Overview
FAR Part 16 provides the policies and procedures for selecting and using various contract types in federal acquisitions. It establishes a framework for balancing performance risk between the Government and contractors, ranging from Firm-Fixed-Price contracts (maximum contractor risk) to Cost-Reimbursement contracts (maximum Government risk).
Key Rules
- Prohibition of CPPC: The "cost-plus-a-percentage-of-cost" system of contracting is strictly prohibited for both prime contracts and subcontracts.
- Preferred Contract Type: Firm-Fixed-Price (FFP) is the preferred type when risks are minimal or predictable, as it provides the greatest incentive for contractor efficiency.
- Sealed Bidding Limitation: Contracts resulting from sealed bidding are restricted to FFP or Fixed-Price with Economic Price Adjustment (FP-EPA).
- Accounting System Adequacy: Before awarding any contract other than FFP (e.g., Cost-Reimbursement, Time-and-Materials), the Contracting Officer must ensure the contractor’s accounting system is adequate for determining costs applicable to the contract.
- Documentation Requirements: For any contract type other than FFP (excluding simplified acquisitions), the CO must document the rationale for the selection, including an analysis of risk and why a fixed-price arrangement was not suitable.
- Economic Price Adjustments (EPA): These are restricted to three specific types: adjustments based on established prices, actual costs of labor/material, or cost indexes.
Responsibilities
- Contracting Officer (CO):
- Negotiating and selecting the most appropriate contract type.
- Documenting the contract file with a Determination and Findings (D&F) where required.
- Ensuring the contractor’s accounting system is capable of generating necessary cost data.
- Inserting appropriate solicitation provisions (e.g., 52.216-1).
- Fee-Determining Official (FDO): Reviews recommendations from the Award-Fee Board to make final determinations on the amount of award fee earned by a contractor.
- Award-Fee Board: A designated team that evaluates contractor performance and assists the FDO in the award-fee process.
- Chief of the Contracting Office: Responsible for approving modifications to certain clauses, such as increasing the 10 percent limit on aggregate increases in EPA contracts.
Practical Implications
- Risk Allocation: In real-world scenarios, the Government assumes the cost risk for highly complex research and development (R&D) where outcomes are uncertain, whereas the contractor assumes the risk for standard commercial supplies.
- Evolution of Contract Types: As a program matures from a prototype to a production run, the FAR requires COs to transition away from cost-reimbursement or time-and-materials contracts toward fixed-price arrangements to protect taxpayer interests.
- Administrative Burden: Choosing a Cost-Plus-Fixed-Fee (CPFF) or Incentive contract significantly increases the administrative burden on the Government, requiring more robust oversight, auditing, and performance monitoring compared to FFP.
- Market Volatility Management: The use of FP-EPA is a critical tool in long-term contracts (over one year) during periods of high inflation or unstable labor markets, preventing contractors from "padding" bids with high contingencies.