Overview
FAR Subpart 16.1 provides the framework for selecting the appropriate contract type, balancing the allocation of risk between the Government and the contractor. It establishes that contract types range from Firm-Fixed-Price (FFP), where the contractor assumes maximum risk, to Cost-Plus-Fixed-Fee (CPFF), where the Government assumes maximum risk, with various incentive-based structures in between.
Key Rules
- Prohibition of CPPC: The "cost-plus-a-percentage-of-cost" system of contracting is strictly prohibited for both prime contracts and subcontracts.
- Sealed Bidding Limitation: Contracts resulting from sealed bidding must be either firm-fixed-price or fixed-price with economic price adjustment.
- Preference for FFP: Firm-fixed-price contracts shall be used when the risk is minimal or can be predicted with reasonable certainty.
- Mandatory Documentation: The contract file must include documentation (often in the Acquisition Plan) justifying the selection of the contract type, explaining how risks will be mitigated, and detailing why a non-FFP type was chosen.
- Accounting System Requirement: Before awarding any contract other than FFP, the Contracting Officer must ensure the contractor’s accounting system is adequate for tracking and developing necessary cost data.
- Determination and Findings (D&F): No contract requiring a D&F may be awarded until the D&F is officially executed.
Responsibilities
- Contracting Officer (CO):
- Exercises sound judgment to negotiate a contract type that balances risk and provides incentive for efficiency.
- Documents the rationale for the selected contract type in the contract file.
- Ensures the contractor has an adequate accounting system for cost-reimbursement or price-redetermination contracts.
- Inserts the provision at 52.216-1 into solicitations.
- Acquisition Personnel/Program Managers:
- Identify and assess technical and performance risks (e.g., through pre-award surveys or past performance).
- Develop strategies to manage and mitigate Government risk when using non-FFP contracts.
- Plan for the transition from cost-reimbursement to fixed-price structures as requirements become more stable over time.
- Contractors:
- Assume cost responsibility and performance risk based on the negotiated type.
- Maintain accounting systems capable of providing the data required for the specific contract type (specifically for cost-reimbursement).
Practical Implications
- Risk Evolution: In the real world, a program often starts with a cost-reimbursement contract during high-risk Research and Development (R&D) phases and transitions to FFP as the product or service becomes standardized and costs become predictable.
- Administrative Burden: Choosing a cost-reimbursement contract significantly increases the administrative burden on the Government, requiring more oversight, cost auditing, and resource-intensive management compared to FFP.
- Negotiation Strategy: Contract type and price are inextricably linked. A contractor may accept a lower profit margin in exchange for the safety of a cost-reimbursement structure, or demand a higher profit ceiling to offset the risks of a firm-fixed-price agreement.
- Compliance Hurdle: Small businesses or new entrants to the federal market often struggle with the "Adequate Accounting System" requirement, which can effectively bar them from cost-reimbursement opportunities until they undergo a rigorous DCAA (Defense Contract Audit Agency) or equivalent audit.