Three MORE Things to Consider When Choosing Contract Types

By Craig Taylor, Senior Analyst

The original implementation of DoD’s “Better Buying Power” initiative heavily promoted the use of Firm Fixed Price (FFP) contract types. Many federal agencies adopted this approach with the intent to control costs and limit the Government’s risk exposure on acquisitions. This does not remove risk from the acquisition itself, and may not even reduce it. It may simply transform it from a risk of cost to a risk of delivery.

With “Better Buying Power 2.0,” the Department of Defense is now encouraging the use of other contract types to give greater flexibility and allow users to select the contract type most appropriate to the acquisition. There are several factors to consider when choosing contract types. Some have been discussed on Integrity Matters. Here I offer three more.

In the recent blog post, “Why Federal Contracting Should Be More Like Made-From-Scratch vs. Store-Bought Cookies,” GovLoop’s Andrew Krzmarzick wrote that most agencies’ approach to contracting is more prepackaged than creative. In Krzmarzick’s blog, John Coombs, an Integrity Senior Fellow and former Assistant to the Deputy Assistant Secretary of the Army for Procurement, recommended agencies take into account three considerations to be more flexible and responsive in their procurement approaches:

• Use indefinite-delivery, indefinite quantity (ID/IQ) contracts, which can cover multiple requirements; ID/IQs give agencies the flexibility to support multiple customers and multiple requirements using fewer human resources and with shorter procurement lead time.
• Consider using hybrid contracts, breaking requirements into a fixed-price core and an optional time-and-materials surge for unforeseen needs; Coombs admits that hybrid contracts are harder to put together, “but they will give you so much more flexibility and control over the requirement and the changes after it’s awarded.”
• Use incentive-based contracts to tie contractor profit to more effective performance, management, and cost control. “Incentives for effective management and cost control” that are tied to a profit potential for contractors can lead to significant savings for government.

Many agencies, such as the Department of Homeland Security (DHS), already have policies in place for their components to consider DHS strategic sourcing vehicles first anyway, and are starting to employ hybrid approaches to service contracts, but this is still a narrow approach to satisfying procurement needs. Agencies still need to consider other factors in determining the most appropriate contracting approach to fulfill their needs. Here are three more I would recommend.

Contract Types

When choosing a contract type, ask the following questions – are the requirements firm? Is the scope well-defined? Is the contractor confident that they can guarantee delivery, and wait until after delivery to receive payment? Is profit based on the contractor’s ability to control costs? If you can answer “yes” to these questions, then a fixed price contract is probably the best bet. This approach works best when the customer knows exactly what it needs, when, and how, and isn’t likely to change its requirements over the course of delivery.

On the other hand, if requirements are highly complex or difficult to nail down, a cost-reimbursable type might be a better option. Consider this approach if the requirements are cutting edge or of such a nature that the contractor cannot accurately price out the work. This may bring on a heavier oversight burden, but this is not always the case (or it may be worth the extra work). Agencies such as NASA and the Department of Defense often have needs for cutting-edge technology that cannot be satisfied by something predictable, such as advancements in stealth technology or satellites. If specific aspects of contractor performance are still a critical factor, such as cost management or timeliness of delivery, consider using a fee structure to incentivize the contractor’s delivery.

If the contractor’s ability to manage and control costs is important, consider using an incentive-fee structure, which usually ties the amount of the fee to how well the contractor manages allowable costs versus a target cost. The better the contractor controls cost, the greater the amount of fee it collects. A fixed or award fee structure may also be set up to incentivize delivery of either goods or services, with or without an incentive component. Incentives and awards can be used to motivate the contractor to keep costs under control and/or enhance timeliness, quality, and performance of the work.

Acquisition Lifecycle Considerations

A program’s position in relation to the acquisition lifecycle also bears consideration for which contract type to use to meet program objectives. If an agency needs to have something developed or built to fill a need, it should consider what stage it is in when choosing the best procurement approach.

The work necessary to deliver an analysis of alternatives and identification of the best solution may be fairly well understood, and a fixed-price type contract may be able to deliver with minimal risk. If that solution involves building from the ground up, or even integrating known systems or subsystems to form a new capability, then cost reimbursement may be the best approach in order to spread risk equitably.

Risk as a Factor

When requirements are well-defined and costs can be estimated accurately, a fixed-price contract is probably most appropriate. The contractor assumes the risk for performance for the established price. However, if requirements are vague, or it is difficult to predict the cost, a cost-reimbursement vehicle is probably the better way to go. It’s proper that the Government assume the risk until the desired solution becomes clearer. Consider it an investment towards the future.

Although risk to the Government is relatively low on a firm fixed price contract, it’s important to recognize that when a FFP contract is wrongly used for a complex development program, the results can be disastrous. What if the fixed price contractor bills the Government and receives progress payments, but eventually determines that the requirements cannot be met at an acceptable cost and then defaults? It’s a lose-lose situation, because the Government is left with getting nothing for the progress payments it made. This can result in lawsuits and settlements to recoup Government costs, but the user’s requirement still goes unmet, leading you to think about returning that store bought cookie.

What about you? What other factors do you consider when choosing contract types?

Article republished from the blog Integrity Matters – Perspectives on Acquisition and Program Management.