Has anyone used a firm-fixed-unit-price contract [see FAR 36.207(a) and ( b )] to buy services, commercial or noncommercial?

If so, what do you consider to be:

(1) the essential difference(s) between the two types,

(2) the criteria for use of one versus the other, and

(3) the pros and cons of one versus the other?

Yes.

To me, a fixed-unit-price (FUP) is a firm-fixed-price construct -- the price is fixed for each and every quantity, and the actual payment to the contractor is quantity x price for that quantity. We are buying and measuring quantity of actions, not labor hours.

For example, we might have a CLIN set up as follows--

---- ------------------------- --- ---- ---------- --------

ITEM DESCRIPTION QTY UNIT UNIT PRICE AMOUNT

---- ------------------------- --- ---- ---------- --------

001 FILE MAINTENANCE 12 MO $10,000 $120,000

. IAW PWS SECTION 4 FOR

. UP TO 1,200 TRANSACTIONS

. PER MONTH

002 ADDITIONAL TRANSACTIONS 400 EA $ 4 $ 1,600

. 1-400 ABOVE THE CLIN est

. 001 QUANTITY IN ANY

. MONTH

003 ADDITIONAL TRANSACTIONS 400 EA $ 2 $ 800

. 401-800 ABOVE THE CLIN est

. 001 QUANTITY IN ANY

. MONTH

There are other ways to set it up.

But no one measures the contractor's number of hours, so there is nothing approaching T&M.

(1) the essential difference(s) between the two types: this approach measures quantity of work, not labor hours.

(2) the criteria for use of one versus the other: this approach works if there is something measurable other than hours.

(3) the pros and cons of one versus the other: this approach is FFP.

What would be wrong with the unit being an hour?

I used a FFUP contract for several types of services outside of construction. The largest was for commercial information technology maintenance services (i.e. repair/replacement of laptops, servers, tape libraries, etc.). A few years ago, my agency had several maintenance contracts for information technology equipment; the agency paid a set-amount every month to guarantee that a technician would arrive onsite to repair damaged equipment. However, we analyzed the number of service calls that we made each year and found that because there were so few calls, we were paying an exorbitant amount per service call. We established a FFUP contract where the Contractor received a fixed amount per each service call resolved by drawing down from a Not to Exceed amount. As a result, we were able to reduce our maintenance spending by around 60-percent.

In response to your questions, the difference between a T&M contract and FFUP relates to the cost risk to perform a specific service. Under a T&M contract, the extent and duration of labor and material costs is unknown until the completion of work. However, under a FFUP contract, both the Contractor and the Government know the cost to perform the work at the onset; the duration of work required is known, just not the extent. A FFUP contract still carries cost risk, though, as the actual quantity required is unknown until contract completion. Both contract types include a ceiling price that the Contractor exceeds at its own risk.

The criteria for using a T&M contract is "when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence," FAR Subpart 16.601©. The FAR does not provide any criteria for when to use a FFUP contract, though some agency procedural regulations may provide guidance. If I were to establish a criteria for when to use a FFUP contract, it would be for requirements where services are clearly defined but the extent or quantity of work required is unknown, and there is a need to obligate the Contractor to perform work on-call.

In terms of pros and cons, a FFUP contract is coded as a FFP contract in FPDS. Agencies are required to reduce their high-risk contracts (sole source and non-FFP) as part of their Service Contract Inventory analysis, and a FFUP contract would further those goals. Moreover, the FFUP contract does not require any special determination and findings that no other contract type is suitable, FAR Section 16.601(d)(1). Also, the FFUP contract will incentivize the Contractor to perform as quickly and efficiently as possible, as it bears the risk of overruns.

On the other hand, for requirements involving significant cost risks, a FFUP contract could be extremely expensive because the Contractor will account for those risks in its FFUP. For broadly-defined work, the agency may end up spending more than had it used a T&M contract. A FFUP contract is also less flexible in terms of changes. Changes on a FFUP contract may lead to a claim and administrative expense in modifying the contract. With T&M contracts, work is typically broadly specified and changes do not incur significant administrative expense. Lastly, because of the price risks associated with a T&M contract, there is a potential that work will require significantly less effort than anticipated, and the agency would benefit from those cost underruns. However, in a FFUP contract, while the agency is insulated from cost overruns, it has no mechanism to take advantage of cost underruns.

