30 Jun There Are How Many Types of Contracts?
Did you know there are at least 16 different variations of government contracts available? Before you can begin to solicit contracts from the government, you need to know which type of contract would be the most beneficial for your business.
Here’s a list of the different types of contracts that you could use to build a business in government acquisitions.
Time and Materials Contracts
Time and materials contracts require the government to pay for all costs associated with the proposed project. Because these contracts are rather expensive for the government, they are rarely awarded.
Labor Hour Contracts are a variation of Time and Material Contracts. In these contracts, the government only pays for the labor on the project. As a contractor, you would be required to pay for materials.
Indefinite Delivery Contracts
Indefinite Delivery Contracts are used when the government doesn’t know how much of a product or service it needs. The government will list a range for required quantities to be bid on a per-item basis. Usually, the government invites certain companies to make bids for this type of contract.
Task-Order Contracts are used when the government needs to maintain its stocks of specific items. These contracts allow for direct shipments to users when the stock gets reaches a pre-determined minimum level. And they give the government agency and the supplier more flexibility for orders and shipments.
Job-Order Contracts are used for multi-year construction contracts. They are established using unit prices outlined in the Unit Price Book (UPB).
When the scope of work required is clearly defined, government agencies can opt to use Fixed-Price Contracts. In these contracts, the overall price of the project is determined before the project begins. There are many types of these projects, and if your business is accurate in pricing and has ample experience creating your product, Fixed-Price Contracts could have a huge payout for you. There are 6 types of Fixed-Price Contracts:
- Firm-Fixed Price (FFP)–the price is set and nonnegotiable. With FFP contracts, you assume all the risks in the project. As a contractor, if you underbid, you need to pay all extra costs. If you complete the project under budget, you win big.
- FFP Level-of-Effort Contracts are defined more by your effort level than results. These are used primarily for research where the scope can be hard to determine in advance.
- FFP with Materials Reimbursement, you have a predetermined price for your service and labor. The government reimburses you for the materials at the end of the project.
- FFP Economic Adjustment in these contracts, the contract price is adjusted at the top of the contract to account for changes in material cost. This is helpful if the market prices for specific items change.
- Fixed-Price Incentive with this contract type, a maximum price will be stated and you can be rewarded for staying under budget. These contracts can give small business owners a larger profit.
With all Fixed-Price Contract variations, there is risk involved. If your project goes over budget, you will be expected to pay for the extra costs and will be completing the contract at a loss. However, if you are exact in your pricing, you can complete the project under budget and make extra money on the contract.
Cost-Reimbursement Contracts are used for projects where estimating the cost in advance is hard to determine. These contracts usually have a defined spending limit and have a much lower risk for the service provider compared to a Fixed-Price Contract.
When the contractor is providing a product or service as a non-profit business, they can enter into a Cost Contract or a variation of a Cost Contract with a government agency. In these contracts, the government covers expenses, but the contractor does not earn a profit from the project, or in some cases, profits from a fixed fee. One of the most popular uses for these contracts is for research.
- Cost Contracts only cover expenses and do not pay the contractor. These contracts are popular for non-profit research projects.
- Cost-Plus-Fixed-Fee contracts usually set a limit for contractor costs that will be paid by a government agency and includes a fixed payment for the contractor’s service.
- Cost-Plus-Incentive this contract operates similarly to the FPI contracts in that there is a financial incentive for completing the project under budget.
- Cost Sharing Contracts are used when the government agency is only going to pay for part of the overall costs. With this type of contract, you will need to be able to cover the remaining portion of the costs. These contracts are commonly used in research projects where you stand to benefit from the research findings.
Cost Contracts are less risky for novice contractors and could be a good option for you to pursue until you gain more experience. Unlike Fixed Price contracts, if your project comes in over budget, you won’t be as heavily penalized. However, the reward of Cost Contracts may not be as great.
Are you unsure which type would be the best fit for the project or service that your business offers? Are you considering a multiple-year FFP contract with the government? There may be many factors to consider, imagine if you had to supply lumber to the government under an FFP that you had signed 2 years ago? Would you be unable to meet your obligation? Do you have an adequate accounting system to qualify for a Cost Type of contract? If you’re full of questions, don’t hesitate to get in touch with a contracting specialist at DASG. We can discuss your options with you and help you pursue the most profitable contract for your business.