Contract Types

1. Contract Types • While there appears to be many types of contracts, all can be placed in one of two “families” • Fixed-price • Cost reimbursement

2. Contract Types • A few contract types have characteristics of both “families” • Fixed-price characteristics • Detailed specification or other detailed description • Performance regardless of cost • Little contract administration on the part of gov’t • Much contract administration on the part of the contractor • Cost reimbursement characteristics • A less detailed description of the work • Best efforts on the part of the contractor • Greater contract administration on the part of the gov’t

3. Contract Types The Real Differences Fixed Price Cost Reimbursement Work Requirements Measured exactly to WS Best Efforts Default Termination No Cost/no profit Cost/no fee Convenience Termination All cost/partial profit all cost/partial fee Change Orders Contractor risk ceiling protection Gov’t Property Contractor risk of loss gov’t risk of loss

4. Contract Types • Firm-Fixed Price • Once price is set it doesn’t change unless there is a contract change • Proposals sometimes identify cost and profit separately • Or in highly competitive situations it may just identify a price • However, even when cost and profit are negotiated separately, the contract just identifies a price • The detailed requirements of the SOW or specifications are used to accept or reject the item or service

5. Contract Types • Fixed Price – Redeterminable • The contract could be Firm Fixed Price (FFP) except for • One or more areas that could significantly change • Example – labor rates, product components, cost of materials • The contract provides for adjustments, up or down, if certain specified events occur

6. Contract Types • Fixed Price Incentive • Price is fixed like FFP • But contract shows cost and profit separately • Profit varies upward or downward with cost outcome to specified limits

7. Contract Types • Cost Reimbursement • Cost Only • Appropriate in circumstances where the contractor has a mutual interest in the work • No fee is provided • Example, contracts with universities, state and local gov’t, non-profits • Cost Sharing • Same circumstances as cost only but the contractor’s level of interest in the work is so high that they will assume part of the cost • Commercial entity has an expectation of receiving substantial benefits • Example, R&D may result in products or processes with broad applicability and significant commercial potential

8. Contract Types • Cost Plus Fixed Fee • Most common type • Fee is mixed at the beginning but cost may be adjusted up or down • Fee is fixed regardless of the cost outcome • Cost Plus Award Fee • Often used where work is on a gov’t site • The gov’t evaluators are in a position to evaluate contractor performance on a regular basis • There may be a base fee • The award fee is earned based on performance

9. Contract Types • Cost Plus Percentage of Cost • Prohibited – illegal form of contract • Why illegal – fee is paid as a percent – no incentive to economize

10. Contract Types • Mixed Contracts • Letter Contract • Used in urgent situations • A “letter” type direction to proceed immediately • But there are often limitations on detail • The FAR encourages negotiations of as many definite provisions as possible before issuance • Requires “definitization” in accordance with a strict schedule

11. Contract Types • Time and Materials and Labor Hour • Used primarily in a repair situations • Labor is on a Fixed Price Loaded Labor Rate basis • Material is on a cost plus handling charge basis • The contract contains a cap • Labor hour arrangement does not involve materials

12. Contract Types • Indefinite Delivery/Indefinite Quantity • Contains all the provisions of a contract except the details on specific orders • Contains a minimum guarantee which is usually a few thousand dollars to 5% to 10% of the estimated annual work • Sometimes are awarded to multiple contractors and their orders are competed among those contractors • The “type” of orders may vary – some may be FFP, labor hour/time and materials or Cost Plus Fixed Fee • If varying type orders are allowed, the contract should contain clauses covering the different types

13. Contract Types • Requirement Type Contracts • Could be the same as IDIQ but there is no money guarantee • The guarantee is that there will only be one contract awarded for the covered commodity or service by the agency – if there are any orders they will go to the contractor awarded the requirements contract

14. Financial • Basic Financial Goals of All types of Business • Make or offer a saleable product or service • Control costs to be price competitive • Keep cask flowing to assist in controlling costs • Make as much profit as possible

