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Saturday, February 9, 2019

IMPORT/EXPORT MANAGEMENT AND SMALL BUSINESS FEDERAL GOVERNMENT CONTRACTING

Image:  EDUCBA.com Import -Export Managment

Because the world has become tightly wired technologically and the current economic situation ties us inexorably to foreign economies, it is likely small business will encounter the import/export process either on the selling or the buying end of federal government contracts involving foreign countries. This is particularly true with Foreign Military Sales (FMS) contracts through DOD and services contracts with civilian agencies such as USAID.

Key to your success will be the development of links to buyers or sources in other nations. You may have gotten the idea that it is a simple and perhaps easy enterprise to get into and successfully perform. It is not in my experience any such thing. Companies who are successful evolve contacts and product relationships in foreign countries and in the US that take careful and businesslike approaches. You will find yourself importing to this country by exporting from other countries and vice versa. There are laws and processes that apply in both domains governing taxes, duties and the import/export process.

It is recommend that you research thoroughly the answers to the following questions:

(a) What are the specifics of the equipment and supplies you are becoming involved in? (Manufacturer's part number, performance specification, unique qualities and market potential) What are the distribution channels that currently exist; is there a product warranty and are their spare and repair parts involved?

(b) Who buys the equipment and supplies in the United States and in countries you intend to sell to. (commercial consumer, government agency, large business, hospitals, military etc.) Do you plan to do market research on the potential demand for a product before you buy it? My advice is that you should - before you buy. I further advise that you research practical marketing, sales and distribution channels for a product before you buy it or import it. What are the possibilities of locally retailing it yourself?

(c) What are the laws and regulations regarding the movement of equipment and supplies? How are they taxed in the US and how are they taxed in foreign countries? Are they regulated by US or foreign countries? Are licenses required to either import or export the items? The answers to all these questions vary with the product and the US State Department and US Customs and Border Protection will have those answers once you identify the equipment and supplies. The links to the associated web sites are in the section below entitled 'THE REGULATORS'

(d) What service can you perform in (a)-(c) above? What value can you add to the process? Do you have special channels to either a customer or a source for the supplies and equipment? Do you have special knowledge or do you know others with special knowledge of these equipment and supplies, customers and sources which you could involve in creating or designing a niche no one else is filling or offer these items at a price attractive enough to generate volume and profit for your business and beat the competition.

(e) Who is your competition and how are they performing (a)-(d) above? Your business involves offering the service of importing equipment and supplies to fill the need in the US from sources out of the country and the other way around. You must develop an available niche that other companies do not fill, either by having lower prices, more and better sources, or a low overhead cost for handling the business; faster delivery, better product warranty, parts service and replacement, all play in the equation. Your market plan must address the reliability of your sources in other countries and the US, the quality of their product and how well they support their product in countries other than their own.

SHIPPING AND FREIGHT FORWARDERS

Along the way be particularly careful in your planning to research Freight Forwarders (FF). Use the Better Business Bureau (BBB) or other such government agencies to research the experience the buying public has had with stateside companies you deal with. BBB company research capabilities on the web are free to the public. Carefully review FF terms and conditions and assess the liability arrangements in the event of product theft or loss for goods coming in from overseas.

A freight forwarder is your paid agent to safeguard your property. He is also registered to handle clearing US customs. Certain other FF specialize in dealing with foreign countries. He is normally the individual to which your overseas manufacturer ships you product or through whom you ship product to foreign countries. Relying on the manufacturer himself to ship, insure, handle export and import requirements is not a safe bet and shipping directly to a foreign country has no assurances of delivery.

The foreign factory producer has too much conflict of interest in simply getting you to pay his bill and move on and your expertise in clearing customs in a foreign country may be limited. Freight forwarder expenses must be added to those of the product you buy from the factory source. These expenses should be included in your business plan and in your product pricing prior to going to market.

BE CAREFUL

Be wary of networks and exchange sites on the web that offer to make you rich and handle all the arrangements. This is seldom the case. Check them out with the Better Business Bureau:

Better Business Bureau

INSURANCE

On the subject of insurance, I assume you have looked into business insurance. A Limited Liability Company (LLC) is a form of Subchapter 'S' corporation that usually experiences the lowest rates for insurance. Have you looked into becoming an LLC? Insurance is a must in the line of business you are pursuing.

THE REGULATORS

For research regarding exporting and importing goods to and from foreign countries please see the web site for the Bureau of Industry and Security out of the Department Commerce. It is the keeper of export administrative regulations and classification numbers. It also has a commerce country chart that shows taxes and duties and license information by country. 