Believe it or not, I have encountered an agency whose senior management thinks an FFUP is really a T&M and that it is being miscoded as FFP in the input to FPDS. The contract is for flight services and the unit of service is a flight hour. The flight hour unit price includes personnel, aircraft usage, maintenance, and fuel, among other things. It's exasperating. I think the poor CO is contemplating homicide. It has dawned on me that maybe others think the same, or don't realize they have an alternative to T&M. I was curious what response I'd receive here.

ji20874, Don, and mettec, you've restored my faith.

What would be wrong with the unit being an hour?

If by "hour" you are referring to simply to one-hour worked by an individual than you have labor-hour contract. If an hour is defined as some sort of deliverable beyond a measurement of time, then I think a FFUP contract is a possibility. As in Vern's example, a "flight hour" includes all costs associated with a certain objective (i.e. flying a plane for an hour) lending to a FFUP contract. Again, my rationale is that in a FFUP contract you know the extent of work, just not the quantity of duration.

Vern,

That's sad -- some people at my agency thought this approach was cost-reimbursement -- they said it wasn't fixed-price because, at the time of award, we didn't know exactly the amount we were going to pay the contractor -- I think we're past that now in my office, but I have know people who objected to calling it FFP.

Right, a flight hour certainly is not a contractor labor hour.

Believe it or not, I have encountered an agency whose senior management thinks an FFUP is really a T&M and that it is being miscoded as FFP in the input to FPDS. The contract is for flight services and the unit of service is a flight hour. The flight hour unit price includes personnel, aircraft usage, maintenance, and fuel, among other things. It's exasperating. I think the poor CO is contemplating homicide. It has dawned on me that maybe others think the same, or don't realize they have an alternative to T&M. I was curious what response I'd receive here.

ji20874, Don, and mettec, you've restored my faith.

Vern,

In ji20874's example, would it still be FFUP if the unit was an hour?

If by "hour" you are referring to simply to one-hour worked by an individual than you have labor-hour contract. If an hour is defined as some sort of deliverable beyond a measurement of time, then I think a FFUP contract is a possibility. As in Vern's example, a "flight hour" includes all costs associated with a certain objective (i.e. flying a plane for an hour) lending to a FFUP contract. Again, my rationale is that in a FFUP contract you know the extent of work, just not the quantity of duration.

What distinction do you make between extent and quantity or duration? Let's say you want to use an aircraft to carry observers to search the woods for a lost child. You specify the area over which the plane must fly, but you don't know how long it will be until the child is spotted. You have an all-inclusive unit price per flight hour and state an estimated number of hours and you include a variation in estimated quantity clause. Have you specified the extent of the work? If not, what kind of contract do you have?

Let's say you want a helicopter to drop water on a wildfire. You know where the fire is, but you don't know how many carries the helicopter will have to make. You have a unit price per hour and you state an estimated number of hours, etc. What kind of contract do you have?

Same for a bulldozer to be used in fighting such wildfires.

Vern,

In ji20874's example, would it still be FFUP if the unit was an hour?

He didn't really give an example. But a contract with (1) an all-inclusive unit price per hour and (2) an estimated number of hours, perhaps with a variation in quantity clause, fits the description of FFUP in FAR 36.207 and is an FFUP contract. ji's colleagues thought that because it was not an FFP lump-sum it was a cost-reimbursement. They are wrong, both under FAR and standard commercial practice.

The key distinction is that in an FFUP contract, the unit is a unit of service, and the unit price is the price of a unit of service. Under a T&M or L-H contract, a labor hour is just a factor in price determination, the other being the labor rate. Under an FFUP contract, a task may be divisible or entire, depending on the agreement between the parties, and payment is conditioned accordingly. Under a T&M contract, a task is always entire, but the contractor is paid for its best effort, and payment is not conditioned upon completion.

I define extent as the understanding of the work's size and complexity, particularly as it relates to cost. For example, I see the extent of a flight hour in your example as all related costs associated with that one hour of flying (maintenance, logistics, equipment costs, etc.) and not just a single hour of an individual's labor. Duration or quantity (for services) is for an amount of time that work is required over the course of the contract.

