16.104 Factors in selecting contract types
Source: FAR 16.104 on acquisition.gov
Contracting officers must holistically evaluate multiple factors—including price, risk, contractor capability, and requirement complexity—when selecting the most appropriate contract type to balance risk and ensure effective contract performance.
Overview
FAR 16.104 outlines the key factors that contracting officers must consider when selecting and negotiating contract types. The regulation emphasizes that no single factor is determinative; rather, a holistic assessment is required to ensure the contract type aligns with the Government’s interests and the specific procurement situation. Factors include price competition, price and cost analysis, requirement complexity, urgency, period of performance, contractor capability, accounting system adequacy, concurrent contracts, subcontracting, and acquisition history. The goal is to balance risk between the Government and contractor, promote realistic pricing, and ensure effective contract performance.
Key Rules
- Price Competition and Analysis
- Effective price competition and thorough price analysis support the use of fixed-price contracts and realistic pricing.
- Cost Analysis and Risk Assessment
- In the absence of competition, cost analysis and identification of performance uncertainties are essential for selecting an appropriate contract type.
- Requirement Complexity and Recurrence
- Complex or unique requirements may warrant greater Government risk, but as requirements become routine, risk should shift to the contractor.
- Combining Contract Types
- Consider firm-fixed-price for portions of the contract when possible.
- Urgency and Performance Period
- Urgent requirements or long performance periods may require special contract provisions or incentives.
- Contractor Capability and Accounting System
- Ensure the contractor’s technical, financial, and accounting systems are adequate for the proposed contract type.
- Subcontracting and Acquisition History
- Extensive subcontracting and repetitive acquisitions affect contract type selection and risk allocation.
Responsibilities
- Contracting Officers: Must evaluate all listed factors, document rationale for contract type selection, and ensure contractor systems are adequate for the chosen contract type.
- Contractors: Should be prepared to demonstrate technical capability, financial responsibility, and adequacy of accounting systems.
- Agencies: Oversee compliance with contract type selection procedures and ensure risk is appropriately allocated.
Practical Implications
- This section ensures contract types are chosen based on a comprehensive risk and capability assessment, not just price.
- It impacts daily contracting by requiring thorough documentation and justification for contract type decisions.
- Common pitfalls include inadequate analysis of contractor systems, failure to consider acquisition history, or overlooking the impact of subcontracting.
There are many factors that the contracting officer should consider in selecting and negotiating the contract type. They include the following:
(a) Price competition. Normally, effective price competition results in realistic pricing, and a fixed-price contract is ordinarily in the Government’s interest.
(b) Price analysis. Price analysis, with or without competition, may provide a basis for selecting the contract type. The degree to which price analysis can provide a realistic pricing standard should be carefully considered. (See 15.404-1(b).)
(c) Cost analysis. In the absence of effective price competition and if price analysis is not sufficient, the cost estimates of the offeror and the Government provide the bases for negotiating contract pricing arrangements. It is essential that the uncertainties involved in performance and their possible impact upon costs be identified and evaluated, so that a contract type that places a reasonable degree of cost responsibility upon the contractor can be negotiated.
(d) Type and complexity of the requirement. Complex requirements, particularly those unique to the Government, usually result in greater risk assumption by the Government. This is especially true for complex research and development contracts, when performance uncertainties or the likelihood of changes makes it difficult to estimate performance costs in advance. As a requirement recurs or as quantity production begins, the cost risk should shift to the contractor, and a fixed-price contract should be considered.
(e) Combining contract types. If the entire contract cannot be firm-fixed-price, the contracting officer shall consider whether or not a portion of the contract can be established on a firm-fixed-price basis.
(f) Urgency of the requirement. If urgency is a primary factor, the Government may choose to assume a greater proportion of risk or it may offer incentives tailored to performance outcomes to ensure timely contract performance.
(g) Period of performance or length of production run. In times of economic uncertainty, contracts extending over a relatively long period may require economic price adjustment or price redetermination clauses.
(h) Contractor’s technical capability and financial responsibility.
(i) Adequacy of the contractor's accounting system. Before agreeing on a contract type other than firm-fixed-price, the contracting officer shall ensure that the contractor’s accounting system will permit timely development of all necessary cost data in the form required by the proposed contract type. This factor may be critical–
(1) When the contract type requires price revision while performance is in progress; or
(2) When a cost-reimbursement contract is being considered and all current or past experience with the contractor has been on a fixed-price basis. See 42.302(a)(12).
(j) Concurrent contracts. If performance under the proposed contract involves concurrent operations under other contracts, the impact of those contracts, including their pricing arrangements, should be considered.
(k) Extent and nature of proposed subcontracting. If the contractor proposes extensive subcontracting, a contract type reflecting the actual risks to the prime contractor should be selected.
(l) Acquisition history. Contractor risk usually decreases as the requirement is repetitively acquired. Also, product descriptions or descriptions of services to be performed can be defined more clearly.