Bureau of Industry and Security

The Office of Foreign Asset Controls out of the Treasury Department is also a site you will have to visit to see if there are any specially designated nationals or targeted countries that the US has regulations against selling to:

Sanctions Programs and Country Information

The US State Department and the US Customs and Border Protection regulate and assist in import and export matters. I strongly suggest you visit their web sites. The State Department controls high technology items and weapons through the International Traffic in Arms Regulation (ITAR). Export licensing under the ITAR can be a lengthy process. Services and technical data as well as products of a weapons or high technology nature requiring licenses appear on a controlled items list in the ITAR. A company can unwittingly make an illegal export of technical data simply by conveying the wrong specifics regarding a controlled item to a foreigner over the phone. The serious nature of ITAR violations can be seen in case histories at the following web site:

Federal Contractor Misconduct Data Base

For an excellent article on ITAR compliance please see:

IMPORT/EXPORT REGULATIONS: comply or watch your business die and go to jail

The web site for the US State Department and US Customs and Border Protection respectively are as follows:

U.S. Department Of State

U.S. Customs and Border Protection

You will need to research the above regulatory sites as appropriate once you identify the specific products in which you intend to deal. It will be necessary to determine licensing, declaration, tariffs, taxes and trade implications. All these factors should be fully documented in your business plan before you undertake operations in a product area.

FINANCE AND CREDIT:

Finally your business plan will be your best long -term asset in establishing your credibility with the banking community and with prospective investors. My advice is to start small and slow, with minimal personal investment and begin dealing in products only after you have a well developed business plan and market research indicates they will be profitable. As the business establishes itself, a demonstrated cash flow and projected earnings statement can be used as leverage with a good business plan to achieve a small business loan, perhaps working with the SBA for a guarantee. Small business credit cards are a possibility if you can work the interest rates into your planned expenses and recover them in your product pricing.

Your planned banking arrangements should involve setting up accounts that involve automatic currency conversion features in the countries you plan to do business in.

I recommend being careful not to make your inventory a burden. Carrying excessive financed inventory without associated sales to pay the bills is one of the biggest traps you can fall into. Also remember many products have a shelf life which must be considered in the storage environment.

Wednesday, February 6, 2019

FEDERAL GOVERNMENT CONTRACT FORMAT


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The Federal Acquisition Regulation (FAR) 15-204-1 specifies a uniform contract format for federal government contracts. You have encountered this format during the RFP stage of your procurement since the government is required to utilize it in structuring the request for proposal (RFP), leaving blank those items, which are subject to negotiation such as final contract pricing. Your contract is divided into four parts, with various sections within each part. Prime contractors issue subcontracts flowing down terms and conditions, pricing and other topics in an identical format.

Like any other contractual document in the business world, the quality and content of this format will vary by agency and with the experience and knowledge of the contracting officer and the government administrative and technical support personnel preparing it or the prime contractor. It behooves your small business to examine the contents, research the appropriate sections of the FAR that may govern them and review them as commitments to which your organization can conform and perform before you sign your contract.

The following is a listing of the items making up this format with a brief description of the contract parts and sections and some tips regarding each from a project management perspective.

PART I - THE SCHEDULE

SECTION A - SOLICITATION/CONTRACT FORM

Standard Form 33 or Optional Form 308 are the most common formats utilized by government agencies. These forms contain the following:

Name, Address, and Location of Issuing Activity, Including Room and Building.

Contract Number/Modification or Revision Number

Date

Request for Proposal (RFP) Number

Number of pages

Requisition or Other Purchase Author

Brief Description of Item or Service

Requirement for the offeror to provide its name and complete address, including street, city, county, state, and zip code, and electronic address (including facsimile address), if appropriate

Other Agency-unique data such as priority ratings, security classification and similar data

Signature blocks for the government and the contractor at contract

Section B - SUPPLIES OR SERVICES AND PRICES/COSTS

This is a listing by contract line item of the negotiated products or services and the prices for them in your contract. This section is very critical for billing purposes in your accounting system. Invoices to the government for supplies or services delivered must reference the items and all detail for the items contained in this section. Government requisition and appropriation data are contained in the contract line item detail and are carried throughout the government finance and accounting systems, to include the operations that make payment on your invoices.

SECTION C - DESCRIPTION/SPECIFICATIONS/STATEMENT OF WORK

Perhaps the most critical section of the contract in terms of technical performance, this section describes the work to be performed and references requirements for the end product, including product performance. A tight, thorough statement of work (SOW) is the key to a well-understood relationship with your COTR, who will approve your performance against the SOW and sign off on your billings and invoices based on said approval. The SOW contains the benchmarks for defining the baseline effort required for the current contract price. One of the highest risks in government contacting is performance outside the statement of work, either due to a very general and loose SOW or by taking direction for added scope from government representatives without getting a contact change order modifying the SOW and increasing the price of the contract.

