Rose Report: Issue 23
Types of Government Contracts
For government contractors, the type of contract can significantly affect your approach to bidding on an RFP and your strategy for performing the work. The most common contract types are Time and Materials (T&M), Firm Fixed Price (FFP), and Cost Reimbursement Type (CRT). In order for your bid and work to be successful and profitable, it’s important to understand the differences between these contract types and the benefits and challenges of each.
Time and Materials (T&M) contracts require that companies track the amount of billable time and the cost of materials used to complete a project. Billable rates are negotiated and agreed upon in advance of the project, as is any mark-up of the cost of materials. The benefit of this contract type is that the contractor is paid based on the amount of hours worked and the materials designated to a particular project. The government can issue a Not to Exceed clause to give the contractor incentive to build in labor efficiencies and to manage the total cost of the project. Most contractors are unaware that if a T&M contract has significant material, the government could consider the contract a Cost Reimbursement Type contract.
Firm Fixed Price (FFP) contracts are negotiated with a set price that does not change based on time spent and expenses incurred. The contractor provides a specific deliverable for a set service or product, which allows the contractor to manage the project based on the fixed price. Generally, this type of contract is used when the risk is low and the contractor and government are on the same page about the level of effort required to accomplish the project. In a 2009 memo to the heads of executive departments and agencies, the White House Office of the Press Secretary wrote, “There shall be a preference for fixed-price type contracts. Cost-reimbursement contracts shall be used only when circumstances do not allow the agency to define its requirements sufficiently to allow for a fixed-price type contract.”
Cost Reimbursement Type (CRT), also known as a cost type contracts, CRT contracts allow contractors to be reimbursed for their actual expenses related to a statement of work, plus receive an agreed-upon fee that may be comprised of a fixed fee plus an award fee for strong performance. These contracts allow the contractor to submit for payment to be reimbursed for allowable incurred costs. Typically used in higher risk contracts where there is a certain level of uncertainty, CRT contracts require an increased level of cost accounting and financial reporting in order to show that costs are allocated properly.
In addition to using these three common contract types, the government is shifting toward hybrid contracts and other different kinds of contracts, notes Jeanne McMillen, partner at Rose Financial Services. “There used to be a clear differentiation between these three contracts types,” she says. “Now there’s a trend towards consolidating them.” For example, Indefinite Delivery, Indefinite Quantity (IDIQ,) contracts are very large contracts in which a number of firms are awarded the eligibility to bid on different tasks before the client decides what those tasks may be. In these cases, the smaller tasks may be set up according to different types of contracts. One task may be set up as a T&M contract, another may be set up as an FFP. Another variation from the traditional contract is an FFP with a Level of Effort (LOE) attached to it. FFP contracts usually include a milestone delivery, but with LOE, they involve a predetermined number of work hours to achieve the milestone.
Each contract is tracked and monitored differently. With all these variations in contracts, government contractors need to become familiar with the differences in tracking and reporting in order to accurately manage the contracts.