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Describing Contract Type: Watch What You Say

Posted by Don Mansfield, 22 December 2010 · 5,657 views

Consider the following exchange between two people:

QUOTE
Speaker 1 (asking Speaker 2): What type of car do you drive, foreign or domestic?
Speaker 2: I drive a red car.


Obviously, Speaker 2?s answer is not responsive to Speaker 1?s question. Speaker 1 wanted to know about a particular aspect of Speaker 2?s car?its origin. Speaker 2 described a different aspect of his car?its color. While Speaker 2?s statement about the color of his car may be true, it doesn?t tell us anything about the origin of his car.

Easy enough, right? Ok, let?s try another one. Consider the following exchange between two contract specialists:

QUOTE
Contract Specialist 1: Is Contract X a fixed-price or cost-reimbursement contract?
Contract Specialist 2: Contract X is an indefinite delivery contract.


Is Contract Specialist 2?s answer responsive to Contract Specialist 1?s question? No, the answer is no more responsive to the question than Speaker 2?s answer was to the question of whether his car was foreign or domestic. Why? In this exchange, Contract Specialist 1 wanted to know about a particular aspect of Contract X?its compensation arrangement. Contract Specialist 2 described a different aspect of Contract X?its delivery arrangement. While Contract Specialist 2?s statement about the delivery arrangement of Contract X may be true, it doesn?t tell us anything about the compensation arrangement of Contract X.

Make sense? If so, see if you can spot anything wrong with the following passage of an article on contract types that recently appeared in the December 2010 issue of Contract Management (see Government Contract Types: The U.S. Government?s Use of Different Contract Vehicles to Acquire Goods, Services, and Construction by Brian A. Darst and Mark K. Roberts):

QUOTE
FAR Subparts 16.2 through 16.6 describe 11 different permissible contract vehicles. These vehicles can be subdivided into three different families:
? Fixed-price contracts,
? Cost-reimbursement contracts, and
? Other contract vehicles that can be used when the quantity of supplies or services cannot be determined at the time of award (i.e., indefinite delivery, time-and-materials (T&M), labor-hour (LH), and level-of-effort contracts) or where it is necessary for the contractor to begin performance before the terms and conditions of the contracts can be negotiated (i.e., letter contracts).


Do you see anything wrong? Notice that the first two ?families? are categorized by compensation arrangement. However, the third family contains a mix of terms used to describe compensation arrangement (T&M/LH), delivery arrangement (indefinite delivery), the extent of contractor commitment (level-of-effort), and a unique term used to describe a contract that is not definitive (letter contract). The way this passage is written implies that an indefinite delivery contract, a level-of-effort contract, and a letter contract are necessarily different (belong to a different "family") from a fixed-price or cost reimbursement contract. However, an indefinite delivery contract or a level-of-effort contract will have a compensation arrangement. The compensation arrangement can be fixed-price, cost-reimbursement, T&M/LH, or some combination thereof. A letter contract may or may not have a compensation arrangement when it is issued. You could conceivably have a letter contract that had a cost-reimbursement compensation arrangement, an indefinite delivery arrangement, and that provided for level-of-effort orders. As such, the authors? categorization of contract types makes as much sense as categorizing cars into three families?foreign, domestic, and red.

Incentive Contracts?Not What You Think They Are

Consider the following simplified description of a compensation arrangement:

QUOTE
The buyer agrees to pay the seller $100,000 to provide a specified quantity of medical transcription services. If the accuracy of the transcriptions exceeds 99%, the buyer agrees to pay the seller an additional $5,000.


Does the preceding describe an incentive contract? Many would say yes, because the arrangement provides for an incentive?specifically, a performance incentive. However, that would be incorrect. Just because a contract contains an incentive does not mean that it is an incentive contract. FAR 16.202-1 contains the following statements in a description of firm-fixed-price contracts (similar statements pertaining to fixed-price contracts with economic price adjustment can be found at FAR 16.203-1(b)):

QUOTE
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.


[Bold added].

Further, FAR 16.402-1(a) states:

QUOTE
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).


Thus, it?s not enough for a contract to contain an incentive to be an incentive contract. It must contain a cost incentive (or constraint).

In the aforementioned Contract Management article, an endnote references FAR 37.601(b)(3) and misinterprets this paragraph as ?encouraging the use of incentive-type contracts where appropriate.? Here?s what FAR 37.601(b)(3) actually says:

QUOTE
Performance-based contracts for services shall include? [?]
(3) Performance incentives where appropriate. When used, the performance incentives shall correspond to the performance standards set forth in the contract (see 16.402-2).


The authors have made the mistake of assuming that a contract that contained a performance incentive was necessarily an incentive contract. In fact, when acquiring services FAR 37.102(a)(2) states the following order of precedence:

QUOTE
(i) A firm-fixed price performance-based contract or task order.
(ii) A performance-based contract or task order that is not firm-fixed price.
(iii) A contract or task order that is not performance-based.


As shown above, a firm-fixed-price contract would take precedence over an incentive contract.

A Genuine Misunderstanding

In a discussion of additional contract types and agreements, the Contract Management article contained the following statement (which caused me to stop reading and start writing):

QUOTE
T&M and LH contracts are varieties of indefinite-delivery contracts and provide procuring agencies with the flexibility to acquire recurring services or when the amount of the effort required to deliver an end-item is uncertain.


Huh? T&M/LH is a type of indefinite delivery contract? I?ll let you readers ponder that one.