SECTION D - PACKAGING AND MARKING

With the vast amount of procurement the U.S. Government performs and the many locals to which the government directs shipments, it is necessary to specifically establish specifications for packaging and identification of products. The government considers this information important enough to establish a separate contract section for it. Your company should closely examine and comply with the instructions therein.

SECTION E - INSPECTION AND ACCEPTANCE

This section identifies the government criteria for an acceptable product under your contract and the methodology that will be utilized by the government to perform inspection to insure the product quality. In many cases a specification will be called out. The place of delivery will also be specified.


SECTION F - DELIVERIES OR PERFORMANCE
A discrete schedule by contract line item will be contained in this section. Requirements for time, place and method of delivery or performance will be specified.

SECTION G - CONTRACT ADMINISTRATION DATA

This section will contain required accounting and appropriation data and any contract administration information or instructions other than those on the contract form. It will specify your payment address if it is different than your company street address.

SECTION H - SPECIAL CONTRACT REQUIREMENTS

Special contract requirements that are not included in Section I, Contract Clauses, or in other sections of the uniform contract format will be specified in this section.

PART II - CONTRACT CLAUSES

SECTION I - CONTRACT CLAUSES

This section includes the clauses required by law or by this part and any additional clauses if these clauses are not required in any other section of the uniform contract format. An index may be inserted if this section’s format is particularly complex. The index normally makes reference to FAR clauses, or FAR Agency Supplements. They may index  the FAR and FAR Agency Supplement web sites to which you should direct your attention, depending on the agency with whom you are doing business. The FAR Agency Supplements are intended to support the FAR by applying overall FAR guidance with specific agency details regarding implementation:

PART III - LIST OF DOCUMENTS, EXHIBITS AND OTHER ATTACHMENTS

SECTION J - LIST OF DOCUMENTS, EXHIBITS AND OTHER ATTACHMENTS

This section lists the title, date, and number of pages for each attached document, exhibit, and other attachment. The government may include documents that clarify or further define the contract. A commonly attached item is the DD Form 1423, "Contract Data Requirements List", that specifies for all data deliverables the Data Item Descriptions (DID's) and their delivery schedules. Lists of government furnished property in support of contractor performance on the contract are contained in this section if such equipment is provided.

PART IV - REPRESENTATIONS AND INSTRUCTIONS

SECTION K - REPRESENTATIONS, CERTIFICATIONS AND OTHER STATEMENTS

The federal government requires the contractor to certify to certain statements in bidding and performing government contracts. These signed documents become a part of your government contract when it is executed. Many of these "Certs and Reps", as they are commonly called, establish compliance with conflict of interest laws and establish the identity of the contractor by specifying information unique to the company such as NAICS Codes, CCR registration numbers, D&B Numbers, CAGE Codes and similar data. Minority-Owned Business and HUB Zone Business certification numbers are specified in this section, together with other small business self-certifications, such as Woman-owned, Veteran-Owned or Disabled-Veteran-Owned designations. Certain representations regarding sources for raw materials may also be required in Section K together with other agency-unique certifications such as facility and security officer information, security classification data and the like.

With the advent of internet use for record retention, the federal government now requires that contractors maintain certain standard certifications and representations at a government web site and update them annually for any changes:

System for Award Management

You should establish and maintain your registration,  certifications  and representations, update them whenever necessary and insure that signed, paper copies of them are included in all your proposals for new work and in your contracts to the government.

Tuesday, February 5, 2019

FEDERAL GOVERNMENT CONTRACT TYPES

Image: "Government Contracting Tips.com

In contracting for supplies and services the federal government utilizes several different contract types. The nature of these contract vehicles has evolved over a period of years based on the government's experience in the acquisition types.

At the heart of selecting the contract type is an analysis of risk involved to the contractor and administrative burden to both the government and the supplier.

Firm, Fixed Price contracting under FAR Part 12, "Commercial Contracting" is by far the most simple form of government contract because the contractor assumes all the risk and the price is fixed, regardless of cost incurred to the supplier.

Other acquisition types, such as new technology development or service contracts in a war zone where the scope of work is unpredictable and subject to change, gravitate to cost plus or time and material contract types. These contracts pose a lower risk to the supplier but also entail considerable audit and systems support costs in both governement and contractor business operations.

