Overview
FAR 16.101 establishes the fundamental framework for contract types, explaining that the Government utilizes a variety of structures to balance cost responsibility and profit incentives between the agency and the contractor. It serves as the introductory guide to how risk is allocated based on the nature of the work and the degree of performance uncertainty.
Key Rules
- Basis of Variation: Contract types are differentiated primarily by two factors:
- The degree and timing of the contractor's responsibility for performance costs.
- The structure of the profit incentive provided for meeting or exceeding performance standards.
- Primary Categories: All contract types are grouped into two overarching categories: Fixed-Price (Subpart 16.2) and Cost-Reimbursement (Subpart 16.3).
- The Risk Spectrum:
- Firm-Fixed-Price: The contractor assumes full responsibility for costs and retains all resulting profit or loss.
- Cost-Plus-Fixed-Fee: The contractor has minimal responsibility for performance costs, and the fee (profit) is fixed regardless of actual costs.
- Incentive Contracts: Located between the two extremes, these types (Subpart 16.4) are used to tailor cost responsibility and profit incentives to specific performance uncertainties.
Practical Implications
- The selection of a contract type is essentially a risk-management decision; as performance uncertainty increases, the Government typically shifts from fixed-price to cost-reimbursement models to ensure contractor participation and performance.
- Contractors must evaluate their internal cost-control systems and risk appetite, as the contract type directly dictates whether the Government or the contractor bears the financial burden of cost overruns.