Not all government contracts are the same. Some place a greater financial and performance risk on the client and others on the contractor.
It’s extremely important to know the difference. Here is a very rough overview of this risk continuum.
- Cost-plus fixed fee – Kind of like investing in certificates of deposit. A lower known profit with no upside potential but minimal financial risk.
- Cost-plus award fee – Either some or all of the potential profit is awarded based on pre-defined performance criteria. A good deal for reliable companies – not so good for poor performers.
- Cost-plus incentive fee – Same protection from overruns but with performance based fee.
- Time and materials – Depending on how the contract is written, there is the potential for higher profit if you hire and manage to your negotiated labor rates. The opposite is also true.
- Cost-plus with rate limits – Something for everyone and, if you ask some people, nothing for anybody!
- Firm-fixed price level of effort – Too many variables that can go wrong for labor contracts. Usually best to avoid these.
- Performance based – Not “officially” a contract type. But, very suitable when the government knows what it wants. When it doesn’t, this can be a nightmare. Hence it is higher on the risk spectrum.
- Fixed price deliverable – Depending on the product or service to be delivered, this isn’t necessarily that risky. But, it is particularly onerous for system development projects including commercial off-the-shelf software procurements that need considerable enhancements to meet the customer’s real, often unstated, requirements.
iMMIX Group has produced an excellent overview of the different contract types and their key differences in the following document: Contract type diagram (PDF)
– Mike Lisagor