'Values - Based' Marketing Techniques for Small Business

                                             

'Values-Based' marketing occurs when you become uniquely aware of what motivates specific personnel internal to a customer company, a buyer or a prospective teaming partner to make favorable decisions regarding your product or services. 

COMPONENTS:

'Values-Based' marketing does not relate to a client's perception of your product or service value.  Rather, it relates to your understanding of the client's personal values and using that knowledge to motivate the client to buy.   It includes answering the following 5 strategic questions:

1.  Who is your client? (personal traits and proclivities)

2.  Where  is your client located in the organization and what role and authority does he or she hold?

3.  What  are the driving factors that will motivate the client to make a buying decision in your favor?

4.  How to best lead the individual client to the conclusion you wish them to make in buying your product or service?

5.  Why is your product or service the best to further the client's personal value system and motives?

METHOD:

Combine the details of your product or service with some transition suggestions regarding how a client can make the leap from where they are now to where you can take them without totally disrupting how they operate at time now.  

Understand that to sell the services and the product you are offering you must provide a bridge for those who do not have your vision of the end game. 

It is a simple fact of life that your sales techniques must provide practical suggestions in getting your client off a blank sheet of paper as to how your concept could be brought internally to their organization.  That can only occur if you are sharp enough and aware enough of their existing processes and systems, status, plans, budgets and funding to offer them a path to follow.  This type of market research is a tough order but you will not sell effectively without it.  

Sometimes clients will not disclose personal values and organization value systems until you are engaged with them and at that time you must be sympathetic to transition issues, think on your feet and evolve a way to get to your sales objective; not just insist that they change dramatically to accommodate your concept. 

Ask the client questions about what you know or have found their needs to be. Then take them to where your presentation has solutions for them; engage them on a solutions frequency and make your concept of the future theirs. A key will be your ability to make the client want to own your product or service in their environment and your assistance to make them as individuals look good for acquiring what you sell to increase their visibility and productivity in the organization. 

Consider the values of the client your are engaging and threaten or further his or her value system.  To do so, find out what they value first.  It may not be what you value - or what you believe they should value;  but you are stuck with those values and the value system backing them up. In many cases they are political, self-serving and disappointing but you cannot ignore them.  You must manage them.  You must threaten or further those value systems to get your customer to act.  Furthering client values is a positive view of the future, enhancing what the client already has.   Threatening client values is making the client feel he or she cannot undertake the future effectively without buying from you.

SUMMARY:

I once had the privilege of experiencing a professor who conducted a course on managing people for 3 days to our management group.

For those 3 days the instructor did not allow us to use the word, "Problem". His message was that there are no such things as problems - just situations that threaten or further peoples' (or the corporate culture values).

Through a series of exercises, mock situations late into the night, critical negotiation teams and value determination exercises he demonstrated that his theory was absolutely correct and that if one determines the values involved in a challenging situation, then develops solutions that threaten or further them, one will motivate people to take action.

'Values-Based' marketing effectively threatens or furthers your client's value system as a strategic element in your marketing program, motivating them to act in your favor. 

Fixed Price Versus Cost Plus in Federal Government Contracting

An interesting conversation with an astute, anonymous interviewer on Quora, replicated here for those who may be confused at times with regard to some of the nuances between fixed price and cost plus federal government contracting. 

Anonymous:

Why are cost-plus-fee government contracts less profitable for defense companies than fixed cost contracts?
 

KEN

They are extremely low risk because the contractor is guaranteed reimbursement of any and all costs up to the funded ceiling on the contract.

Therefore under the guidelines for negotiation of profit based on risk, the profit range is always settled at a lower range than other types of contracts with higher risk factors. 

Contract Types

Weighted Guidelines

Anonymous:

Thank you Ken. Is the government moving more towards cost-plus contracts and away from fixed cost contracts?

KEN

 

It depends on the type of effort involved.  Cost plus is generally in very advanced development arena, where the state of the art is being pressed, the requirements are nebulous and the design baseline is tough.

Higher profit production programs where the product or service is mature, predictable and repetitive are usually the recipients of firm fixed price contracts at higher profits.

It is common for the huge billions for services in the war zone for instance to be cost plus due to the unknown nature of warfare.  A similar program stateside at an air force base would lock them into fixed rates for several years but at a higher profit. 

Cost type contracts are generally pursued for cash flow, "Keep the lights on and bill every month" reasons, while higher profit programs are being pursued at the same time in the company

Anonymous:

What about small UAVs / drones? Are those now mostly cost plus contracts?

KEN

 

During development the more complex ones are indeed.  Size in the services and the intelligence community does not necessarily equate to simplicity with micro technology, Satcom and sensors involved.

When they hit production on a repetitive basis they move to more fixed price oriented and incentive oriented higher profit contract types, which of course is the real goal of the companies involved.

Anonymous:

I'm confused, I thought cost plus was for more established technology product and fixed price was for more complex technology product (because it allowed for higher returns)?

KEN

 

It is just the opposite.

Companies will not undertake advanced technology like the F-35 without a cost plus contract because of the risk in pressing the state of the art and meeting an enormously difficult specification.  A prototype is a one of a kind item. 

A production program has high volume potential and yields less risk at a higher profit rate overall at fixed prices.

Pentagon history is replete with incidents where companies went broke on new product development on a fixed price basis. At one point the FAR disallowed fixed price product development because of that issue.

The Lockheed Skunk works went broke years ago and had to be bailed out.  The Pentagon simply plussed up their cost plus contracts and the Black Bird was the result.

