Step 7: Establish the contracts baseline

It is very important for project managers to understand the contract type and the associated technical, schedule and cost management risks.

Both you and the contracts administrator should read the contract carefully and make note of any discrepancies or areas of concern.

  • Verify contract documents against RFP and proposal
  • Check clauses, terms and conditions, assumptions. (Are they the same as RFP and our proposal?)
  • Check payment terms (EFT or check)
  • Verify amounts (labor, travel, other direct costs)
  • Verify contract type (FFP, T&M)
  • Confirm key personnel Requirements
  • Check for any contract options

Upon verification that all parts of the documents are as requested/bid, the contracts administrator will negotiate with the government contracting officer and then sign the final contract.

You should then receive a copy of the fully executed contracting documents back from contracts administrator. It is important to note that only the contracts administrator is authorized to commit company resources beyond the scope of the contract.

There are several different contract types, each with its own advantages and disadvantages. Your project management strategy needs to take into consideration the contract type. Familiarize yourself with the FAR Part 16 (available by searching on Google). It describes the federal regulations for each of these contract types.

You need to be conscious of the various clauses in your contract. In the case of task or delivery orders, there are usually additional clauses in the basic contract. Most of the clauses are described in the Federal Acquisition Regulation.

There are two major types of contract clauses: Standard Federal Contract Clauses and GSA Contract Clauses.For contract vehicles like GWACs and IDIQs, must adhere to clauses explicitly written in the task order contract and the overarching contract.

Firm Fixed Price (FFP). The contractor is paid a price for performing the work and must complete the work to receive this pre-established price regardless of the actual cost incurred by the contractor:

  • If the costs are greater than the price the contractor will suffer a loss.
  • The lower the costs the greater the profits.

If the work is not satisfactorily completed on time, the contractor will be liable for breach of contract.  This could entail the contract being terminated for default (failure to perform) which may result in the contractor being held liable for any additional costs incurred by the customer to re-procure the contract items from another contractor.

Fixed Price Incentive (FPI). A fixed-price incentive contract provides for adjusting profit and establishing the final contract price by application of a formula based on the relationship of total final negotiated cost to total actual cost.  It is a compromise between a firm fixed-price arrangement and a cost reimbursement one.  The major FPI elements include:

  • Target Cost – The amount against which final costs are measured.
  • Target Profit – The profit for target cost at target performance.
  • Target Price – The sum of target cost and target profit.
  • Ceiling Price – The maximum dollar amount for which the customer will be liable.
  • Sharing Formula – An arrangement for establishing final price, expressed as a customer/contractor share ratio; e.g. 60/40.

Cost Plus Award Fee (CPAF). This is a cost-reimbursement contract in which the fee is earned in part upon satisfactory performance.  The fee typically consists of (a) a base amount (which may be zero) fixed at inception of the contract and (b) an award amount that the contractor may earn in whole or in part during performance.  The amount of award fee to be paid is subjectively determined by the customer in regard to contractor performance relative to the criteria stated in the contract.  This determination is made unilaterally, and is not subject to dispute.

Cost Plus Fixed Fee (CPFF). The negotiated fee is fixed at contract inception and does not vary with actual cost.  (It may be adjusted, however, as a result of changes in the work to be performed.)  The contract may take one of two basic forms – completion or term.

The completion form describes the scope of work by stating a definite goal and specifying an end product.  The completion form is preferred whenever the work can be defined well enough to permit the development of reasonable estimates to complete.  The completion form requires the contractor to complete and deliver the specified end product (e.g., a final report) within the estimated cost, if possible, as a condition for payment of the fixed fee.

The term form describes the scope of work in general and obligates the contractor to devote a specified level of effort for a stated time period.  The term form shall not be used unless the contractor is obligated to provide a specific level of effort within a definite time period.  Under the term form, if performance is deemed satisfactory, the fixed fee is payable at the expiration of the agreed-upon period.  (The contractor must provide a certificate that the specified level of effort has been expended.)

Cost Plus Incentive Fee (CPIF). A cost-plus-incentive-fee contract is a cost reimbursement contract that provides for an initially negotiated fee (target fee) to be adjusted later by a formula (share ratio) based on the relationship of total allowable cost to target cost.  This contract type includes the following elements:

  • Target cost
  • Target fee
  • Share Ratio
  • Minimum fee
  • Maximum fee

After contract performance, the fee payable to the contractor is determined in accordance with the share ratio.

