Overview
FAR 12.207 establishes that firm-fixed-price (FFP) or fixed-price with economic price adjustment (FP-EPA) contracts are the standard for commercial acquisitions, while strictly limiting the use of time-and-materials (T&M) and labor-hour (LH) contracts to specific, justified scenarios. It prohibits the use of any contract types not explicitly authorized by the subpart, most notably cost-reimbursement contracts.
Key Rules
- Preferred Contract Types: Agencies must use FFP or FP-EPA for commercial products or services unless specific exceptions apply.
- T&M/LH Conditions: These may be used for commercial services only if:
- The contract is awarded under competitive procedures (or results in at least two offers under non-competitive procedures).
- The Contracting Officer (CO) executes a Determination and Findings (D&F) proving no other contract type is suitable.
- A mandatory ceiling price is established, which the contractor exceeds at their own risk.
- D&F Requirements: The D&F must include market research, establish why costs cannot be estimated with confidence, and outline a plan to transition to fixed-price contracts for future requirements.
- Indefinite-Delivery Contracts (IDC): IDCs can use T&M/LH rates, but the CO must typically execute a D&F for every order placed on that basis unless the base contract received higher-level approval to be T&M/LH exclusive.
- Incentives: Award fees and performance/delivery incentives are permitted, provided they are based on factors other than cost.
- Prohibitions: The use of cost-reimbursement contracts for the acquisition of commercial products or services is strictly prohibited.
Practical Implications
- Administrative Burden: Using T&M/LH for commercial services requires significant documentation and higher-level oversight, forcing agencies to conduct more robust market research and justification than a standard FFP award.
- Risk Management: Because cost-reimbursement contracts are prohibited, contractors must be prepared to accept the price risk of fixed-price arrangements or the rigid ceiling prices and non-cost-based incentives associated with commercial T&M/LH contracts.