The F-35 cost plus contract was finally capped by the Air Force recently and a portion of the risk shifted to Lockheed due abuse of the cost plus contracting by Lockheed Martin.

F-35 Program Overruns

Companies seek a production program follow-on at a high volume and fixed prices with higher profit with lower risk to ultimately make the real bucks,  Under such an arrangement they also own the tooling.  Uncle Sam owns the tooling on a cost plus contract.

Anonymous:

 

I'm still confused.  A company I know had high gross margins because they had more fixed price business in the last two years. For this year, they will have more cost plus and are guiding to lower margins. I thought they and more cost plus this year because they are doing more retrofitting as opposed to the original technology? I am ultimately trying to understand if this is a permanent shift in their Department of Defense business... but any clarification would help!

KEN

 

It is not surprising that gross margins go down when the cost plus base increases.  I have never seen it any other way in my 40 years in the aerospace industry.  Cost plus is low risk and low profit. 

In fact, on certain cost plus contracts there has been a regulated maximum ceiling on profit.

At the bottom line there is no shift in what you are observing.  It is simply the mix of business in the company driving a lower profit rate due to the low risk, hence lower profit, nature of the cost plus environment. 

If the mix were to change to a higher base of fixed price contracts (and higher risk) the opposite trend would occur.

Anonymous:

 

Is there a reason why for the last three years they had more fixed contracts but now over a sudden the mix shifts to cost plus? Does that make sense?   So to understand - this can change every year? Is there any way to predict it based on the types of products they have going forward? Is it because they are retrofitting that its cost plus and not fixed?

KEN

 

Cost plus = high tech, high risk, difficult to meet the spec, full of unknowns and a specification that is moving around all the time until the product is base lined.

Fixed Price = mature product, prototyped and tested, probably through low rate initial production and now going high quantity for fielding.  Lower risk, company willing to commit to FFP; government comfortable the company will not go broke in doing so at a fixed price.

Rule of thumb - look at your product or service complexity and technical challenge  mix, not a government trend.

Check the above mix in the company, the mix in the market, the mix in the competition, the mix in the environment the product or service will  encounter.   Then assume cost plus for high risk, pressing the state of the art procurements and fixed price for lower risk mature products or experienced services.

Anonymous:

 

Can a program start off as fixed price and then become cost plus? Or is it the opposite?

  

KEN

 

The opposite. A program generally moves from cost plus to fixed price as it matures.

The federal government generally recognizes 6 principal categories of  acquisitions. Below is an extract from the FAR for each.

It is possible  for a product to go through, or be supported by, all 6 acquisition  categories during its life cycle and many different contact types, depending on the nature of the work, the risk and the product.

 
Acquisition Categories

Contract Types

Managing Risk In Small Business Federal Government Contracting

The challenges and difficulties for the small business in government contracting are not so much in the areas of barriers as  they are in lack of knowledge (which I concede is a form of barrier but one that can be dealt with).

Successful Traits in Government Contracting

Large business and government agencies indirectly take advantage of the small enterprise lack of knowledge or make poor assumptions regarding what a small business knows about the Federal Acquisition Regulation (FAR) and associated Cost Accounting Standards (CAS). This leads directly to abusive practices.

A prime example of an abusive practice is large corporations signing  teaming agreements during proposal efforts and then not awarding  subcontracts to the small enterprise as agreed, keeping the majority of work for themselves.

Managing Teaming Relationships

Agencies can take extended periods to put in place actual prime contracts after source selections and award to a small business. They do not realize that a small enterprise does not have deep pockets and must have cash flow to sustain a new program with new employees.

Funding levels on IDIQ and Omnibus programs are insufficiently committed and the small enterprise is not adequately informed about limitation of funds and  funding exposure. 

Managing Government Contract Limitation of Funds and Funding Exposure

Enough small  businesses succeed in the government contracting field that I am  convinced the government needs more active roles in education of  the small enterprise and more trained contracting officers that understand the limitations of a small business.

The most common traumatic situation I encounter is with newly  established businesses who have won their first government contract and  have no CAS compliant job cost accounting system in place to bill it  out. The government has assumed that capability will materialize and  when it does not they audit the bills, find no backup and shut down the  cash flow until the system is fixed. At that point the business can fail. The company should have been educated much earlier in the process about these requirements.
 What Small Business Should Know About FAR and CAS

The number of poorly performing SETA contractors in roles not suited  to them in contract administration support is increasing in federal  agencies. These firms need to be vetted and better managed for the  omissions and commissions they contribute to the above.
SETA Contracting

Not every small enterprise can get  into a class on government contracting at George Washington University,  The Defense Acquisition University or send their personnel to lengthy  and costly seminars conducted by organizations like the National Contract  Management Association. These are  great education sources but do not  come close to filling the complete requirement and they cost time and money.

The contracting officer and his staff as well as larger enterprises need to be upgraded in the skills necessary to guide - not abuse - the small business in federal government contracting.

REMEMBER:

Be straight-forward and honest with your industry teaming partners.

Do not violate share arrangements, teaming agreements or non-disclosure agreements. Such violations are a death knell for your reputation in the business.

Do not become known as a resource raider by hiring away from other firms with whom you have teamed.

Give it your best shot as a prime or a sub but involve the government contracting officer if you must resolve industry teaming disputes that may damage your past performance record.

Exclusivity in teaming is a practical way to go on any given large scale program. Team early and exclusively then give it your all and be a winner. Your reputation is key, ethics count and your customers as well as your industry are observing you.

The Role of Risk In Federal Government Contract Types

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 the government and the administrative burden of the contract.

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 are the major contract types utilized by the federal government:

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.