404)
13
Delivery Incentive Example Positive Incentives
– 20% of incentive for completion of Critical Design Review (CDR) at least two (2) weeks
ahead of schedule ($20,000)
– 20% of incentive for passing Design Qualification Test at least two (2) weeks ahead of
schedule ($20,000)
– 15% of incentive for passing site acceptance test at least two (2) weeks ahead of
schedule ($15,000)
– 45% of incentive for achieving Initial Operational Capability at least two (2) weeks
ahead of schedule ($45,000)
Negative Incentives
– 20% of incentive for not achieving completion of CDR on schedule (-20,000)
– 45% for not achieving IOC on schedule (-$45,000)
14
Award Fee Contract Award fee can be an added incentive on any
type contract
Establish separate fee consisting of:
Base Fee (0 - 3%)
Award fee pool which contractor may earn for superior performance
Amount of fee to be paid is a judgmental decision
decision is made in accordance with criteria in award fee
plan
Fee determination is a unilateral Government
decision that can be protested under the Disputes
Act
15
Summary
Selecting the contract type is generally a matter for
negotiation and requires the exercise of sound
judgment.
16
Questions