Different types of contracts and high level things to look for…

Choosing type appropriate contracts is essential to successful performance under a contract. The type of contract determines the cost and performance risks which are placed on the contractor. There are three broad contract groups–fixed price, cost reimbursement, and Time & Materials. Within each of these groups, there are various types of contracts which can be used individually or in combination.

Firm Fixed Price Contracts (FAR 16.201)

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 a 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 (see 16.404) and performance or delivery incentives (see 16.402-2 and  16.402-3) 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.

Cost Reimbursable Contracts (FAR 16.301)

Cost- reimbursement types of contracts provide a payment of allowable incurred costs, to the extent prescribed in the contract.  These contracts established an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed (except at its own risk) without the approval of the contracting officer.  A cost-reimbursement contract may be used only when the contractor’s accounting system is adequate for determining costs applicable to the contract or order. A contractor’s accounting system is “adequate” when it complies with all requirements of the SF 1408.

Time and Material Contracts (FAR 16.601)

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 (except as provided for in 31.205-26(e) and (f)).  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.  The contract shall specify separate fixed hourly rates that include wages, overhead, general and administrative expenses, and profit for each category of labor. 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.

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