The article concludes with a plug for the authors? two-day course in, you guessed it, types of contracts. I will pass.





So so true. Drives me nuts when people use terms interchangeably that are not interchangeable - such as "ceiling" and "funding". The background discussion for DFARS
Case 2009-D036 was another prime example - mixing terms like task order and contract and my personal favorite, sole-source and single source.
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woops55:

Mixing terms like task order and contract? Why does that drive you nuts? A task order is a contract, as contract is defined in FAR 2.101:

QUOTE
?Contract? means a mutually binding legal relationship obligating the seller to furnish the supplies or services (including construction) and the buyer to pay for them. It includes all types of commitments that obligate the Government to an expenditure of appropriated funds and that, except as otherwise authorized, are in writing. In addition to bilateral instruments, contracts include (but are not limited to) awards and notices of awards; job orders or task letters issued under basic ordering agreements; letter contracts; orders, such as purchase orders, under which the contract becomes effective by written acceptance or performance; and bilateral contract modifications. Contracts do not include grants and cooperative agreements covered by 31 U.S.C. 6301, et seq. For discussion of various types of contracts, see Part 16.

Emphasis added.

And what do you think is the difference between sole source and single source? Sole source is defined in FAR 2.101, but single source is not defined anywhere in the FAR system (Title 48 of the CFR). The term "single source" appears only seven times in FAR and not in any current agency FAR supplement. It could mean anything, depending on how it is used. The way it is used in a couple of places in FAR is consistent with the definition of sole source. See, for example, 13.106-1( c) and 18.110. So why does the conflation of the terms bother you?
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Vern -
I agree that a Task Order is a contract but there are places in the FAR, specifically 16.504 where the two terms have very distinct meanings and some folks want to use them interchangeably. I do assisted acquisitions and have had the conversation multiple times that yes you can award a single TO for over $100M without getting head of agency approval because the multiple award preference paragraph is referring to the IDIQ, not the task orders under the IDIQ.
As for the other, I meant to state sole-source versus single award. Sorry for the confusion. In the background of the DFARS case I cited, the write-up referred several times to a prohibition on sole-source IDIQs when they really meant single award IDIQs. Guess I should have read what I wrote more carefully to ensure it said what I meant. cool.gif
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I am not in favor of mis-educating people who need to know the details and get them correct. The thing is, I don't believe Contract Management is the place to get the details correct. (Maybe it should be.)

The magazine has a wide circulation that includes commercial contract managers, subcontract managers, and many others. Perhaps the authors have provided sufficient education for those others? Maybe there is some learning to be had, even though some of the details are not correct?

Don't get me wrong, I'm not defending them. (And yes, I know both authors personally.) Wrong is wrong. When you hold yourself out as an expert, you need to get the details correct. And clearly they didn't.

But, seriously. What did you expect? It's Contract Management.
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The problem for Contract Management is that it is forced to rely on articles by consultants because it cannot get enough decent articles from people in contracting jobs, e.g., 1102s and their industry counterparts. Look over the tables of contents of a few issues and you'll see that articles from working practitioners are rare. In some ways, the magazine has become a forum for selling consulting services and spreading acquisition propaganda. It is not a scholarly journal.

The magazines editors are not themselves subject matter experts and can't critique the articles they receive on technical bases. The thing to do is write to Contract Management and point out the errors in the article. I think the magazine is pretty conscientious about publishing corrections.

It does no good to complain about Contract Management if you won't contribute articles. NCMA members should improve the quality of their publication by contributing.
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Vern,

I see nothing in your words to disagree with. Too many CM articles are too clearly sales jobs.

Not sure if your final sentence was directed at me, or not. In case it was, let me say that I've contributed more than a handful of articles to CM in the past decade--one in the past 12 months. (Not under the name "Here_2_Help" obviously.) I hope I got the details correct.

When I write for CM I try to keep in the back of my mind that not all readers are FAR/DFARS experts. That's why my articles usually have extensive footnotes. The footnotes are for those (few) who want the details and the exact citations.

Again, Don is correct. Brian and Mark should have done better.

Happy New Year to all.
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Help:

It was not directed at you. But I do prod Don to write more. He's a good writer when he gets around to it and has had a couple of guest articles in The Nash & Cibinic Report. I wish he'd write for CM.

Anyway, in the spirit of putting my money where my mouth is, I just sent something to CM. We'll see if they accept it for publication.
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I didn't intend to criticize CM--they are just providing a forum for others to speak. Sometimes their articles are actually quite good. The Legal Forum, written by Jack Horan, is usually worth the price of the issue. The article on contract types wasn't all that bad--the authors are just confused on some technical points. I've read CM articles that are so bad that I wouldn't know where to begin a critique.
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I agree that CM provides a great forum, and also agree that experienced contracting professionals should contribute articles. Training for contract types as compensation arrangements needs to also include training in corresponding payment clauses. For example, I know of some people in our profession that issue types of contracts with express payment arrangement language that is in fact administered as another type of contract. Call it a Ford, but it is a Chevrolet under the hood.
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Also terms such as experience vice tangible evidentiary evidence, see it in black and white!!! The human memory is arguably the most unreliable and flawed thing in the world. But we continue to do the easy thing by asking our perceivably more experience colleagues on what to do in a situation, rather than perform the time consuming activity of research. What if the person has a flawed memory, what if the person has been doing it wrong for all of these years? If the person is truly correct than they can show evidentiary proof of their course of action. If not do your own research, you will likely learn more than you bargain for…
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