The following is an extract from the Federal Acquisition (FAR) describing the major contract types utilized by the federal governmment:

FAR 16.202 - FIRM FIXED PRICE CONTRACTS

16.202-1 -- Description.

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.

16.202-2 Application

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.

FAR 16.203 - FIXED-PRICE CONTRACTS WITH ECONOMIC PRICE ADJUSTMENT

16.203-1 -- Description

A fixed-price contract with economic price adjustment provides for upward and downward revision of the stated contract price upon the occurrence of specified contingencies. Economic price adjustments are of three general types:

(1) Adjustments based on established prices - These price adjustments are based on increases or decreases from an agreed-upon level in published or otherwise established prices of specific items or the contract end items.
(2) Adjustments based on actual costs of labor or material - These price adjustments are based on increases or decreases in specified costs of labor or material that the contractor actually experiences during contract performance.
(3) Adjustments based on cost indexes of labor or material - These price adjustments are based on increases or decreases in labor or material cost standards or indexes that are specifically identified in the contract.

The contracting officer may use a fixed-price contract with economic price adjustment 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 fixed-price with economic price adjustment when used with these incentives.

16.203-2 -- Application

A fixed-price contract with economic price adjustment may be used when:

(i) there is serious doubt concerning the stability of market or labor conditions that will exist during an extended period of contract performance
(ii) contingencies that would otherwise be included in the contract price can be identified and covered separately in the contract. Price adjustments based on established prices should normally be restricted to industry-wide contingencies. Price adjustments based on labor and material costs should be limited to contingencies beyond the contractor’s control.

In establishing the base level from which adjustment will be made, the contracting officer ensures that contingency allowances are not duplicated by inclusion in both the base price and the adjustment requested by the contractor under economic price adjustment clause.

In contracts that do not require submission of cost or pricing data, the contracting officer obtains adequate information to establish the base level from which adjustment will be made and may require verification of data submitted.

FAR 16.204 - FIXED-PRICE INCENTIVE CONTRACTS

A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and establishing the final contract price by application of a formula based on the relationship of total final negotiated cost to total target cost. The final price is subject to a price ceiling, negotiated at the outset.

A fixed-price incentive contract is appropriate when

(1) A firm-fixed-price contract is not suitable.
(2) The nature of the supplies or services being acquired and other circumstances of the acquisition are such that the contractor’s assumption of a degree of cost responsibility will provide a positive profit incentive for effective cost control and performance.
(3) If the contract also includes incentives on technical performance and/or delivery, the performance requirements provide a reasonable opportunity for the incentives to have a meaningful impact on the contractor’s management of the work.

FAR 16.205 -- FIXED - PRICE CONTRACTS WITH PROSPECTIVE PRICE REDETERMINATION
16.205-1 -Description
A fixed-price contract with prospective price redetermination provides a firm fixed price for an initial period of contract deliveries or performance and prospective redetermination, at a stated time or times during performance, of the price for subsequent periods of performance.

16.205-2 -- Application
A fixed-price contract with prospective price redetermination is used in acquisitions of quantity production or services for which it is possible to negotiate a fair and reasonable firm fixed price for an initial period, but not for subsequent periods of contract performance.
The initial period is the longest period for which it is possible to negotiate a fair and reasonable firm fixed price. Each subsequent pricing period is at least 12 months.
The contract may provide for a ceiling price based on evaluation of the uncertainties involved in performance and their possible cost impact. This ceiling price provides for assumption of a reasonable proportion of the risk by the contractor and, once established, may be adjusted only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances.

FAR 16.206 - FIXED-CEILING-PRICE CONTRACTS WITH RETROACTIVE PRICE REDETERMINATION

16.206-1 -- Description

A fixed-ceiling-price contract with retroactive price redetermination provides for a fixed ceiling price and retroactive price redetermination within the ceiling after completion of the contract.

16.206-2 -- Application

A fixed-ceiling-price contract with retroactive price redetermination is appropriate for research and development contracts estimated at $100,000 or less when it is established at the outset that a fair and reasonable firm fixed price cannot be negotiated and that the amount involved and short performance period make the use of any other fixed-price contract type impracticable.
(a) A ceiling price is negotiated for the contract at a level that reflects a reasonable sharing of risk by the contractor. The established ceiling price may be adjusted only if required by the operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances.
(b) The contract is awarded only after negotiation of a billing price that is as fair and reasonable as the circumstances permit.
(c) Since this contract type provides the contractor no cost control incentive except the ceiling price, the contracting officer makes clear to the contractor during discussion before award that the contractor’s management effectiveness and ingenuity will be considered in retroactively redetermining the price.

