Negotiating contract type
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.