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Tuesday, June 15, 2021

Are Startups Missing Out By Not Bidding On Federal Contracts?


Image:  Yourstory.com


By Kayleigh Alexandra


If you run a startup, the thought might never have crossed your mind to seek out contract work with the government. After all, it isn’t the conventional way forward, and you might well figure that federal contracts will invariably go to companies with well-established government links.

But are you missing out by not making an effort to seek out federal contract work? Let’s go through some reasons why you might want to give it more consideration.

You can’t get what you don’t apply for

The notion that government contracts will always go to giant corporations is something of a self-fulfilling prophecy, as it spurs small enterprises to hold back from applying for them. Despite this impression, it’s generally quite viable, especially since the Federal Government sets a goal every fiscal year for contracting a percentage of its work to small businesses.

In 2017, the Federal Government awarded 60 billion dollars in contract work to small businesses, with the yearly goal agreed for 22% but set as 23% by Congress. The goal for 2018 is similar at 22%, so they should achieve a financial figure not far off that 60 billion dollars.

Given this ongoing commitment to diversifying the awarding of government work, now is as good a time as any to pitch for available contracts. If you succeed in getting one, you may be able to parlay it into an ongoing working relationship.

The field is becoming more open

The main difficulties with landing federal contracts are not technical but procedural and organizational, and the problem with high-level bureaucracy is that it’s incredibly difficult to dislodge. The flexibility in approach, then, must stem from the applicants.

While this is undoubtedly a frustrating notion to small businesses everywhere, consider that it also wards off a lot of possible competition, and that the benefits of securing federal work are extensive. In addition, the incumbent win rate for federal contract proposals dropped 21% from 2015 to 2016, going from 75% to 54%, so the playing field has become a lot more open.

Another thing worth noting for programs set aside for small business is that medium and large businesses are both precluded from assuming prime roles and limited in their participation as subcontractors. The government’s mandate for a small business set-aside contract caps participation by firms other than the small business prime awardee at 49% of the project effort (factoring in work scope, cost, and time). While this does mean that a small business must demonstrate (during the proposal and site survey phases) the ability to carry out 51% of the work internally to win a contract, it does ensure that a majority of the work genuinely goes to small business workers.

The advantages of government work

Even disregarding the intimidating process involved in securing government work, a lot of startups may well think that it isn’t the right fit for them, particularly given the common perception that federal contracts are dull, expensive, or overly complicated. Brand image is very important in the social media age (and more important than people think for contract bidding), and pitching to popular brands might feel like a better option.

The big advantage to working on government contracts is that it lends your company a great deal of credibility and cache. People understand that it’s a difficult marketplace to operate in, and will view your ability to do so as an indication of your professionalism.

Here are some more advantages:

     Scheduling Consistency
     A lot of contract work extends to substantial periods of time, meaning you plan your financial year around it and allocate your resources efficiently.
     Industry Networking
     You’ll have the chance to meet people in very important positions in your industry, providing you with the opportunity to network and establish useful contacts.
     Financial Certainty
     Government payments will always be issued on time and in accordance with the agreed terms. You will never face the prospect of chasing them for payment.

Meeting the requirements for contractors

There are specific requirements that prospective contract work suppliers must meet in order to be granted consideration, and meeting those requirements is the most challenging part of the process (with the possible exception of formulating the pitch).

Typically, you’ll need to ensure that your business system meets government standards for job cost accounting (each job is unique and must be costed accurately), be fully prepared to deal with thorough audit requests, and have the capacity to produce project proposals of a sufficiently-high quality and that your business system meets government standards

You’ll also want to make sure your company has adequate insurance. Basic commercial insurance likely won’t cut it— you should pursue a suitable custom policy that covers everything needed, such as Defense Base Act insurance if you use overseas employees. The government is very risk-averse in awarding contracts and you won’t stand a chance if your proposition seems a little rocky.

To navigate those murky waters, it’s generally best to consult a specialist. This website offers a great deal of information for free, but there are also paid consultants you can hire to help get your business ready to be viable for contract bidding. Here are a couple of you can consider:

     Mark Amtower: https://www.linkedin.com/in/markamtower/

Working with a prime contractor

Given the complexity and expense involved in becoming a government contractor, it’s often worth considering the option of working as a subcontractor for a prime contractor. A prime contractor is a business that has been granted full control of a government contract, allowing it to delegate parts of the work should it wish to.

