16.103 Negotiating contract type
Source: FAR 16.103 on acquisition.gov
Contracting officers must carefully justify and document the selection of contract type, especially when using other than firm-fixed-price contracts, to ensure balanced risk and incentivized contractor performance.
Overview
FAR 16.103 outlines the principles and procedures for negotiating contract types in federal acquisitions. It emphasizes that selecting the contract type is a negotiation matter requiring sound judgment, closely tied to price negotiations. The goal is to balance contractor risk and incentivize efficient, economical performance. Firm-fixed-price contracts are preferred when risk is minimal or predictable, but other types may be used when firm pricing is not feasible. Contracting officers must document the rationale for the chosen contract type, especially when using other than firm-fixed-price contracts, detailing risks, government resource needs, and plans to transition to firmer pricing. Exceptions exist for certain simplified, firm-fixed-price, and small business set-aside contracts.
Key Rules
- Negotiation of Contract Type and Price
- Contract type and price should be negotiated together to balance risk and incentivize performance.
- Preference for Firm-Fixed-Price Contracts
- Use firm-fixed-price contracts when risk is low or predictable; otherwise, consider other types with appropriate profit incentives.
- Changing Contract Types
- Adjust contract type as circumstances change, avoiding prolonged use of cost-reimbursement or time-and-materials contracts when firmer pricing becomes feasible.
- Documentation Requirements
- Contract files must document the rationale for contract type selection, including risk analysis, resource needs, and transition plans for non-firm-fixed-price contracts.
- Exceptions
- Certain acquisitions (simplified, non-major system firm-fixed-price, and small business set-aside portions) are exempt from detailed documentation requirements.
Responsibilities
- Contracting Officers: Must exercise judgment in selecting contract type, negotiate type and price together, document rationale and risk, and plan for transition to firmer pricing when possible.
- Contractors: Should be prepared to discuss risk, pricing, and performance incentives during negotiations.
- Agencies: Must ensure oversight, adequate resources, and compliance with documentation and transition planning requirements.
Practical Implications
- This section ensures contract types are chosen thoughtfully to manage risk and incentivize performance, not just by default. It requires thorough documentation and planning, especially for non-firm-fixed-price contracts, and encourages transitioning to firmer pricing as soon as feasible. Common pitfalls include inadequate documentation, failure to reassess contract type as circumstances change, and insufficient planning for government resource needs.
(a) Selecting the contract type is generally a matter for negotiation and requires the exercise of sound judgment. 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.
(b) A firm-fixed-price contract, which best utilizes the basic profit motive of business enterprise, shall be used when the risk involved is minimal or can be predicted with an acceptable degree of certainty. However, when a reasonable basis for firm pricing does not exist, other contract types should be considered, and negotiations should be directed toward selecting a contract type (or combination of types) that will appropriately tie profit to contractor performance.
(c) In the course of an acquisition program, a series of contracts, or a single long-term contract, changing circumstances may make a different contract type appropriate in later periods than that used at the outset. In particular, contracting officers should avoid protracted use of a cost-reimbursement or time-and-materials contract after experience provides a basis for firmer pricing.
(d)
(1) Each contract file shall include documentation to show why the particular contract type was selected. This shall be documented in the acquisition plan, or in the contract file if a written acquisition plan is not required by agency procedures.
(i) Explain why the contract type selected must be used to meet the agency need.
(ii) Discuss the Government’s additional risks and the burden to manage the contract type selected (e.g., when a cost-reimbursement contract is selected, the Government incurs additional cost risks, and the Government has the additional burden of managing the contractor’s costs). For such instances, acquisition personnel shall discuss –
(A) How the Government identified the additional risks (e.g., pre-award survey, or past performance information);
(B) The nature of the additional risks (e.g., inadequate contractor’s accounting system, weaknesses in contractor's internal control, non-compliance with Cost Accounting Standards, or lack of or inadequate earned value management system); and
(C) How the Government will manage and mitigate the risks.
(iii) Discuss the Government resources necessary to properly plan for, award, and administer the contract type selected (e.g., resources needed and the additional risks to the Government if adequate resources are not provided).
(iv) For other than a firm-fixed price contract, at a minimum the documentation should include –
(A) An analysis of why the use of other than a firm-fixed-price contract (e.g., cost reimbursement, time and materials, labor hour) is appropriate;
(B) Rationale that detail the particular facts and circumstances (e.g., complexity of the requirements, uncertain duration of the work, contractor’s technical capability and financial responsibility, or adequacy of the contractor’s accounting system), and associated reasoning essential to support the contract type selection;
(C) An assessment regarding the adequacy of Government resources that are necessary to properly plan for, award, and administer other than firm-fixed-price contracts; and
(D) A discussion of the actions planned to minimize the use of other than firm-fixed-price contracts on future acquisitions for the same requirement and to transition to firm-fixed-price contracts to the maximum extent practicable.
(v) A discussion of why a level-of-effort, price redetermination, or fee provision was included.
(2) Exceptions to the requirements at (d)(1) of this section are –
(i) Fixed-price acquisitions made under simplified acquisition procedures;
(ii) Contracts on a firm-fixed-price basis other than those for major systems or research and development; and
(iii) Awards on the set-aside portion of sealed bid partial set-asides for small business.