In the first example, you identified costs associated with multiple personnel, equipment, and other costs incidental to search and rescue services. As a result, the extent of work is definable but the duration of work is not, making it a candidate for a FFUP contract.

In the second example, I do not know if there is enough information provided to make a determination. If you are simply reimbursing the pilot for hours worked then it is a labor hours contract. One way to convert that contract to a FFUP contract would be to a fixed unit price per drop which would resolve any ambiguity.

P.S. The Variation in Estimated Quantity clause may not be the correct choice for search and rescue services. See the prescription for FAR Clause 52.211-16, Variation in Quantity. Edit: Now that I read both clauses closer, neither may be appropriate in a search and rescue contract. Instead, you could write your own variation language as long as they are consistent with commercial practices.

What impact, if any, does FAR 16.207 on FFP LOE contracts have on this analysis?

He didn't really give an example. But a contract with (1) an all-inclusive unit price per hour and (2) an estimated number of hours, perhaps with a variation in quantity clause, fits the description of FFUP in FAR 36.207 and is an FFUP contract. ji's colleagues thought that because it was not an FFP lump-sum it was a cost-reimbursement. They are wrong, both under FAR and standard commercial practice.

The key distinction is that in an FFUP contract, the unit is a unit of service, and the unit price is the price of a unit of service. Under a T&M or L-H contract, a labor hour is just a factor in price determination, the other being the labor rate. Under an FFUP contract, a task may be divisible or entire, depending on the agreement between the parties, and payment is conditioned accordingly. Under a T&M contract, a task is always entire, but the contractor is paid for its best effort, and payment is not conditioned upon completion.

Vern,

If I have a contract for file maintenance whereby the unit of service is an hour, the all-inclusive price per hour of the service is $60, the estimated amount of units is 2,000 hours, then I have a FFUP contract--not a labor-hour contract. Correct? Assume the task is divisible.

Jacques:

An FFUP service contract is one under which the quantity of services in units is estimated at the outset of performance, rather than definite, and total payment is based upon the number of units actually delivered upon completion or cessation of performance as agreed by the parties.

An FFP LOE contract is not an FFUP contract. Under an FFP LOE contract the parties agree that the contractor will devote a specified level of effort (hours or some other measure, e.g., FTEs or persons) devoted to an undertaking. Payment is stated as a lump sum and is made upon delivery of the level of effort.

Vern,

If I have a contract for file maintenance whereby the unit of service is an hour, the all-inclusive price per hour of the service is $60, the estimated amount of units is 2,000 hours, then I have a FFUP contract--not a labor-hour contract. Correct?

Ummm, it depends on how you specify "file maintenance" and "hour."

Ummm, it depends on how you specify "file maintenance" and "hour."

Ok. Let's say the work is to take a pile of paperwork and put it in the appropriate files in support of an agency's ongoing operations. As paper gets filed, more paper is added to the pile. Size of the pile fluctuates throughout the year, sometimes there is no pile. Task is severable. An hour is 60 minutes. Contractor gets paid FFP for each hour of service provided.

Edited March 19, 201510 yr by Don Mansfield

Don, I think that you could potentially consider that requirement as a FFUP contract but that does not mean that it makes business sense. It is almost if you are buying a FFUP with each unit representing a LOE. However, it would make more sense to have a fixed unit price per file or folder so that you can remove the incentive to work slower to get paid more money.

Don, I think that you could potentially consider that requirement as a FFUP contract but that does not mean that it makes business sense. It is almost if you are buying a FFUP with each unit representing a LOE. However, it would make more sense to have a fixed unit price per file or folder so that you can remove the incentive to work slower to get paid more money.

metteec,

Whether it makes business sense is not relevant. I'm just wondering what it would be called.

Ok. Let's say the work is to take a pile of paperwork and put it in the appropriate files in support of an agency's ongoing operations. As paper gets filed, more paper is added to the pile. Size of the pile fluctuates throughout the year, sometimes there is no pile. Task is severable. An hour is 60 minutes. Contractor gets paid FFP for each hour of service provided.