If your startup isn’t ready to battle with much larger companies for huge contracts, subcontracting work could be a great first step to take. Most of the advantages we covered earlier still apply, as well, so it gives you the chance to make some influential contacts.

In summary

It isn’t easy to acquire a government contract, especially if your business is just getting started, but it isn’t impossible, and the benefits can be substantial.

If it’s an option you’d like to pursue in the future, make an effort to begin preparing your organizational structure to meet federal requirements, and seek out subcontracting work to help you establish the connections that could help you in the right direction.

ABOUT THE AUTHOR:


Kayleigh Alexandra is a content writer for Micro Startups — a site dedicated to giving through growth hacking. Visit the blog for your latest dose of startup, entrepreneur, and charity insights from top experts around the globe. Follow us on Twitter @getmicrostarted.

Thursday, June 10, 2021

10 Common Traits Among Successful Small Business Government Contractors


Image:  Quora

As a volunteer counselor over the last 14 years, I have noted common traits among the most successful small business federal government contractors.  The following are 10 of the most prominent traits and tips on how successful small companies developed them
Commercial success before entering government contracting.  From maintaining buildings to keeping the lights on, from grounds maintenance to flight maintenance, look for niches that can be pursued based on successful past performance, transitioning via industry teaming via subcontracts, partner roles with larger companies or in small business set aside orders for minor items and simpler services provided directly to the government.  Your Entry Points
Willingness to concede there were things they did not know and seeking advice early.   You may download the book, SmallBusiness Federal Government Contracting and its supplement from the "Box" in the right margin of this site.  You may also benefit from the free "Reference Materials". Contract agreements, incorporation instructions for all the US states, guidance on marketing and business planning are also included.   Free Books and Supplements
Recognition of the value in industry teaming. Synergism is paramount in teaming with any size company, whether in a lead or subcontracting role. There should be technical, management and market segment similarities between you and any company with whom you are considering teaming. Your prospective team member ideally will not be a direct competitor; rather a business in a related field with whom you share a mutual need for each other's contributions in pursuing large-scale projects. Small Business Teaming in Government Contracting 
Strong capability statement (CAPE) development, networked prudently among government agencies and large government contractors. Your CAPE targets contracting officers and prime contractor buyers who are seeking to fulfill their small business buying goals. It is a way to get you in the door and speak to, or correspond with, the management and technical personnel who are the decision makers in sourcing small business buys.  A good quality CAPE is the spearhead of your marketing campaign and your visual image;  focused and direct, it must be informative, concise and a snapshot of the very best you can offer. Your Capability Statement
Maximizing set-aside qualifications in seeking both prime and subcontract opportunities. Small business group-designated procurements are far more frequent than sole source contract awards.  Agencies must prepare special justifications for sole sourcing and those most frequently approved are for Hub Zone and Small, Disadvantaged [8(a)] firms.  Small business group designations are beneficial to firms who hold them by enhancing the probability of an award through agency restrictions on prime contractor bidding to only those who hold the group designation. Others may bid as subcontractors to the prime but the prime small business contractor must be capable of performing at least 51% of the total effort in terms of work scope, hours and dollarsMarketing to Achieve a Small Business Set-aside Contract
Prudent bid/no bid decisions. Government contract proposal preparation is time consuming and can be costly. Meeting agency Request for Proposal (RFP) requirements with a responsive proposal can be well worth the effort if a winning strategy can be formulated.  When considering a proposal to a given government solicitation, conduct a bid/no bid exercise. By going through that process you will begin formulating your win strategy or you will discover that you should not bid the job for lack of such a strategy. Making an Astute Bid/No Bid Decision
Ethical business conduct and avoidance of conflicts of interest. A small business ethics image is different than a product or service "Brand Identity". The latter focuses on that which the customer receives from you in the way of products and/or services. A company ethics image is how the organization is viewed in general from a public perception as positive or negative.  That view is held by customers, your industry partners or prospective partners, regulators and the average citizen. If carefully sculpted your public ethics image can be a vital element in business success; if neglected it can pose a high risk to your enterprise.  Maintaining an Ethical Company Image
Excellence in risk analysis. 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) Large business and government agencies 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. Managing Small Business Risk
 Solid long range planning and plan maintenance. The time to consider separating government from commercial work and/or establishing new cost centers for bidding, accounting and billing purposes is when the enterprise is generating a long range marketing plan to determine rates for bidding new long term contracts. The location of the work (both geographic location and whether performance is in or out of a government facility, its duration, skill set requirements, government-mandated fringe benefits for workers and the competition are all factors to consider).Strategic Planning for Small Business
Excelling in meeting the past performance challenge, building a performance record with solid customer service and sensitivity.  How can a new organization or one that is new to government contracting muster a response to the past performance challenge? The answer lies in historical projects that may be similar in the commercial arena and a high quality proposal that clearly demonstrates an understanding of the requirement at hand, a unique and cost effective project plan and high performing personnel and/or products tailored to the statement of work to offset an interim, light past performance record. Meeting the Past Performance Challenge

