DID YOU KNOW?… Optional Contract Types May Reduce Uncertainty

Although many of us are optimistic 2021 will be better than the year we just went through, the world will continue to struggle with both the short- and long-term impacts of the COVID pandemic. In addition to trying to keep ourselves and others physically and mentally healthy during these trying times, there also are concerns about the health of our economy – including volatility in the pricing and availability of labor and materials. Economic swings may impact not only the way government agencies contract for products and services, but also the amount of risk contractors are willing to accept on these contracts.

Justin Niceswanger
CIRAS Government Contract Specialist

Here are a few options for you to consider:

Many government agencies prefer to establish long-term contracts for repetitive purchases. A lot of these contracts establish a base period (typically 12 months), along with option periods available to extend the length. Agencies use a variety of contract types, and they determine which type is most appropriate based on multiple factors. For federal agencies, a list of contract types available for use (and one type prohibited from use) can be found in Part 16 of the Federal Acquisition Regulation. A federal agency typically identifies their anticipated contract type somewhere within their solicitation document.

Firm fixed-price contracts commonly are used when the agency believes the needed products or services are relatively straightforward – comparative price information is available from previous or similar purchases, market competition is available, and any uncertainties can be identified and estimated. But these contracts require the contractor to assume more risk and responsibility.  Contractors need to perform a contract correctly and efficiently to make a profit at the end. If the actual cost of providing the products or services exceeds the contract total, the government will not reimburse the contractor for the additional incurred costs!

The government acknowledges that, while firm fixed-price contracts are both useful and popular, this contract type is not always the appropriate type to use. In conditions where the costs of labor and materials for a particular industry are unstable, it may make better sense to use fixed-price contracts with economic price adjustments (FAR 16.203). As the name implies, these contracts allow for some adjustments to pricing for items, labor, or materials. Using this contract type reduces the risk for a contractor, removing some of the guesswork on trying to predict future costs.

If you’re looking at an open solicitation for a long-term opportunity anticipating use of a firm fixed-price contract but your industry is being negatively impacted by changing prices or availability of labor and materials (or it’s looking like things are heading in that direction), you may want to consider reaching out to the contracting officer to see if the agency would consider a contract with economic price adjustment options.  Many agencies recycle solicitation documents from the previous round of competition and may not have taken into consideration current industry challenges which were either minimal or nonexistent in previous years.

If you currently have a long-term contract and are experiencing issues as described in this article, you can take a look at the terms and conditions in your contract to see if there are any clauses included which allow for economic price adjustments.  Federal, state, county, and municipal governments use different sets of terms and conditions, so there may or may not be language included which allows for this flexibility (or allows for it only at specified times).  Additionally, some agencies’ terms and conditions require the exercise of any option periods to be bilateral (both the government and the contractor would have a say on whether to continue), while others can be extended unilaterally by the government.

Please keep in mind, if you need assistance with understanding terms and conditions found in either existing or potential government contracts, the CIRAS PTAC is available to help research and answer your questions!

For more information, contact Justin Niceswanger at jnice@iastate.edu.