Federal agencies award different types of government contracts worth billions of dollars every year to businesses. Spanning thousands of categories, the government’s needs are too complex to be handled by one type of contract with its suppliers. So, the federal government has developed different types of contracts to find the best companies to fulfill its needs and receive the best value for its (our) money.
The government categorizes the providers of its goods and services as prime contractors and subcontractors. Prime contractors have large and/or specific obligations in contracts with the government. Subcontractors commit to prime contractors to support them as they fulfill the contractual requirements. In this article, we will look at the different types of contracts they form with the federal government.
What is a government contract?
There are two basic types of government contracts that commit a business to work with the federal government: the fixed-price contract and the cost-reimbursement contract. The two types and their many subsets are structured to address different compensation arrangements, incentives, types of work, and degrees of risk borne by the government and the contractor.
The Federal Acquisition Regulation System outlines more than a dozen different kinds of contracts to be used. (FAR) Part 16. Let’s get into the weeds on these contract types.
The fixed-price contract
In this arrangement, a contractor agrees to provide a product/service at a price that is not to exceed a certain amount. This type of contract is exceedingly common with federal agencies as well as state and local governments. It serves well for procurement of goods and common services but would present a higher risk if used for conceptual services and research.
The variations allowed in the regulations include:
- Firm-fixed-price level of effort/term
- Firm-fixed-price materials reimbursement
- Fixed-price with award fees
- Fixed-price with economic price adjustment
- Fixed-price incentive
- Fixed-price prospective price redetermination
- Fixed-ceiling-price with retroactive price redetermination
The subsets provide flexibility in fixed-price contracts to allow for defined ceiling prices, target pricing, and adjustable pricing.
Cost-reimbursement, or cost-plus, contracts
A cost-reimbursement contract can be used when circumstances do not allow the agency to determine costs as it could in a fixed-price scenario. This structure sets a spending limit for a contractor. If it goes over it, it will depend on approval from the contracting officer to be paid.
Administrative oversight is important here. In fact, a contractor can win one of these contracts only if its accounting system passes muster. The government wants the ability to monitor proper execution of the contract, check the accounting for costs and maintain long-term contract validity to the costs of doing business.
The five main subsets of cost-reimbursement contracts are:
- Cost-plus incentive fee
- Cost-plus award fee
These contracts are often used when contractors are non-profit organizations, providers of educational services and research resources.
Incentive contracts provide flexibility on fixed-price and cost-reimbursement contracts. The head of the government contracting agency can approve awards and incentive fees for meeting performance and delivery goals. Multiple incentives can be built into a contract, but all non-incentivized aspects of the contract must be satisfied as well.
Indefinite-delivery, indefinite-quantity contracts (IDIQ)
The government uses IDIQ contracts when it can’t determine, above an agreed-upon minimum, how much of the supplies or services it will need during a given time. This mode saves time and money for the government by contracting for the service over several years, with an option for renewals. The government can contract with different agencies to do the same type of work, then compare and identify the best suppliers. This allows a streamlined approach for the government to find the best value without initiating several new contract review processes. Additionally, both specific-agency and agency-wide contracting are applicable within the Government Wide Acquisition Contracts (GWAC) system.
Job/task order contracts arrange for specific tasks to be performed during the duration of the contract. No definite quantities, other than a minimum/maximum, are established.
Delivery order contracts allow for ordering supplies without specifying a firm quantity but allowing an issue of orders for supplies within a maximum/minimum quantity guideline.
A requirement contract enables contractors to receive orders and purchase requirements for products and services from government activities. The contracting agency provides, on an informative basis, a reasonable assessment to the contractor of the maximum amounts of products or services that might be required during the course of the contract. Research should be done by the agency on the contractor’s most recent data on services and products supplied, and reasonable maximum/minimum levels set accordingly.
A definite delivery contract is appropriate when a specific quantity of supplies or services are known at the time of contract award and known to be readily available on short notice during the timeframe expressed in the contract.
Time-and-materials, labor-hours and letter contracts
These contracts provide for acquisition of supplies and services for direct labor hours at specific hourly rates.
When an accurate estimate of the extent of the materials required or duration of the work cannot be defined, a time-and-materials contract might be used for certain commercial services.
A labor-hour contract is a variation of time-and-materials in which the contract stipulates that the materials are not provided by the contractor.
A letter contract is a preliminary contractual instrument used when immediate production of supplies or performance of service is in the best interest of the government.
Small business categories
Another subset of contract categories stems from the government’s goal to award about 25% of its business to small businesses every year. The Small Business Administration helps connect businesses and government agencies so that the goal, worth billions of dollars, can be met. The three main categories of these contracts are set-aside contracts for small business, set-asides for government contracting programs, and joint ventures.
Set-aside for small business
Competitive set-aside contracts: Contracts under $150,000 that more than one company could perform.
Sole source set-aside contracts: If only one business can satisfy the requirements of a specific contract request, a sole-source contract can be pursued without a competitive bidding process. The business must register with the System for Award Management (SAM) and participate in any contracting program it qualifies for.
Set-aside for government contracting programs
Small businesses that meet certain socio-economic definitions may also bid for contracts in these SBA programs: Small Business, Woman Owned Small Business, Veteran Owned Small Business, Service-Disabled Veteran Owned Small Business, Minority Owned Small Business 8(a) program, and HUB (Historically Under-utilized Business) Zone.
If they have registered properly with the SBA, two or more small businesses can join together to fulfill a government contract as a joint venture. Joint ventures can also be used to gain access to other set-aside categories, such as Veteran or Women owned businesses, if one of the businesses qualifies in that category.
Additionally, there is an All Small Mentor-Protégé program, where a contractor seeking set-asides can team up with a large business in this sort of joint venture and compete for small business contracts. If the small business contractor qualifies for specific set-aside programs, those contracts are accessible also.
GovCon Wealth, a division of Cape Corrales, works with government contractors as they approach the end game of selling the business. GovCon Wealth’s motto is that exit planning is simply good business strategy.