Just as with my Quick Hitters on the FAR and GSAR, my Quick Hitter series on the DFARS is meant to simplify contracting business with the government. This time with DoD.
DFARS 216.104 Selecting Contract Types
This subpart is being explained through an in-house document entitled, “Guidance On Using Incentive And Other Contract Types” from March 2016.
The contracting professional as well as the vendor must be well trained and well experienced as to the nuances of contracting to select the contract type best for their vision for the project. Please keep in mind that this particular term is indeed negotiable.
A successful selection of contract type balances risk for both the government and the firm. Research by DoD illustrates that cost-plus-incentive-fee and firm-price-incentive-firm-target achieve this goal the best for them.
Pricing and contract type go hand in hand. Thus vendor compensation is derived from contract types, pricing and financing which is dependent upon federal appropriations. Such motivates the contractor to perform both in a well organized manner as well as businesswise.
Contract Performance Risk
Risks must be discerned and diminished to the best of the government’s ability. The CO is able to fulfill this responsibility by drafting a clear performance or work statement, project complexity, performance uncertainty, availability of historical and current cost and pricing data, past performance, the contractor’s responsibility concerning technique as well as finances and any possibilities concerning subcontracting. Time, which includes historical events as well as a current working business partnership plays an important role in risk mitigation.
Market Risk
Each unique market sector possesses its own volatilities. Time enhances such volatilities. Cost and shortage are just two examples of such volatility.
FAR 16.104
COs are expected to analyze the following when selecting contract types, but are not limited to; type of requirement, complexity of the purchase, urgency of the buy, POP and/ run, technical capability, financial responsibility, concurrent contracts, subcontracting possibilities, acquisition history, price competition, availability of cost and pricing data to determine fair and reasonable price as well as cost uncertainties and also the contract risk for all involved parties.
Uncertainties In Performance
COs are to gauge potential pitfalls in each project. Cost functions accompanied by incentivized bench-markers mitigate many contract performance unpredictabilities. Uncertainties include lack of availability of historical cost and pricing data, vague nature of the SOW, PWS or SOO, deviation from plant forecast from the time of negotiations, program or design changes following negotiations and plant malfunctions during test or production phases. Complexity is derived from the number of required skills. Cost and contract uncertainties arrive from unstable design obtained from a lack of historical trend or reasonable design.
Contract Types
They span from firm-fixed-price to cost-plus-fixed-fee. The former puts all the risk on the contractor to perform while the latter places minimal risk on the contractor as they get paid regardless of performance. The FAR lists contract types, and allows each CO the liberty to be creative. Keep in mind that negotiation skills are what seals the deal and not creativity concerning the contract type. Such advice is privy to both sides of the negotiation table and all parties involved. That being said, hybrid contracts can be a legitimate advantage to both the contractor and the government.
Firm-fixed-price contracts are arguably the safest type for all parties because all parties involved know what’s expected and how much it is going to cost. An example of such is the purchase of a mass produced commercial good. Whereas a pure cost contract allows the contractor to submit invoice(s) for proper payment and receives no fee from the government for their time and effort. An example of this type of agreement is academic research by an educational institution for government matters.
My work experience within the VA’s FSS program is in firm-fixed-price contracts. My training and simulations at the VA Acquisition Academy covered the rest. I am equipped with the knowledge and skills to assist your company in navigating this seemingly complex but essential portion of your contract negotiation.
If you think I can help you then email nicholas.s.robertson@outlook.com for your introductory email and free consultation. 
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