15. Financial • Financial Team Players • Financial Manager – sometimes known as the CFO • Comptroller – could be same as CFO in small companies • Treasurer • Auditors – internal and external • Government Players • The Procurement Contracting Officer – negotiates original contract and primary changes • Administrative CO – conducts systems reviews including finance, sets billing and overhead rates and approves invoices • Program Manager – agrees on quantities and changes and approves invoices • Auditor – conducts financial reviews for the CO

16. Financial • CAS – Cost Accounting Standards Board • 1970 Congress created – to implement standards that would achieve uniformity and consistency in the cost accounting practices and reporting of costs under negotiated different prime and sub contracts • CAS applies to contracts over $500,000 • Exceptions to CAS • Contracts under 500K • Sealed bid contracts • Contracts w/ small business and foreign gov't • Contracts where price is set by law • Contracts and subcontracts performed entirely outside the US • FFP contract award on basis of adequate price competition

17. Financial • Also, may be waived for a particular prime contract (or sub contract) under $15 million if the head of the contracting agency determines, in writing, that the performing business is • Engaged in the sale of commercial items and • Would not be subject to CAS other than size of contract

18. Financial • Contractor Obligations under CAS • Disclose in writing the cost accounting practices by completing a disclosure statement • Follow the disclosed practices consistently in estimating and reporting costs • Comply with CAS in effect at the time of award • Agree to price adjustment in the event gov’t shows contractor failed to comply w/ existing CAS or its own approved practices

19. Financial • Costing Principals • Are used when cost analysis is required • When negotiating a fixed price contract – used a guide in both the pricing and any subsequent changes • They apply to proposals and cost incurred after award for cost reimbursement arrangements • For post award incurred cost, they only apply to Cost Reimbursement situations • Cost reimbursement does not mean that a contractor will be reimbursed all of their costs • Do be reimbursed a cost must be “allowable”

20. Financial • Costing Principles • To be allowable - FAR 31.201-2 requires that a cost must be • Reasonable – (vague) prudent person in the conduct of competitive business • Allocable – if it chargeable, and if it is incurred specifically for the K or benefits K and other work (make a pro-rata distribution) • Meet accounting standards or generally accepted accounting principles • Meet terms of contract • Meet FAR principles

21. Financial • Reasonable means • In nature and amount it’s reasonable • It is the type cost that a prudent person would have incurred in the conduct of competitive business • Allocable means • The cost was incurred specifically for the contract (direct), or • That the cost benefits both the contract and other work and can be reasonably • That the cost is necessary for overall business operation (G&A) • Meets accounting standards means • It meets established CAS, or • It meets generally acceptable principles recognized in the industry

22. Financial • Meets the terms of the contract means • It meets any special provisions on the contract • These provisions cannot violate cost principles • Examples of some provisions: • Special treatment for the project • Pre-contract costs included • Meets FAR Principles means • It does not violate FAR part 31 • FAR part 31 identifies 53 types of costs and provides guidelines for their acceptability (outlined in the text) • Unallowables • Contractors must account for • Fee or profit pays for unallowables

23. Financial • Some Selected Costs • Many public relation and most advertising – generally non-allowable but selling costs are allowable • Allowable PR costs – trade shows, public communication, stockholder communication, general news/media liaison, community event support • Interest – non-allowable • Bad debts – non-allowable • Compensation for personal services • CAS has guidance for all types of compensation • Executive compensation is a ‘hot’ issue • Severance pay is also an issue covered • Salary surveys are conducted within the commercial sector to determine reasonableness

24. Financial • Some Selected Costs • Employee morale – health and welfare – allowable • Examples • Employer/employee relations • Crisis consultation • Health clinics • Employee publication • Dining rooms • Recreation facilities • Picnics/parties • Awards\ • Entertainment costs – unallowable

