Firm-Fixed-Price Contract with Award Fee

[Don Mansfield]

Consider the following passages from the FAR:

FAR 16.401(e): Award-fee contracts are a type of incentive contract.

FAR 16.402-1(a): Most incentive contracts include only cost incentives, which take the form of a profit or fee adjustment formula and are intended to motivate the contractor to effectively manage costs. No incentive contract may provide for other incentives without also providing a cost incentive (or constraint).

FAR 16.202-1: The contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive (see 16.404) and performance or delivery incentives (see 16.402-2 and 16.402-3) when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives.

FAR 16.401(a): Incentive contracts as described in this subpart are appropriate when a firm-fixed-price contract is not appropriate...

Is a firm-fixed-price contract with an award fee an incentive contract?

[formerfed]

Don,

Your last two FAR references answers the question. FAR 16.401(a) says "Incentive contracts as described in this subpart are appropriate when a firm-fixed-price contract is not appropriate..." so a firm-fixed-price contract is not an incentive contract. FAR 16.202-1 says "The contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive (see 16.404) and performance or delivery incentives (see 16.402-2 and 16.402-3) when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives." So an award fee provision does not alter the fact that you still have a firm-fixed-price contract.

In short, you have a firm-fixed-price contract with a provision that incentivizies performance in one or more desired and dedesignated aspects.

[Don Mansfield]

formerfed,

Thanks for your response. Would you agree, then, that a FFP contract with an award fee incentive is not an award fee contract? FAR 16.401(e) states that "Award fee contracts are a type of incentive contract."

Also, do you think that there is any difference between a FFP contract with an award fee incentive (as described at FAR 16.202-1) and a fixed-price contract with an award fee (as described at FAR 16.404)?

[formerfed]

Don,

Yes, I don't see a FFP contract with an award fee incentive as an incentive contract.

Also I think a FFP contract with an award fee incentive (as described at FAR 16.202-1) is the same as what is described at FAR 16.404. However the discussion at 16.202-1 is broader and includes performance and delivery incentives as well saying "The contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive (see 16.404) and performance or delivery incentives (see 16.402-2 and 16.402-3) when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives.

[Guest Vern Edwards]

Don is doing his socratic thing again.

An FFP contract with award fee is an incentive contract if for no other reason than the fact that it's described in FAR Subpart 16.4, Incentive Contracts. But you don't need a cost incentive with a firm-fixed-price contract with award fee, because the government is not exposed to cost risk. The price is "fixed." You need a cost incentive with the other incentive contracts because the government shares in the cost risk and the contractor may be able to optimize its profit or fee by overly emphasizing technical or schedule performance to the government's detriment.

The FAR language is, as if often the case, careless. But with a little thought there is no reason to find it confusing.

[Don Mansfield]

I think that there is a conflict that needs resolution. The interim rule on award-fee incentives requires compliance with FAR 16.401(e) (i.e., D&F) before award of an FPAF contract. However, I can see someone making the argument that a FFP contract with an award fee incentive is not an incentive contract because

1) The statement at FAR 16.202-1 that a FFP contract with an award-fee, performance, or delivery incentive "remains firm-fixed-price when used with these incentives";

2) FAR 16.401(a) distinguishes incentive contracts from FFP contracts: "Incentive contracts as described in this subpart are appropriate when a firm-fixed-price contract is not appropriate..."; and

3) FAR 16.402-1(a) requires an incentive contract to have a cost incentive, which a FFP contract with an award-fee incentive does not have.

I'm thinking of submitting a comment to the FAR Council to point this out, but I'm interested in knowing if other people see the conflict.

[Loul]

Don -

I do not agree with you when yousay a fixed price award fee contract is not an incentive contract.

True FAR 16.401(a) says (i)ncentive contracts as described in this subpart are appropriate when a firm-fixed-price contract is not appropriate. Hopwever, i believe in this case they are speaking of true FFP contracts, not hybred FFP/Award Fee Contracts.

