Overview
FAR 16.104 provides a framework of variables that Contracting Officers must evaluate to determine the appropriate allocation of risk between the Government and the contractor. The ultimate goal is to select a contract type that results in reasonable contractor responsibility for costs while providing appropriate profit incentives for efficient performance.
Key Rules
- Preference for Fixed-Price: Effective price competition normally results in realistic pricing, making a fixed-price contract the preferred choice for the Government.
- Risk Migration: As a requirement moves from complex research and development to repetitive production, the cost risk should shift from the Government to the contractor, moving toward fixed-price arrangements.
- Hybrid Contracting: If a total requirement cannot be firm-fixed-price, the Contracting Officer is required to consider if specific portions or line items of the contract can be established on a firm-fixed-price basis.
- Accounting System Requirement: Before awarding any contract type other than firm-fixed-price, the Contracting Officer must ensure the contractor’s accounting system is adequate for providing the necessary cost data required by the contract type.
- Risk Identification: In the absence of competition, the Government must perform cost analysis to identify performance uncertainties and ensure the contract type places a reasonable degree of cost responsibility on the contractor.
- Environmental Factors: External factors such as extreme urgency, long periods of performance, or economic uncertainty may justify the Government assuming more risk or utilizing economic price adjustment clauses.
Practical Implications
- Contractor Burden of Proof: To move away from fixed-price mandates, contractors must demonstrate high technical complexity or performance uncertainties that make cost estimation nearly impossible.
- Audit Readiness: Contractors aiming for cost-reimbursement or incentive-based work must invest in sophisticated accounting systems, as the inability to track cost data in real-time is a regulatory "showstopper" for non-fixed-price awards.
- Evolution of Requirements: For long-term programs, contractors should expect the Government to push for a transition from cost-plus to fixed-price structures as the "acquisition history" matures and the requirement becomes better defined.