25. Financial • Some Selected Costs • Pre-contract costs • Costs incurred before effective date of contract • Allowable to extent they would have been allowable after award • If necessary to meet delivery schedule • Good idea to get letter of agreement • Costs of fines, penalties and mischarging – generally unallowable • Losses on other contracts – generally unallowable • Training, education, trade, business, technical and professional activity costs - generally allowable

26. Financial • Payment Withholding • Payments on CR contracts may be withheld for many reasons • Failure to make progress on contract • Labor standards violation • Contract violation • Payments withheld for unallowable costs • Withholding payment can either involve suspension or disallowance • Suspension = temporary withholding pending a final determination • The ACO, PCO or in some cases, auditor can suspend payments or disallow costs • If auditor, then ACO makes a final decision on disputed issues

27. Financial • Important Contract Administration Functions • Establishes labor rates and material estimates to be used in proposals • Establishes company overhead (OH) and general and administrative (G&A) rates • Develops cost reports for project managers • Assures cash flow • Obtains money to run projects

28. Financial • Cash Flow Analyses • When are payments of bills due and how much • Labor • Materials • Rent • Utilities • Installment/loan payments • When is income scheduled to come in • How will income be used to pay bills • Financing necessary?

29. Financial • Labor Rate Composites • Example – the contract may have 3 fixed price labor categories Engineer $75 p/h 5000 max. hours Technician $45 8000 Analyst $60 10000 How does the Finance Manager calculate – justify the calculations

30. Financial • Overhead Rate Development • Direct cost of unit • Sales of unit • Overhead pool expenses • Example • Product direct cost per unit $1.00 • Estimated annual sales (units) 100,000 • Direct cost of product $100,000 • Estimated annual overhead cost $100,000 • Overhead to be applied to each unit 100% • Total cost of each unit $2.00 • Add profit (assume 10%) .20 • Unit selling price $2.20

31. Financial • How much money is needed? • Fixed –Price Contracts • Payment upon acceptable delivery is normal rule • But progress payments are possible • Delivery may be broken into segments with payment schedule • May be able to get advance on contract (rare) • Cost Reimbursement Contracts • Periodic payments every 2 weeks or once a month possible • But payment delays may occur after approval of invoices • Advance available

32. Financial • Truth in Negotiation Act (TINA) 1962 • Applies to negotiated contracts or modifications with a value of $550,000 or more. • Exempted from TINA if there is adequate price competition, procurement of commercial items or service, or price set by law or waiver from requirements • Requires certification of cost or pricing data (by prime contractors and sub-contractors) • Cost or pricing data is defined as • All facts • Existing at the date of the agreement of price • That are significant to price negotiations

33. Financial • TINA • Certification requires that data must be • Accurate • Current • Complete • Use standard forms 1411 and 1448 • Data is information that is • Factual, historical – not estimates • FASA amended TINA – • raised the threshold from $500K to $550K • Made exceptions to TINA mandatory • Broadened exemption categories • Created commercial item exception

34. Financial • TINA • Certification is as of the date of the agreement • All info to be submitted before award is made • Contract clause provides for defective price audit – FP or CR (both) • If defective pricing is found – remedies • Repayment of excess • Interest on excess • Penalty • Criminal prosecution if fraud (disbarment/suspension) • Subcontractor • Sub should certify to prime • Prime certifies to government • No privity of contract between sub and gov’t • Always in a prime contract with a sub – have provision that sub will make prime whole in the case of defective pricing

35. Fraud & Ethics • Civil Fraud • False Claims Act – allows recover of damages/penalties from anyone who submits a false claim to a federal agency • Knowingly presents or causes to be presented to the gov’t a false/fraudulent claim for payment or approval • Uses a false record or statement to get claim paid/approved • Conspires to defraud gov’t by getting a false claim paid/approved • Knowingly uses a false record/statement to conceal; avoid or decrease an obligation to pay or transmit money or property to gov’t

