It is crucial to understand the types of government contracts in federal contracting because different types can create different remedies. The various types of government contracts impact your financial implications and work responsibilities and performance in numerous ways. You want to make sure you understand what type of contract you are entering into.
Common Types of Government Contracts
The Federal Acquisition Regulation (“FAR”) specifies the wide variety of types of contracts. The contracts can be broken down into six main categories:
- Fixed-Price Contracts
- Cost-Reimbursement Contracts
- Incentive Contracts
- Indefinite-Delivery Contracts
- Time and Materials, Labor-Hour, and Letter Contracts
Within each category there are various forms of these categories and types of government contracts.
While the contract type is a matter for negotiation, it is up ultimately to the Contracting Officer to decide which contract type to use. FAR 16.104.
However, FAR 16.104(a) states that a fixed-price contract is ordinarily in the Government’s [best] interest.” This is because this type of contract is usually the most economically valuable to the government, as the contractor bears the most risk. A firm-fixed price contract shall be used when the risk involved in the contract is either minimal or predictable to a reasonable degree of certainty.
Generally a fixed price contract is used when the government is acquiring commercial items. If a firm-fixed price contract cannot or should not be used, there must be an analysis of why another contract type is appropriate, including a detailed rationale, assessment, and discussion.
Cost-Reimbursement Types of Contracts
Arguably, the government will want to avoid cost-reimbursement contracts at all costs. In a cost-reimbursement contract, the government incurs costs risks and has to manage the contractor’s costs. A cost-reimbursement contract should be used only when fixed-price is not appropriate, costs cannot be estimated with sufficient accuracy, and it is approved by someone at least one level above the contracting officer.
Incentive contracts are appropriate when a fixed-price is not and the requires supplies or services can be acquired at lower costs and often with improved delivery or technical performance.
Indefinite delivery contracts are appropriate when the exact times and/or quantities of future deliveries are not known at the time of contract award.
Time and Materials, Labor-Hour, and Letter Contracts
In addition to the basic approval procedures, a time and materials contract may be used only if it is approved by the head of contracting activity and the contract includes a ceiling price that the contractor assumes their own risk for going above.
A labor-hour contract is a form of a time and materials contract and used when the materials are not supplied by the contractor.
A letter contract authorizes a contractor to immediately begin work. This type of government contract is appropriate when it is in the government’s best interest to have the contractor begin work immediately and negotiating a definitive contract is not possible in the time period. A contract letter will include an overall ceiling price. See information about contracting by negotiation.
There are two types of contracts: basic agreements and basic ordering agreements. Both are not contracts, but rather, agreements.
A basic agreement should be used when a substantial number of separate contracts may be awarded to a contractor during a particular period and significant negotiating problems have been experienced with the contractor. It can also be used in conjunction with negotiation fixed-price or cost-reimbursement contracts.
Basic ordering agreements may be used to expedite contracting for certain requirements not known when the agreement is executed. A basic ordering agreement does not imply any government agreement to place future contracts or orders.
It is extremely important to understand the various types of government contracts before entering into an agreement with the federal government. This can help avoid possible litigation and future costs. Call our government contract lawyers today, 1-866-601-5518.