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Types of Contracts

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Standard Operating Procedure Table of Contents

Purpose

To provide a description of the types of contracts that may be used and guidance for selecting a contract type that is appropriate to the circumstances of the acquisition.

Procedure

The contracting officer’s representative (COR) makes recommendations to the contracting officer (CO) to help determine the appropriate contract type. However, the CO is ultimately responsible for selecting the contract type.

The contract type selected significantly affects acquisition planning and contract administration and, therefore, must be done carefully, beginning with a precise description of the work.

The contract type selected must be stated in the acquisition plan. The contract type also must be subsequently stated in the solicitation; however, it may change before award based on negotiations with offerors. FAR 16.102 details policies that apply to selecting the contract type and FAR 16.104 details the factors that should be considered in selecting and negotiating the appropriate contract type.

Negotiating the contract type and negotiating prices are closely related and should be considered together. The objective is to negotiate a contract type and price (or estimated cost and fee) that will result in reasonable contractor risk and provide the contractor with the greatest incentive for efficient and economical performance (see FAR 16.103).

A wide selection of contract types is available to the government and contractors in order to provide needed flexibility in acquiring the large variety and volume of supplies and services required. Contract types vary according to both of the following:

  • The degree and timing of the responsibility assumed by the contractor for the costs of performance.
  • The amount and nature of the profit incentive offered to the contractor for achieving or exceeding specified standards or goals.

Contract types are grouped into two broad categories: fixed-price (see FAR Subpart 16.2) and cost-reimbursement (see FAR Subpart 16.3).

The specific contract types range from firm-fixed-price, in which the contractor has full responsibility for the performance costs and resulting profit (or loss), to cost-plus-fixed-fee, in which the contractor has minimal responsibility for the performance costs and the negotiated fee (profit) is fixed. In between are the various incentive contracts (see FAR Subpart 16.4), in which the contractor’s responsibility for the performance costs and the profit or fee incentives offered are tailored to the uncertainties involved in contract performance.

Here are details on these two categories and subtypes:

  • Fixed-price contracts
    • Used to acquire commercial items, supplies, or services based on reasonably definite specifications.
    • Fixed price contracts give contractors the greatest incentive to control costs and perform effectively, while imposing the smallest administrative burden on both parties.
  • Cost reimbursement contracts
    • Used when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use a fixed-price contract.
    • While cost reimbursement type contracts are routinely used to procure biomedical R&D at NIAID, they are the least desirable contract type because contractors have minimal cost risk and, therefore, little incentive to control costs.
    • A cost-reimbursement contract may take one of two basic forms—completion or term.
      • The completion form describes the scope of work by stating a definite goal or target and specifying an end product.
        • This form of contract normally requires the contractor to complete and deliver the specified end product (e.g., a final report of research accomplishing the goal or target) within the estimated cost, if possible, as a condition for payment of the entire fixed fee.
        • However, in the event the work cannot be completed within the estimated cost, the government may require more effort without increase in fee, provided the government increases the estimated cost.
      • The term form describes the scope of work in general terms and obligates the contractor to devote a specified level of effort for a stated time period.
        • Under this form, if the performance is considered satisfactory by the government, the fixed fee is payable at the expiration of the agreed-upon period, upon contractor statement that the level of effort specified in the contract has been expended in performing the contract work.
        • Renewal for further periods of performance is a new acquisition that involves new cost and fee arrangements.
    • Because of the differences in obligation assumed by the contractor, the completion form is preferred over the term form whenever the work, or specific milestones for the work, can be defined well enough to permit development of estimates within which the contractor can be expected to complete the work.
    • The term form shall not be used unless the contractor is obligated by the contract to provide a specific level of effort within a definite time period.

Other types of contracts and acquisition methods include:

  • Indefinite-delivery contracts (see FAR Subpart 16.5)
    • There are three types of indefinite-delivery contracts: definite-quantity contracts, requirements contracts, and indefinite-quantity contracts.
    • The appropriate type of indefinite-delivery contract may be used to acquire supplies and/or services when the exact times and/or exact quantities of future deliveries are not known at the time of contract award.
    • Indefinite-delivery contracts provide for the issuance of orders for the delivery of supplies or the performance of tasks during the period of the contract.
  • Time-and-materials (see FAR 16.601) and labor-hour (see FAR 16.602)
    • A time-and-materials contract provides for acquiring supplies or services on the basis of direct labor hours at specified fixed hourly rates, which include wages, overhead, general and administrative expenses, and profit, and actual cost for materials.
    • A labor-hour contract is a variation of the time-and-materials contract, differing only in that materials are not supplied by the contractor.
  • Basic agreement and basic ordering agreements (see FAR Subpart 16.7)
    • A basic agreement is a written instrument of understanding, negotiated between an agency or contracting activity and a contractor, that contains contract clauses applying to future contracts between the parties during its term and contemplates separate future contracts that will incorporate by reference or attachment the required and applicable clauses agreed upon in the basic agreement.
    • A basic agreement is not a contract. A basic ordering agreement is a written instrument of understanding, negotiated between an agency, contracting activity, or contracting office and a contractor, that contains terms and clauses applying to future contracts (orders) between the parties during its term, a description, as specific as practicable, of supplies or services to be provided, and methods for pricing, issuing, and delivering future orders under the basic ordering agreement.
  • Letter contracts (see FAR 16.603)
    • A letter contract is a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services.
    • A letter contract may be used in extraordinary circumstances when the government’s interests demand that the contractor be given a binding commitment, so that work can start immediately, and negotiating a definitive contract is not possible in sufficient time to meet the requirement.
  • Performance-based contracts (see FAR Subpart 37.6)
    • Performance-based contracts are not a contract type, but an acquisition method where the requirements are described by either a performance work statement or a statement of objectives.
    • Performance-based contracts are used to ensure that contractors meet quality levels; payment relates to the degree that contract standards (i.e., in terms of quality, timeliness, quality, etc.) are met. These standards are measured through the use of quality assurance surveillance plans.
  • Interagency acquisitions under the Economy Act (see FAR Subpart 17.5)
    • An “interagency acquisition” is a procedure by which an agency needing supplies or services (the requesting agency) obtains them from another agency (the servicing agency).

Contracting Officer's Representative (COR)

  • Make recommendations to help the contracting officer determine the appropriate contract type.

Contracting Officer

  • Review the contracting officer's representative's (COR) recommendations.
  • Select the contract type.

Contacts

See the Office of Acquisitions staff listing for the appropriate contract specialist.

If you have knowledge to share or want more information on this topic, email deaweb@niaid.nih.gov with the title of this page or its URL and your question or comment. Thanks for helping us clarify and expand our knowledge base.

Links

FAR Part 16, Types of Contracts

FAR Part 17, Special Contracting Methods

FAR Part 37.6, Performance-Based Contracting

NIH Manual Issuance 1165, Agency Agreements

NIH Manual Issuance 6016-2, Task and Delivery Order Contracting

OFPP Guidance for Improving the Management and Use of Interagency Acquisitions (June 6, 2008)

Lock icon: This link will not work for public visitors.Reviewing and Clearing Inter-Agency Agreements

Last Updated May 23, 2012

Last Reviewed September 17, 2014