This little article can really help your business grow, because it is important to understand the different types of contracts the government uses. Each contract type has its own uses, and entering in to the right type of contract is essential to making a profit.
There is where I give a little self-serving advice: At this level of competition, it is always good to have professional help “as much as you are able to afford”. For example, if you enter a “Cost Plus Incentive” contract, you will need to accurately track allowable and unallowable costs. A good CPA will do this for you and end up saving you money. The same thing applies to legal issues, intellectual property rights, Trade Agreement compliance, proposal writing, GSA contracting, and so on. This is a primary reason why the Government Contracting Advisory Team was created. Check it out at: http://www.mygcat.com .
Now, let’s get back to subject of contract types. Here is a real-life example of why you need to pay attention – big time. Years ago I worked as a training manager for a Fortune 500 company. The project was huge, and the relatively tiny training budget was more than $8M with a period of performance at about six years. Needless to say, a huge amount of work went into preparing the proposal and writing the bid. In the solicitation, the government asked for a “Firm Fixed Price” (FFP) bid, which I thought was ridiculous. Fixed Price means the vendor states a given price and takes all the risk… if the bid is not accurate, tough cookies. When the contract is large with many unknown variables, FFP is dangerous country indeed.
However, following our orders we spent many evening and weekend hours estimating everything – even down to the number of sheets of paper we would need over the six-year period! If you know anything about training you know there are many variables, such as number of students, how many courses, what kind of training is held, student media, and so on. And the product had not even been designed or built yet.
We won the contract! Then hard reality struck. All of the estimations had been pure guesses, based on assumptions that were not really verifiable in the first place. When we met with the government to kick off the training program, it was clear to everyone that what was needed was a “Cost Plus Contract” where the vendor gets paid project costs, plus an agreed upon fee (profit). We could have saved thousands of hours writing the proposal if the government had specified the proper contract type to begin with. The actual cost of the completed training program was north of $11M.
Following is Gary’s simple summary of the contract types, based upon my experience and reading the applicable Federal Acquisition Regulations (FAR). If you need more detail and the exact definitions, refer the FAR (Subpart 16 - Definitions). For your enjoyment, I have a linked PDF file available along with this article. If you don’t see the download here, just send me an email. The best place to see and download the FAR is http://farsite.hill.af.mil/.
Caveat: Obviously, the FAR can be changed at any time. My notes are accurate as of this writing, but always be sure to refer to the current FAR to help make and confirm your decisions. Here is a short synopsis of each contract type:
· (FAR 16.2) Fixed Price: No ambiguity; but the risk is all yours. Typically used for products, this where understanding your cost structure becomes so much more important. If you don’t understand your costs, your offer is probably going to be either too high or too low. If it’s high you won’t be competitive; if it’s low, you may lose money. What are all the costs incurred in getting your product to the customer; labor, shipping, insurance, credit card fees, rent, power, and so on. To further understand your prices, remember most products are somewhere on a GSA schedule. Go to www.gsaadvantage.gov and search on product keywords. Study the pricing to make sure you can be competitive. You may have to cut costs, and your cost structure will help you see where you can trim. Subtypes include:
o 16.203 Fixed-price contracts with economic price adjustment.
o 16.204 Fixed-price incentive contracts.
o 16.205 Fixed-price contracts with prospective price redetermination.
o 16.206 Fixed-ceiling-price contracts with retroactive price redetermination.
· (FAR 16.3) Cost Reimbursement: You get paid for your expenses; less risk for you but lower profits and more record keeping. You will need to provide all your costs to the government for approval before you get paid, so record keeping is critical. You also need cash for your employees’ pay. Your fee (profit) depends on your negotiations with the government. There may not be too much profit in it for you, but over the long haul, these are nice contracts to get. Subtypes include:
o 16.302 Cost contracts.
o 16.303 Cost-sharing contracts.
o 16.304 Cost-plus-incentive-fee contracts.
o 16.305 Cost-plus-award-fee contracts.
o 16.306 Cost-plus-fixed-fee contracts.
· (FAR 16.4) Incentive: You get a fixed price, plus an incentive (in dollars) for finishing early or on-time. This is just what it says, and is typically used for construction projects. It give the builder and their employees) an incentive to do the work as fast as possible. Subtypes include:
o 16.403-1 Fixed-price incentive (firm target) contracts.
o 16.403-2 Fixed-price incentive (successive targets) contracts.
o 16.404 Fixed-price contracts with award fees.
o 16.405 Cost-reimbursement incentive contracts.
o 16.405-1 Cost-plus-incentive-fee contracts.
o 16.405-2 Cost-plus-award-fee contracts.
· (FAR 16.5) Indefinite Delivery: This is the type GSA uses (see subtype 16.504). There is no promise to buy; they will buy if and when they need it (and have the budget). GSA uses the Indefinite Delivery, Indefinite Quantity (IDIQ) contract type. Note that just getting on schedule is the beginning. You have to actively market, and GSA is a very competitive environment. If you don’t make a marketing effort, you won’t get sales. Subtypes include:
o 16.502 Definite-quantity contracts.
o 16.503 Requirements contracts.
o 16.504 Indefinite-quantity contracts.
· (FAR 16.6) Time-and-Materials, Labor-Hour, and Letter Contracts: These are similar to Cost Reimbursement, but are based strictly on labor and materials used. The government pays for the labor and materials, but not indirect costs (running your company). You get a fixed profit based upon negotiations. Subtypes include:
o 16.601 Time-and-materials contracts.
o 16.602 Labor-hour contracts.
o 16.603 Letter contracts.
In summary, knowledge is power in government contracting decisions, and the better your decisions, the better the outcome. In order to make the best decisions you need to understand the basic structures of government contracting and how they are used. Take a little time to look at the FAR sections referenced here. I hope you see that understanding Contract Types (and knowing where to find related regulations) will help you prosper.
Good luck and stay tuned for more survival training! Next time: Managing Contract Requirements: A systematic method for not losing your shirt.
