Similar to the prior “Are you Prepared for Government Contracting?” newsletter, this post will expand on the fundamental principles Contractors should know and understand going into a Government contract. We reiterate that the more information you possess will help you to successfully navigate the complexities of Government Contracting, as tasks that Government Contractors face can be quite daunting. The correct application of that knowledge is key to your success.
There are seemingly endless sources of information available to a Contractor regarding Government Contracts, and a multitude of questions that must be answered; for example: which information applies to your contract? Do you understand the type of work involved under the type of contract you have? Are you aware of what is required under Federal Acquisitions Regulations?
It is vital to obtain the right answers to the key questions, from the best sources. This includes a specific set of questions based on your individual contract type.
The most common types of Government Contracts are as follows:
- Firm Fixed-price contracts (FFP)
- Cost-reimbursement/Cost Plus contracts (CRC, CPFF)
- Incentive contracts (FPIF, CPIF)
- Indefinite Delivery contracts (IDIQ)
- Time and Materials contracts (T&M)
Accordingly, the questions that arise are usually in direct correlation to the type of contract your company has been awarded.
Basic questions to keep in mind:
- Q: Are additional expenses incurred or additional work performed guaranteed to be compensated under a Fixed-price contract? A: Typically, “No.” Unless the Client/Owner changes the Scope of the Work, pricing changes will usually not occur. If changes are necessary, the Contractor must ensure that a formal “Change Order” or “Modification” is in place to protect the interest of both parties. Any work performed by the Contractor without a formal Modification means the Contractor takes on 100% of the risk involved.
- Q: What costs are reimbursed under a CRC? A: Costs incurred over the length of the contract performance period, which are subject to variations that cannot be predicted with certainty.
- Q: What is most beneficial about the Incentive contracts? A: The open communication between the Government and the contractor, which may allow both parties to form a more beneficial long-term exchange of ongoing work and mutual trust between the parties.
- Q: Why are “multiple” smaller contracts awarded under the IDIQ contract instead of separate contracts? A: By issuing the Task Orders/Delivery Orders under the IDIQ, the award time is faster, the Government funds that are available have already been obligated, thus the entire contract award process flows much more smoothly and quickly.
- Q: When does the Government use a Time & Materials contract? A: The Government uses this type of contract when there is a need for flexibility that does not meet the other types of contract requirements.
It is important that contractors understand the differences between these contracts, because those differences are paramount to the path you will use to forge ahead once you have been awarded the contract. This article provides a very simplistic description of the differences between each of the contracts as outlined below:
Fixed-Price contracts are as the name implies – this type of contract is generally a Firm Fixed Price and it is agreed at the time of award that the performance of the contractual duties will not exceed the price that was accepted by the Government. This is the most common type of contract because it is low-risk for both parties.
Cost-Reimbursement/Cost Plus contracts – this type of contract provides that a contractor is paid up to a set limit. While this sounds the same as the Fixed-Price contract, this type of contract does not allow the contractor’s costs and expenses to be estimated to help prevent fluctuations in costs. The intent with this contract is to help ensure a level of certainty.
Incentive contracts – this type of contract is intended to provide, as the name implies, an incentive for the contractor to perform above and beyond its performance goals. The Government can offer either financial compensation for exceeding contractual goals or an increase in business activity that ultimately results in more cash flow for the contractor. The primary purpose of this type of contract is to develop mutual respect and understanding between the parties, and that outcome can prove beneficial for both the Government and the contractor.
Indefinite Delivery/Indefinite Quantity contracts – this type of contract is typically intertwined with Fixed-Price and Cost-Reimbursement contracts. Again, as the name implies, this type of contract allows for an “indefinite quantity” of materials and/or work to be performed within a specific time period, such as 5 years. During the 5-year period, the Government can issue an “indefinite quantity” of multiple smaller-type contracts also known as Task-Orders or Delivery Orders, which are specific to the project(s) or service(s) the Government wants, but all fall under the Umbrella of the Indefinite Delivery/Indefinite Quantity contract. The other important factor for this type of contract is that the Government can choose a particular group of contractors, who then bid against one another for each Task Order. This provides the Government with competitive bids without creating an entire separate contract for each project.
Time and Materials contracts – this type of contract is considered to be a hybrid of the Fixed-Price contracts and the Cost-Reimbursement contracts. The Government, under this type of contract, takes on more of the risk involved in the performance of the project. The Government is responsible for purchase of materials or the services to be performed, and just as the name of this type of contract implies, it is based on either the fully-loaded labor hours, or the actual cost of the materials. This type of contract is riskier than the first two previously mentioned but are intended to take the place of Fixed-Price or Cost-Reimbursement contracts when the Government is unable to accurately estimate the amount of time or materials that will be required to accomplish the goal of the project.
There are additional variations to these types of contracts, which we will discuss in our next newsletter. In the meantime, know that the more research you do, and the more you learn about Government Contracts, the better equipped you will be to perform the contractually required work.
As always, if you are unsure of the processes for Government Contract Management, get the expertise you need by contacting the experts at Excell Consulting International. Our consultants will help make sure your organization is ahead of the curve. Contact our Excell Team today! (719-599-8336)