Another key decision that must be made during the planning phase is
what contract type to use. Unlike the method of procurement, which
determines how a procuring agency will solicit bids or proposals for a
project, the contract type determines how potential bidders or proposers
will price the products or services. The contract type also defines the
contracting environment that will govern the contractual relationship
between the agency and the supplier.
Based on its market research the procurement professional should
have a good idea how the supplier industry gauges various pricing models
to the requirements of the needed product or service. This market
research will be critical in helping a procurement professional to
determine the contract type to solicit.
A key factor that drives the contract type is the level of project
risk and how to fairly allocate that risk between the agency and the
supplier. A risk that is high for the buyer (agency) will be low for the
seller (supplier).
Fixed price contract
A fixed price contract places responsibility on the supplier for
the delivery of the products, or the performance of services, according
to the contract terms at a price that may be firm or subject to
contractually specified adjustments. This contract type is appropriate
to use when the agency’s requirements for the extent and type of work
can be reasonably specified, and the cost can be reasonably estimated,
as is the case for standard commercial products or certain services.
There are two types of fixed price contracts: firm fixed price, and
fixed price with price adjustment. The firm fixed price provides a
price that is not subject to adjustment due to variations in the
supplier’s cost of performing the work specified in the contract. It
should be used whenever fair and reasonable prices can be established at
the outset.
The fixed price contract with price adjustment provides for
variation in the contract price under special conditions defined in the
contract, other than customary provisions authorizing price adjustments
due to modifications to the work. The formula, pricing index or other
basis by which the adjustment in contract price can be made, must be
specified in the solicitation and the resulting contract. Adjustment
allowed may be upward or downward, only or both, depending on the
requirement.
The indefinite quantity contract, is a type of fixed price contract
in which the unit price is set but the total number of units may not
be.
Time and materials/labor hour contract
A time and materials contract provides an agreed basis for payment
for materials supplied and labor performed. It is important, to the
extent possible, that a time and materials contract contain a stated
ceiling or an estimate that must not be exceeded without prior agency
approval.
A labor hour contract provides only for the payment of labor
performed. A labor hour contract must contain the same not to exceed
pricing ceiling as the time and materials contract. A labor hour
contract also requires the same determination as required for a time and
materials contract.
Cost reimbursement contract
The cost-reimbursement contract provides for payment to a supplier
of allowable costs, as specified in the contract and incurred in the
performance of the contract. This contract type establishes at the
outset an estimated cost for performance, and a dollar ceiling which the
supplier may not exceed, except at its own expense, without prior
approval or subsequent approval by the agency. A contract reimbursement
contract provides that the supplier agrees to perform as specified in
the contract until the contract is completed, or until the costs reach
the specified ceiling, whichever occurs first.
This contract type is appropriate when the uncertainties involved
in performance are significant enough that the cost of contract
performance cannot be estimated with sufficient certainty to realize
economy by use of any type of fixed price contract. It is particularly
suitable for research, development and study contract types. This
contract type requires appropriate monitoring by agency personnel during
performance to provide reasonable assurance that the objectives of the
contract are being met.