FAR 14.404 is entitled Fixed-price contracts with award fees. 16.404(a)(1) says that in a fixed price contract with award fee "This price (the established fixed price) will be paid for satisfactory contract performance. Award fee earned (if any) will be paid in addition to that fixed price."

So, if the FAR part dealing with incentive contracts says there is a fixed price incentive contract, why do you say there is not?

[Don Mansfield]

Loul,

I didn't say that a fixed-price contract with an award fee was not an incentive contract. I said that there was a conflict within the FAR on this issue. FAR 16.202-1 clearly states that a FFP contract with an award-fee incentive is a FFP contract. Yet, FPAF contracts have there own section in FAR 16.4 under Incentive Contracts. I think that both formerfed's and Vern's interpretations are reasonable.

[Loul]

Don -

Sorry. I misread your comment. Please dock my award fee!

[Don Mansfield]

Don -

Sorry. I misread your comment. Please dock my award fee!

No need--you took appropriate corrective action.

[Don Mansfield]

Does a FPAF contract comply with the following requirement at FAR 16.402-1(a)?

No incentive contract may provide for other incentives without also providing a cost incentive (or constraint).

In other words, does an FPAF contract comply because it contains a cost constraint (i.e., the fixed-price)? Or do you read "constraint" to mean something different?

[joel hoffman]

Don, this has been covered above in that 16.202-1 exempts a fixed price contract with an award fee from including a cost constraint, as stated in your opening post under this thread.

FP Incentive and CP Incentive contracts are quite different than fixed price contracts that contain an award fee as a type of incentive for higher performance than just meeting the minimum requirements. I believe that the FPAF language is Johnny Come Lately, added later, but poorly integrated with FAR 16.4.

This language in FAR 16.402-1(a) was in the January 1996 FAR:

"Most incentive contracts include only cost incentives, which take the form of a profit or fee adjustment formula and are intended to motivate the contractor to effectively manage costs. No incentive contract may provide for other incentives without also providing a cost incentive (or constraint)."

This language was not in FAR 16.202-1 at that time: "The contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive (see 16.404) and performance or delivery incentives (see 16.402-2 and 16.402-3) when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives."

The FPAF language added to 16.202-1 apparently wasn't coordinated with the existing incentive contracts language above. The footnotes indicate that it was added by FAC 2001-13, effective 4/17/2003. I checked the FAC and it didn't describe the background for the added language.

[joel hoffman]

Don, this has been covered above in that 16.202-1 exempts a fixed price contract with an award fee from including a cost constraint, as stated in your opening post under this thread.

FP Incentive and CP Incentive contracts are quite different than fixed price contracts that contain an award fee as a type of incentive for higher performance than just meeting the minimum requirements. I believe that the FPAF language is Johnny Come Lately, added later, but poorly integrated with FAR 16.4.

This language in FAR 16.402-1(a) was in the January 1996 FAR:

"Most incentive contracts include only cost incentives, which take the form of a profit or fee adjustment formula and are intended to motivate the contractor to effectively manage costs. No incentive contract may provide for other incentives without also providing a cost incentive (or constraint)."

This language was not in FAR 16.202-1 at that time: "The contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive (see 16.404) and performance or delivery incentives (see 16.402-2 and 16.402-3) when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives."

The FPAF language added to 16.202-1 apparently wasn't coordinated with the existing incentive contracts language above. The footnotes indicate that it was added by FAC 2001-13, effective 4/17/2003. I checked the FAC and it didn't describe the background for the added language.

We used award fees on some large, very complex construction contracts back in the 1980's in my organization. This was before there was any FAR coverage for FFP with AF. Of course, our award fee criteria was based upon performance beyond the contract minimum requirements in the areas of safety, quality management, schedule management and general ability to overcome adversity and other problems in order to achieve a safe, high quality project, finished on time.