To me, an FFUP contract requires the performance of a job (e.g., a flight mission) that the parties expect to entail delivery of an estimated quantity of units (e.g., meals served, persons treated, flight hours, etc.), +/- a percentage. The contractor is paid for the actual number of units delivered. Funds are obligated to cover the price of the estimated quantity. So, for example, we hire someone to do cholera immunizations for the people at Refugee Camp No. 6 in Darfur. We agree to a unit price per person immunized, but we don't know how many there are, so we estimate the quantity. We know exactly what value we'll get with each unit. We pay only for immunizations made in accordance with the specification. The contractor bears the risk of the cost of an immunization. Although the job is specified in terms of a job -- immunize the people at Refuge Camp No. 6 -- performance is clearly severable.

A labor-hour contract requires a contractor to make its best effort to complete a specific job, a goal for which a ceiling price has been established. The contractor is paid by the hour for labor, but an individual hour of labor has no determinate output. The hour is not a measure of value received. It is just a factor used in calculating payment for the effort that has been made.We pay for every hour worked in pursuit of the goal, whether the person achieves anything or not. The goal does not have to be achieved within the ceiling price, and if the government won't raise the ceiling price the parties go their separate ways.

It sounds to me like what you describe is the performance of an indeterminate function, filing, measured in hours, but without specific hourly output and without a specific mission and an estimated quantity of units. I'm not sure what that is. It does not sound like my FFUP contract, because the hours don't reflect any specific value received, just an hour doing something that is not well defined, but it doesn't sound like a labor-hour contract, either. It would be a misbegotten deal, but it does not seem to fit into any of the standard contract types. What would you be paying for? What would you get?

Why come up with such an example? What are you trying to get at?

deleted.

An approach using the contractor's hours as the payable unit is a labor-hour contract.

But there are all sorts of other hours: flight time, engine hours, system availability, stand-by time, and so forth.

Using flight time as an example, I used to contract for small-plane charters in remote loccations (floatplanes). Imagine something like this, where for each flight we pay $450.00 plus $12.00 per flight hour...

---- ------------------------- ----- ---- ----------- -----------

ITEM DESCRIPTION QTY UNIT UNIT PRICE AMOUNT

---- ------------------------- ----- ---- ----------- -----------

001 ON CALL CHARTERED FLIGHT 80 EA $ 450.00 $ 36,000.00

. IAW PWS PARA 3 est

.

002 FLIGHT HOURS 1,200 HR $ 12.00 $ 14,400.00

. IAW PWS PARA 4 est

A 45 minute flight would cost $990 = ($450 + (45 x $12)).

I see this as a FFP approach. We only pay for what we use, and we pay by the unit of what we use. This is fixed-unit-price, as we use the term, but we code it in FPDS-NG as FFP (FUP is not one of the selections in FAR Part 16). Some people will say this is an indefinite delivery contract (a "D" contract), and we need to issue task orders for the flights and hours, but I see it as a standard contract (a "C" contract") with estimated quantities under FAR 16.202.

So what has me perplexed is that nobody has presented validation that a FFUP contract is allowable except in the procurement of supplies or construction. I would submit that a FFUP contract for services is not allowed by the FAR. Reference FAR Subpart 11.7.

deleted

Carl:

See FAR 16.102:

(a) Contracts resulting from sealed bidding shall be firm-fixed-price contracts or fixed-price contracts with economic price adjustment.

( b ) Contracts negotiated under Part 15 may be of any type or combination of types that will promote the Government’s interest, except as restricted in this part (see 10 U.S.C. 2306(a) and 41 U.S.C. 3901). Contract types not described in this regulation shall not be used, except as a deviation under Subpart 1.4.

FFUP contracts are described in FAR 36.207 as a type of fixed-price contract. Nothing in FAR Part 16 prohibits their use for other acquisitions. See FAR 1.102(d) and 1.102-4(e). Such contracts have been in use in the acquisition of services since at least as far back as the mid-1940s. As far as I'm concerned, failure to mention service contracts in FAR 11.7 is administrative oversight. Anyway, nothing expressly prohibits.

Why come up with such an example? What are you trying to get at?

It goes back to my original question--why can't the unit be a labor hour? ji just wrote:

An approach using the contractor's hours as the payable unit is a labor-hour contract.

That's what I don't get. Why can the unit be a month, like in ji's original post, but not a labor hour? Why is a flight hour ok, but not a labor hour?

You wrote that the task under a T&M or LH contract is always entire. What if the task were divisible and provided for payment based on each hour worked and included an estimated number of hours? Would that be FFPUP?