FAR 16.207 - FIRM-FIXED PRICE, LEVEL OF EFFORT TERM CONTRACTS

16.207-1 -- Description.

A firm-fixed-price, level-of-effort term contract requires --
(a) The contractor to provide a specified level of effort, over a stated period of time, on work that can be stated only in general terms; and
(b) The Government to pay the contractor a fixed dollar amount.

16.207-2 -- Application.
A firm-fixed-price, level-of-effort term contract is suitable for investigation or study in a specific research and development area. The product of the contract is usually a report showing the results achieved through application of the required level of effort. However, payment is based on the effort expended rather than on the results achieved.

FAR 16.302 - COST CONTRACTS

(a) Description. A cost contract is a cost-reimbursement contract in which the contractor receives no fee.

(b) Application. A cost contract may be appropriate for research and development work, particularly with nonprofit educational institutions or other nonprofit organizations, and for facilities contracts.

FAR 16.303 - COST SHARING CONTRACTS

(a) Description. A cost-sharing contract is a cost-reimbursement contract in which the contractor receives no fee and is reimbursed only for an agreed-upon portion of its allowable costs.

(b) Application. A cost-sharing contract may be used when the contractor agrees to absorb a portion of the costs, in the expectation of substantial compensating benefits.

FAR 16.304 - COST-PLUS INCENTIVE-FEE CONTRACTS

A cost-plus-incentive-fee contract is a cost-reimbursement contract that provides for an initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. Cost-plus-incentive-fee contracts are covered in Subpart 16.4, Incentive Contracts.

FAR 16.305 - COST-PLUS-AWARD-FEE CONTRACTS

A cost-plus-award-fee contract is a cost-reimbursement contract that provides for a fee consisting of


(a) a base amount (which may be zero) fixed at inception of the contract and
(b) an award amount, based upon a judgmental evaluation by the Government, sufficient to provide motivation for excellence in contract performance.

FAR 16.306 - COST-PLUS-FIXED-FEE CONTRACTS

(a) Description. A cost-plus-fixed-fee contract is a cost-reimbursement contract that provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed under the contract. This contract type permits contracting for efforts that might otherwise present too great a risk to contractors, but it provides the contractor only a minimum incentive to control costs.

(b) Application.

A cost-plus-fixed-fee contract is suitable for use when certain conditons are present for example --
(i) The contract is for the performance of research or preliminary exploration or study, and the level of effort required is unknown; or
(ii) The contract is for development and test, and using a cost-plus-incentive-fee contract is not practical.

FAR 16.403 - FIXED-PRICE INCENTIVE CONTRACTS

(a) Description. A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and establishing the final contract price by application of a formula based on the relationship of total final negotiated cost to total target cost. The final price is subject to a price ceiling, negotiated at the outset.


(b) Application. A fixed-price incentive contract is appropriate when --

(1) A firm-fixed-price contract is not suitable;
(2) The nature of the supplies or services being acquired and other circumstances of the acquisition are such that the contractor’s assumption of a degree of cost responsibility will provide a positive profit incentive for effective cost control and performance; and
(3) If the contract also includes incentives on technical performance and/or delivery, the performance requirements provide a reasonable opportunity for the incentives to have a meaningful impact on the contractor’s management of the work.

FAR 16.403-1 - FIXED-PRICE INCENTIVE (FIRM TARGET) CONTRACTS

(a) Description. A fixed-price incentive (firm target) contract specifies a target cost, a target profit, a price ceiling (but not a profit ceiling or floor), and a profit adjustment formula. These elements are all negotiated at the outset. The price ceiling is the maximum that may be paid to the contractor, except for any adjustment under other contract clauses. When the contractor completes performance, the parties negotiate the final cost, and the final price is established by applying the formula. When the final cost is less than the target cost, application of the formula results in a final profit greater than the target profit; conversely, when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss. If the final negotiated cost exceeds the price ceiling, the contractor absorbs the difference as a loss. Because the profit varies inversely with the cost, this contract type provides a positive, calculable profit incentive for the contractor to control costs.


(b) Application.

A fixed-price incentive (firm target) contract is appropriate when the parties can negotiate at the outset a firm target cost, target profit, and profit adjustment formula that will provide a fair and reasonable incentive and a ceiling that provides for the contractor to assume an appropriate share of the risk. When the contractor assumes a considerable or major share of the cost responsibility under the adjustment formula, the target profit should reflect this responsibility.

FAR 16.403-2 - FIXED-PRICE INCENTIVE (SUCCESSIVE TARGETS) CONTRACTS

(a) Description.