36. Fraud & Ethics • False Claims Act • Burden of Proof – on gov’t by a preponderance of the evidence • Knowledge = actual knowledge or “deliberate ignorance” • Innocent mistakes/negligence (even gross negligence) not enough for a conviction • “Qui Tam” whistleblower provision of law – fixed by 1986 amendment to False Claims Act • Made it more attractive • Especially in areas of Medicare/Medicaid – • Syracuse example

37. Fraud & Ethics • “Qui Tam” • Exceptions • Suits between members of military and gov’t • Suits based on info known to gov’t • Suits based on allegations that are subject of a civil suit to which gov’t is a party

38. Fraud & Ethics • False Statements Act • Widely used in prosecuting criminal fraud cases • Supreme Court – has repeatedly stated that statute should be “broadly and liberally” interpreted • Practical effect – gov’t may use this statute, even where a more narrowly defined and more specific statute could be applied. • Conviction requires a showing of • A statement was made • The statement made was false • The person making the statement knew it to be false when the statement was made • Statement was material • Statement concerned a matter w/in federal jurisdiction

39. Fraud & Ethics • Major Fraud Act of 1988 • Covers Gov’t prime contracts over $1,000,000 • Subcontractors are also subject to statute • Contains whistleblower protection and rewards

40. Fraud & Ethics Government Corruption • Anti-Kick Back Act – 1986 • Covers prohibited conduct – forbids any individual or business from • Providing/attempting to provide any kickbacks • Soliciting or accepting (or attempting to accept) a kickback • Includes the amount of any kickback that may be in the price charged by a subcontractor to a prime contractor (or a higher tier subcontractor) in the price charged by the prime to the Gov’t • Kick-back is defined as: money/fee/commission/credit/gift/gratuity/thing of value or compensation of any kind (directly or indirectly) for the purpose of improperly obtaining or rewarding favorable treatment in connection w/ a government contract • Applies to all government contracts

41. Fraud & Ethics • Procurement Integrity Act – 1996 (as amended) • Conflicts of interest • Improper disclosures and • Receipt of procurement information • Restricts acceptance of employment by former agency officials with gov’t contractors and employment contracts/consultants for procurements over $10 million for one year • Loophole – no restriction on working for another division or affiliate of the contractor • “designed to restore public confidence in gov’t procurement process”

42. Fraud & Ethics Procurement Integrity Act • Also prohibits current and former federal official from “knowingly disclosing or knowingly obtaining” contractor bid or proposal information before the award of a contract, to which info relates to, is awarded • Example – cost/pricing data, indirect costs, labor costs, trade secrets, other proprietary information

43. Fraud & Ethics Lobbying Restrictions • Byrd Amendment – gov’t-wide restrictions on contractors use of federally appropriated funds for legislative and executive branch lobbying (looking to deal with improper influence peddling?!) • Lobbying Disclosure Act – 1995 • Created more gov’t employees by creating a comprehensive scheme for reporting and registering lobbyists

44. Fraud & Ethics Suspension & Debarment • May preclude contractor from getting contracts for up to 3 years • FAR procedure - suspension • Notice to contractor – stating when suspension will take effect/cause • Contractor has 30 days to submit information in opposition but no right to a pre-suspension hearing • May obtain a post-suspension fact-finding hearing based on the strength of submission • Debarment • Right to a detailed statement of reasons for proposed debarment • 30 days to respond

45. Fraud & Ethics • Protests – contents • Must be signed by the protestor or legally authorized agent and addressed to GAO • Protestor’s – name/address/phone and fax numbers • Name of contracting agency and solicitation # • A detailed statement of the legal factual grounds of protest • Copies of relevant documents • All info establishing that protestor is an interested party and protest is timely • Request for a ruling by GAO • Statement of relief requested • Example – protective order, hearing, specific documents • GAO – decision issued w/in 100 days