Government Contractors! Know Your Contract Pricing Models

There are many different types of government contracts, and each has its own set of rules and regulations under the Federal Acquisition Regulations System (“FAR”). The FAR was established for the codification and publication of uniform policies and procedures for acquisition by all federal agencies.

As a government contractor you need to be familiar with different types of contract pricing models so that you can pursue them accordingly.

1. Fixed-Price Contracts (FAR 16.2) – 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. 
   
2. Cost-Reimbursement Contracts (FAR 16.3) – Provides for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish 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.
   
3. Incentive Contracts (FAR 16.4) – Appropriate when a firm fixed-price contract is not appropriate and the required supplies or services can be acquired at lower costs and, in certain instances, with improved delivery or technical performance, by relating the amount of profit or fee payable under the contract to the contractor’s performance.
   
   Incentive contracts are designed to obtain specific acquisition objectives by:
   
   a) Establishing reasonable and attainable targets that are clearly communicated to the contractor; and
   b) Including appropriate incentive arrangements designed to:
   (i)   motivate contractor efforts that might not otherwise be emphasized; and
   (ii)  discourage contractor inefficiency and waste.
   
4. Indefinite-Delivery Contracts (FAR 16.5) – There are three types of indefinite-delivery contracts:
   
   a) Definite-Quantity Contracts
   b) Requirements Contracts
   c) Indefinite-Quantity Contracts

The appropriate type of Indefinite-Delivery Contract may be used to acquire supplies and/or services when the exact times and/or exact quantities of future deliveries are not known at the time of contract award.

Requirements Contracts and Indefinite-Quantity Contracts are also known as Delivery-Order (supplies) or Task-Order (service) Contracts.

i. Delivery-Order Contract – a contract for supplies that does not procure or specify a firm quantity of supplies (other than a minimum or maximum quantity) and that provides for the issuance of orders for the delivery of supplies during the period of the contract.

ii. Task-Order Contract – a contract for services that does not procure or specify a firm quantity of services (other than a minimum or maximum quantity) and that provides for the issuance of orders for the performance of tasks during the period of the contract.

a) Definite-Quantity Contracts – 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.

A definite-quantity contract may be used when it can be determined in advance:

• a) A definite quantity of supplies or services will be required during the contract period; and
• b) The supplies or services are regularly available or will be available after a short lead time.

b)  Requirements Contracts – Provides for filling all actual purchase requirements of designated government activities for supplies or services during a specified contract period (from one contractor), with deliveries or performance to be scheduled by placing orders with the contractor.

The contracting officer shall state a realistic estimated total quantity in the solicitation and resulting contract, and if feasible, the maximum limit of the contractor’s obligation to deliver and the government’s minimum 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.

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.

c)  Indefinite-Quantity Contracts – 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. This is commonly referred to as an Indefinite-Delivery / Indefinite-Quantity (IDIQ) Contract.

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.

Contracting officers may use an IDIQ 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.

5. Time-and-Materials Contracts (FAR 16.6) – Provides for acquiring supplies or services on the basis of direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, and profit; and the actual cost of materials.

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.

In addition, to even the playing field for small businesses, the federal government limits competition for certain contracts specifically to small businesses. These ‘small business set-asides’ can be based on socio-economic factors or awarded simply as a defined small business.

The two types of small business set-aside contracts are the following:

• a) Competitive Set-Aside Contracts – When at least two small businesses can provide the product or service at a fair and reasonable price, the federal government must set aside and award the contract exclusively for small businesses for all contracts under $250,000.

• b) Sole-Source Contracts – Most contracts are competitive, but sometimes there are exceptions to this rule. Sole-source contracts are an award that can be issued without a competitive bidding process. This usually happens in situations where only a single business can fulfill the requirements of a contract or in times of emergency when supplies and services are in immediate need.

Some set-aside and sole-source contracts are open to any small business, but some are open only to small businesses who participate in SBA contracting assistance programs based on certain socio-economic conditions. For example, these set-aside requirements may be for businesses that are veteran-owned, woman-owned, minority-owned, HUBZone, or 8(a) disadvantaged to bid on contracts.

FedBiz Access (“FedBiz”) has an experienced team that takes the time to get to know your business and ask questions to ensure you understand contract pricing models and have a solid engagement plan. 

FedBiz offers proprietary marketing packages that can help you target direct buyers within the federal government. FedBiz is a leading government contracting business development and marketing firm that offers research and engagement strategy coaching, registrations, set-aside certifications, and GSA Schedules.

FedBiz has over 22 years of experience working with thousands of companies worldwide to help them win over $35.7 billion in awards. From registration to award, FedBiz helps businesses succeed in the government marketplace.