(1) A fixed-price incentive (successive targets) contract specifies the following elements, all of which are negotiated at the outset:
(i) An initial target cost.
(ii) An initial target profit.
(iii) An initial profit adjustment formula to be used for establishing the firm target profit, including a ceiling and floor for the firm target profit. (This formula normally provides for a lesser degree of contractor cost responsibility than would a formula for establishing final profit and price.)
(iv) The production point at which the firm target cost and firm target profit will be negotiated (usually before delivery or shop completion of the first item).
(v) A ceiling price that is the maximum that may be paid to the contractor, except for any adjustment under other contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances.
(2) When the production point specified in the contract is reached, the parties negotiate the firm target cost, giving consideration to cost experience under the contract and other pertinent factors. The firm target profit is established by the formula. At this point, the parties have two alternatives, as follows:
(i) They may negotiate a firm fixed price, using the firm target cost plus the firm target profit as a guide.
(ii) If negotiation of a firm fixed price is inappropriate, they may negotiate a formula for establishing the final price using the firm target cost and firm target profit. The final cost is then negotiated at completion, and the final profit is established by formula, as under the fixed-price incentive (firm target) contract.

(b) Application.

A fixed-price incentive (successive targets) contract is appropriate when --
(1) Available cost or pricing information is not sufficient to permit the negotiation of a realistic firm target cost and profit before award;
(2) Sufficient information is available to permit negotiation of initial targets; and
(3) There is reasonable assurance that additional reliable information will be available at an early point in the contract performance so as to permit negotiation of either
(i) a firm fixed price or
(ii) firm targets and a formula for establishing final profit and price that will provide a fair and reasonable incentive. This additional information is not limited to experience under the contract, itself, but may be drawn from other contracts for the same or similar items.

FAR 16.404 – FIXED-PRICE CONTRACTS WITH AWARD FEES

(a) Award-fee provisions may be used in fixed-price contracts when the Government wishes to motivate a contractor and other incentives cannot be used because contractor performance cannot be measured objectively. Such contracts shall --


(1) Establish a fixed price (including normal profit) for the effort. This price will be paid for satisfactory contract performance. Award fee earned (if any) will be paid in addition to that fixed price; and
(2) Provide for periodic evaluation of the contractor’s performance against an award-fee plan.
(b) A solicitation contemplating award of a fixed-price contract with award fee shall not be issued unless the following conditions exist:
(1) The administrative costs of conducting award-fee evaluations are not expected to exceed the expected benefits;
(2) Procedures have been established for conducting the award-fee evaluation;
(3) The award-fee board has been established; and
(4) An individual above the level of the contracting officer approved the fixed-price-award-fee incentive.

16.405-1 - COST-PLUS-INCENTIVE-FEE CONTRACTS

(a) Description.

The cost-plus-incentive-fee contract is a cost-reimbursement contract that provides for the initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. This contract type specifies a target cost, a target fee, minimum and maximum fees, and a fee adjustment formula. After contract performance, the fee payable to the contractor is determined in accordance with the formula. The formula provides, within limits, for increases in fee above target fee when total allowable costs are less than target costs, and decreases in fee below target fee when total allowable costs exceed target costs. This increase or decrease is intended to provide an incentive for the contractor to manage the contract effectively. When total allowable cost is greater than or less than the range of costs within which the fee-adjustment formula operates, the contractor is paid total allowable costs, plus the minimum or maximum fee.

(b) Application.

(1) A cost-plus-incentive-fee contract is appropriate for services or development and test programs when --
(i) A cost-reimbursement contract is necessary and
(ii) A target cost and a fee adjustment formula can be negotiated that are likely to motivate the contractor to manage effectively.
(2) The contract may include technical performance incentives when it is highly probable that the required development of a major system is feasible and the Government has established its performance objectives, at least in general terms. This approach also may apply to other acquisitions, if the use of both cost and technical performance incentives is desirable and administratively practical.
(3) The fee adjustment formula should provide an incentive that will be effective over the full range of reasonably foreseeable variations from target cost. If a high maximum fee is negotiated, the contract shall also provide for a low minimum fee that may be a zero fee or, in rare cases, a negative fee.

FAR 16.405-2 - COST-PLUS AWARD FEE CONTRACTS

(a) Description.

A cost-plus-award-fee contract is a cost-reimbursement contract that provides for a fee consisting of
(1) a base amount fixed at inception of the contract and
(2) an award amount that the contractor may earn in whole or in part during performance and that is sufficient to provide motivation for excellence in such areas as quality, timeliness, technical ingenuity, and cost-effective management. The amount of the award fee to be paid is determined by the Government’s judgmental evaluation of the contractor’s performance in terms of the criteria stated in the contract. This determination and the methodology for determining the award fee are unilateral decisions made solely at the discretion of the Government.