Task Order Contracts. Under a task order contract vehicle, a firm quantity of services or supplies is not pre-specified.  Instead, this type of contract provides for the issuance of delivery or task orders for the delivery of supplies during the contract.  The orders become the firm contract obligation.  These contracts are commonly referred to as IDIQs. (Indefinite Delivery,

Indefinite Item Indefinite Quantity (IDIQ) contracts and Basic Ordering Agreements (BOA).  The IDIQ contracts contain a “minimum” order provision that establishes the “consideration” necessary for contract information. BOAs do not commit the customer to procure a specific quantity of services or supplies and therefore are “agreements” in lieu of “contracts” but often establish such things as labor rates. They are often used to purchase management and professional services, studies, analysis and evaluations, and engineering and technical services as well as supplies.  The contractor proposes the particulars for each task order.  These proposals may be competitive or sole source depending on the particular contract/agreement.  The customer attempts to award multiple task order contracts except when there is only one capable contractor or the cost of administration is prohibitive.  The customer believes that competitive pressures result in better price/terms.

Time and Materials (T&M) Contracts. The T&M contract provides for payment for direct labor hours at a specified fixed hourly “wrap” rate that includes profit.  Materials (i.e., other direct costs and subcontracts) are cost reimbursable and are paid at cost (without profit).  A contract-ceiling price is established at award.

Commercial Contracts. Commercial contracts may be Firm-Fixed-Price or Time & Materials type contracts.  In certain situations, commercial customers may establish a Basic Ordering Agreement with fixed labor rates.  The actual labor categories and number of hours are separately negotiated for each order under a BOA.  FFP contracts include firm specifications on hardware deliverables.  Sometimes schedule penalties are included in a contract to provide an incentive for your company to maintain project schedule.

Warranties. Usually a 1 or 2-year replacement warranty is the minimum.  Warranty reserves may need to be set up to cover the cost of replacements and provide product support.

Risk. Commercial contracts are inherently more risky while also offering potentially higher profit margins.  Risk is not bad, but it must be understood and mitigated.  Backup or Contingency plans are essential in successfully dealing with risk.  Also, the higher the risk the more the need to make sure management understands the contract.

Intellectual Property. If a customer pays for the development of a product, it is not unreasonable to provide the customer with some sort of exclusive sales rights for their specific components.  In general, your company maintains all ownership and other rights to the design.

Indemnification. If a component is designed by your company and the Intellectual Property rights reside with your company, customers will want your company to provide them with some sort of patent infringement protection from third party lawsuits. This is not unreasonable, but the cost risk should be capped at a value acceptable to business unit management. This typically means that the cost risk is limited to the value of the contract.

International Considerations. Proper and timely review of export licensing requirements is critical to your business. Export of technology, know-how, and hardware are a major concern in international contracts and even in domestic contracts with foreign national employment, VISAs, visitors, consultants, or access to programs. Your company may be involved in many areas and technologies that are controlled because of DOD and U.S. Government interests.

Export laws were enacted to control the flow of vital U.S. technology for national security purposes, implement foreign policy, control U.S. technology, and to halt the proliferation of weapons of mass destruction.

The Department of State (DOS) is charged with controlling exports and defense services under the International Traffic in Arms Regulations (ITAR), which contains the U.S. Munitions List (USML).  The ITAR restricts the export of USML articles and services that may be used for military applications.  The Department of Commerce (DOC) implements and enforces the Export

Administration Regulations (EAR), which contains the Commerce Control List.  The DOC administers the export of commercial and dual use items, and their associated software and technical data.

In some cases, exports governed by the EAR require prior written assurances from the foreign customer that the export not be further released to other countries.  Specific statements may also be required on the shipping documents.  The use of exemptions may require written reporting.  The following activities, if conducted prior to obtaining DOS and/or DOC approval, could constitute a violation of a U.S. Law:

  • Talking to or emailing a foreign person – here in the U.S. or overseas – about data/technology.
  • Permitting access or conducting a plant tour through sensitive areas (areas that are not necessarily classified) showing manufacturing know-how.
  • Carrying technical documents (or memory device) on a business trip overseas.
  • Shipping parts, components or hardware.

The key steps are to: identify what is an export; determine when the export may/will take place; if there are any foreign national issues, and take adequate measures to obtain advance approval from the DOS or DOC.

– Mike Lisagor


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