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Why are there types of contracts? (FFP, T&M, etc)


Swampdonkey

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I was hoping there was a newbie forum where I could appropriately post this question...I apologize if it's silly.

I have been wondering this though, why does the government categorize contracts into types? I ask because when I'm negotiating contracts with other companies unrelated to the Government Contracting industry, contracts are never categorized. For example, Acme Inc. comes in to do a top-to-bottom HR review and we pay them $100k for a report. It's not identified as an FFP type contract. We pay Acme Inc. to do some consulting work and it's not identified as a T&M contract, it's just a flat hourly fee.

I've asked experienced Government Contracts attorneys and only received, "because that's how it's done responses." I've also done my own research and found nothing. My best guess is that it has something to do with efficiency and standardization.

Thank you in advance for any replies.

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That's actually a thoughtful question--not a silly one. I don't know if I can fully answer your question, but I think I can do better than "because that's how it's done."

Terms like "firm-fixed-price", "time-and-materials", "cost-plus-fixed-fee", etc., are used to describe a particular attribute of a contract--the cost or pricing arrangement. The risk assumed by the buyer differs depending on the contract's cost or pricing arrangement. For purposes of regulation, it's helpful to categorize contracts by cost or pricing arrangements because different sets of policies, procedures, clauses, etc. can be written for each type. For example, the Government requires higher-level approvals before using T&M contracts, but not for FFP contracts. The inspection clause in a fixed-price contract requires the contractor to correct defects discovered before acceptance at no increase in contract price, whereas the inspection clause in a cost-reimbursement contract would generally permit the contractor to get reimbursed for the cost of correcting defects. There are lots of other examples.

Categorizing contract types by cost or pricing arrangement is an important convention in Government contracting, particularly for the application of regulations, but it may be trivial in other circumstances (i.e., commercial transactions with Acme).

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Guest Vern Edwards

I have been wondering this though, why does the government categorize contracts into types?

I'm not sure that I understand the question. Swampdonkey, are you asking (a) why does the government use a variety of pricing arrangements, or are you asking ( b ) why does the government group the various arrangements into categories to which it gives names like "firm-fixed-price" and "time-and-materials"? I think you are asking ( b ), but I would like to be sure.

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Guest Vern Edwards

For purposes of administrative and legal efficiency and consistency, the government uses standard ("boilerplate") contract clauses in its contracts.

The government uses different pricing arrangements in order to allocate cost risk. Arrangements with similar characteristics are categorized into "types," and so we have the fixed-price, cost-reimbursement, time-and-materials, and other "types." The government also categorizes contracts by "kind", e.g., supply, service, research and development, construction, etc. Clauses have been written that are suitable for each of the various type/kind combinations, e.g., fixed-price supply and cost-reimbursement R&D, etc.

When the time comes for a CO to select the clauses for a prospective contract, he or she categorizes the contract by "type" and "kind", and then complies with FAR "prescriptions" in order to choose the appropriate boilerplate clauses. Presumably, this "boilerplate" system saves time and money and increases textual consistency and legal predictability

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To what Don and Vern said, take a look at the FAR clause matrix in 52.3. That illustrates clauses applicable to various contract types.

Although it doesn't happen frequently now, negotiation of contract types often used to be an issue. It ranges from firm fixed price where essential risk of performance rests with the contractor to cost reimbursement where the government assumes the bulk of risk - essentially the contractor gets reimbursed for all the cost it incurs.

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