(b) Application.

(1) The cost-plus-award-fee contract is suitable for use when --
(i) The work to be performed is such that it is neither feasible nor effective to devise predetermined objective incentive targets applicable to cost, technical performance, or schedule;
(ii) The likelihood of meeting acquisition objectives will be enhanced by using a contract that effectively motivates the contractor toward exceptional performance and provides the Government with the flexibility to evaluate both actual performance and the conditions under which it was achieved; and
(iii) Any additional administrative effort and cost required to monitor and evaluate performance are justified by the expected benefits.
(2) The number of evaluation criteria and the requirements they represent will differ widely among contracts. The criteria and rating plan should motivate the contractor to improve performance in the areas rated, but not at the expense of at least minimum acceptable performance in all other areas.
(3) Cost-plus-award-fee contracts shall provide for evaluation at stated intervals during performance, so that the contractor will periodically be informed of the quality of its performance and the areas in which improvement is expected. Partial payment of fee shall generally correspond to the evaluation periods. This makes effective the incentive which the award fee can create by inducing the contractor to improve poor performance or to continue good performance.

FAR 16.502 – DEFINITE –QUANTITY CONTRACTS

(a) Description.


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.

(b) Application.

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.

FAR 16.503 – REQUIREMENTS CONTRACTS

(a) Description.

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.

(1) For the information of offerors and contractors, the contracting officer shall state a realistic estimated total quantity in the solicitation and resulting contract. This estimate is not a representation to an offeror or contractor that the estimated quantity will be required or ordered, or that conditions affecting requirements will be stable or normal. The contracting officer may obtain the estimate from records of previous requirements and consumption, or by other means, and should base the estimate on the most current information available.

(2) The contract shall state, if feasible, the maximum limit of the contractor’s obligation to deliver and the Government’s obligation to order. The contract may also specify maximum or minimum quantities that the Government may order under each individual order and the maximum that it may order during a specified period of time.

(b) Application.

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.

FAR 16.504 – INDEFINITE – QUANTITY CONTRACTS

(a) Description.


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.
(1) The contract must require the Government to order and the contractor to furnish at least a stated minimum quantity of supplies or services. In addition, if ordered, the contractor must furnish any additional quantities, not to exceed the stated maximum. The contracting officer should establish a reasonable maximum quantity based on market research, trends on recent contracts for similar supplies or services, survey of potential users, or any other rational basis.
(2) To ensure that the contract is binding, the minimum quantity must be more than a nominal quantity, but it should not exceed the amount that the Government is fairly certain to order.
(3) The contract may also specify maximum or minimum quantities that the Government may order under each task or delivery order and the maximum that it may order during a specific period of time.
(4) A solicitation and contract for an indefinite quantity must—
(i) 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;
(ii) Specify the total minimum and maximum quantity of supplies or services the Government will acquire under the contract;
(iii) 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;
(iv) State the procedures that the Government will use in issuing orders, including the ordering media, and, if multiple awards may be made, state the procedures and selection criteria that the Government will use to provide awardees a fair opportunity to be considered for each order.
(v) Include the name, address, telephone number, facsimile number, and e-mail address of the agency task and delivery order ombudsman if multiple awards may be made;
(vi) Include a description of the activities authorized to issue orders; and
(vii) Include authorization for placing oral orders, if appropriate, provided that the Government has established procedures for obligating funds and that oral orders are confirmed in writing.

(b) Application.

Contracting officers may use an indefinite-quantity contract when the Government cannot predetermine, above a specified minimum, the precise quantities of supplies or services that the Government will require during the contract period, and it is inadvisable for the Government to commit itself for more than a minimum quantity. The contracting officer should use an indefinite-quantity contract only when a recurring need is anticipated.

FAR16.601 -- TIME AND MATERIAL CONTRACTS

Description.


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.

Application.