Thursday, June 3, 2021

Weighted Guidelines Profit Determination In Federal Government Contract Negotiations

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Image: Defense Acquisition University
The accepted template for negotiated procurements with the government is as follows:

A. Audit

B. Fact-finding


C. Pre-award Survey

D. Cost Negotiations

E. Final Profit Negotiations

F. Contract Award

Although policy in FAR Part 215-404-4 states that contracting officers ….” do not perform a profit analysis when assessing cost realism in competitive acquisitions”, it is wise to understand that during Steps A trough D above, the contracting officer and his representatives are indirectly forming opinions of the risk to the contractor and the mix of cost elements in the proposal. That opinion directly effects profit negotiations and judgments at Step E, above.

Although the above FAR clause allows for 3 methods of profit negotiation, this article will discuss the most common method contracting officers use --  the Weighted Guidelines Method.

ELEMENTS

Contractors should be aware that the Weighted Guidelines Method is mandatory for all negotiated procurements except Cost-Plus Award Fee Contracts and exceptions as approved by a higher authority. Contracting officers are to prepare their position using DD Form 1547 with associated backup and file it at the conclusion of negotiations.

Understanding the weighted guidelines method can assist in achieving a higher profit on a negotiation because a contractor can present a position at the table that logically supports the following elements required by FAR Part 215-404-4:  

  • Performance Risk
  • Contract Type Risk
  • Facilities Capital Employed
  • Costs Efficiency

    The detailed analysis guidelines for contracting officers under each of the above factors are contained at the following link:
    It should be noted that the Facilities Capital Cost Employed (FCCM) factor (a separate DD Form 1861) does not always enter into small business negotiations, because many start-ups and smaller enterprises do not propose it as part of their allowable costs due to elements they cannot demonstrate in capital investment, land, buildings and similar items.

    UTILIZING THE FORM FOR NEGOTIATION

    A DD Form 1547 accompanies this posting. An Excel version with arithmetic formulas and a separate tab for DD Form 1861, FCCM, can be downloaded from the  Box “References” cube in the top right margin of this site.

    Study the form and its guidelines at the above link. Apply it to your proposal. This puts your perspective on profit into the same structure as the contracting officer is required to develop his.

    When profit discussions ensue and the contracting officer takes a position, ask for a copy of his weighted guidelines analysis form. If he does not provide it, or has not prepared one, give him yours with your position on profit, updated to reflect costs negotiated during steps A-D above.

    A reasonable discussion can then occur on the elements of profit negotiation and offers, counter offers and ultimate agreement can be equitably reached with a known structure addressing risk and other required factors.

    SUMMARY

    The majority of negotiated cost proposal effort involves coming to an agreement with the government via audit, fact-finding, pre-award survey and cost realism. But keep in mind that the government is forming an opinion on the elements of weighted guidelines profit determination during those stages as well.

    You can influence the government negotiator (s) on the weighted guidelines profit elements during the early stages of negotiations as you settle on cost factors. You do so by presenting the data and narrative basis of estimate in such a fashion as to identify risk and other key area of weighted guidelines analysis. Insure the technical, management and cost volumes of your proposal, if they are required, are consistent in that regard.

    Update your DD Form 1587 in your working file and prepare to use it as you settle on profit to conclude negotiations. Relate your profit position to weighted guidelines cost elements, as agreed upon with the government, supported by your proposal and any other documented disclosures you have submitted during negotiations. Doing so will support your position on profit and give the contracting officer an opportunity to accept it.






    Monday, May 31, 2021

    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.