A time-and-materials contract may be used only when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence
(1) Government surveillance. A time-and-materials contract provides no positive profit incentive to the contractor for cost control or labor efficiency. Therefore, appropriate Government surveillance of contractor performance is required to give reasonable assurance that efficient methods and effective cost controls are being used.
(2) Fixed hourly rates.
(i) The contract shall specify separate fixed hourly rates that include wages, overhead, general and administrative expenses, and profit for each category of labor.
(ii) For acquisitions of noncommercial items awarded without adequate price competition the contract shall specify separate fixed hourly rates that include wages, overhead, general and administrative expenses, and profit for each category of labor to be performed by—
(A) The contractor;
(B) Each subcontractor; and
(C) Each division, subsidiary, or affiliate of the contractor under a common control.
(iii) For contract actions that are not awarded using competitive procedures, unless exempt under paragraph (c)(2)(iv) of this section, the fixed hourly rates for services transferred between divisions, subsidiaries, or affiliates of the contractor under a common control—
(A) Shall not include profit for the transferring organization; but
(B) May include profit for the prime contractor.
(iv) For contract actions that are not awarded using competitive procedures, the fixed hourly rates for services that meet the definition of commercial item at 2.101 that are transferred between divisions, subsidiaries, or affiliates of the contractor under a common control may be the established catalog or market rate when—
(A) It is the established practice of the transferring organization to price interorganizational transfers at other than cost for commercial work of the contractor of any division, subsidiary or affiliate of the contractor under a common control; and
(B) The contracting officer has not determined the price to be unreasonable.
(3) Material handling costs. When included as part of material costs, material handling costs shall include only costs clearly excluded from the labor-hour rate. Material handling costs may include all appropriate indirect costs allocated to direct materials in accordance with the contractor’s usual accounting procedures consistent with Part 31.

16.603 - LETTER CONTRACTS

Description

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

Application

(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.
(b) When a letter contract award is based on price competition, the contracting officer shall include an overall price ceiling in the letter contract.
(c) Each letter contract shall contain a negotiated definitization schedule including
(1) dates for submission of the contractor’s price proposal, required cost or pricing data, and, if required, make-or-buy and subcontracting plans,
(2) a date for the start of negotiations, and
(3) a target date for definitization, which shall be the earliest practicable date for definitization. The schedule will provide for definitization of the contract within 180 days after the date of the letter contract or before completion of 40 percent of the work to be performed, whichever occurs first. However, the contracting officer may, in extreme cases and according to agency procedures, authorize an additional period.
(d) The maximum liability of the Government shall be the estimated amount necessary to cover the contractor’s requirements for funds before definitization. However, it shall not exceed 50 percent of the estimated cost of the definitive contract unless approved in advance by the official that authorized the letter contract.

16.702 -- BASIC ORDERING AGREEMENTS

(a) Description.


A basic agreement is a written instrument of understanding, negotiated between an agency or contracting activity and a contractor, that
(1) contains contract clauses applying to future contracts between the parties during its term and
(2) contemplates separate future contracts that will incorporate by reference or attachment the required and applicable clauses agreed upon in the basic agreement. A basic agreement is not a contract.
(b) Application. A basic agreement should be used when a substantial number of separate contracts may be awarded to a contractor during a particular period and significant recurring negotiating problems have been experienced with the contractor. Basic agreements may be used with negotiated fixed-price or cost-reimbursement contracts.
(1) Basic agreements shall contain --
(i) Clauses required for negotiated contracts by statute, executive order, and this regulation and
(ii) Other clauses prescribed in this regulation or agency acquisition regulations that the parties agree to include in each contract as applicable.
(2) Each basic agreement shall provide for discontinuing its future applicability upon 30 days’ written notice by either party.
(3) Each basic agreement shall be reviewed annually before the anniversary of its effective date and revised as necessary to conform to the requirements of this regulation. Basic agreements may need to be revised before the annual review due to mandatory statutory requirements. A basic agreement may be changed only by modifying the agreement itself and not by a contract incorporating the agreement.
(4) Discontinuing or modifying a basic agreement shall not affect any prior contract incorporating the basic agreement.
(5) Contracting officers of one agency should obtain and use existing basic agreements of another agency to the maximum practical extent.
16.703 -- Basic Ordering Agreements.
(a) Description. A basic ordering agreement is a written instrument of understanding, negotiated between an agency, contracting activity, or contracting office and a contractor, that contains
(1) terms and clauses applying to future contracts (orders) between the parties during its term,
(2) a description, as specific as practicable, of supplies or services to be provided, and
(3) methods for pricing, issuing, and delivering future orders under the basic ordering agreement. A basic ordering agreement is not a contract.

(b) Application.

A basic ordering agreement may be used to expedite contracting for uncertain requirements for supplies or services when specific items, quantities, and prices are not known at the time the agreement is executed, but a substantial number of requirements for the type of supplies or services covered by the agreement are anticipated to be purchased from the contractor. Under proper circumstances, the use of these procedures can result in economies in ordering parts for equipment support by reducing administrative lead-time, inventory investment, and inventory obsolescence due to design changes.