COMMENTARY

Want better contracts? Get creative.

Ray Bjorklund is senior vice president and chief knowledge officer at Deltek FedSources.

For contractors looking to do business with the government, it’s easy to get lost in the dozen or so contract types you can choose from. But when you stand back and look at what the Federal Acquisition Regulation has to offer, you see two fundamental types: cost reimbursement and fixed price. Each represents one end of the contracting spectrum, with many possible variations and combinations in between.

That spectrum represents how risks can be allocated among the parties to the contract. Choose a contract type near the cost-reimbursement end of the spectrum, and the government takes on the majority of the risk. Make it some type of fixed-price contract, and the contractor picks up most of the risk.

Somewhere between the two extremes is the best contract type for the circumstances — one that recognizes the urgency of the delivery date, the complexity of the requirements, the maturity of the technologies used, the ability of the contractor to perform, and the ability of the agency to manage the program with fiscal stability and disciplined execution.

To complement the best contract type, there are many variations and combinations of purchasing methods, from simplified acquisitions to indefinite-delivery, indefinite-quantity ordering.

If contractors and agencies want to make contracting easier and more efficient, both sides need to take full advantage of the range of contracting and purchasing options available.

Without creating inordinate complexity, both sides could move toward combinations of contract types within a single contract by picking the elements that elicit the correct behaviors in contract performance — or what I have long called harnessing market dynamics.

For example, a contract line item number might represent a single contract type. Then again, the type of contract might change based on where the contractor is in the period of performance or other situation-specific circumstances. A production CLIN might be suited for a fixed-price incentive while a product deployment CLIN might be better suited to a cost-plus-award-fee arrangement. The possibilities and combinations are vast.

Why do I call it market dynamics? I’m no economist, but I can sense how the “invisible hand” creates an ebb and flow in market power between contractors and the government. Knowing where you are and where you want to be helps in choosing the best contract type.

A contractor is likely to analyze its competitive position in a specific procurement but less likely to assess the ability of the government program office to vigorously manage a certain type of contract. Consequently, a contractor might sign up for a fixed-price contract not knowing that the program manager embraces scope creep.

The buying agency is supposed to apply similar market research to determine the art of the possible — for example, whether contractors have been able to deliver on similar programs or what the appropriate contract ceiling should be. Because an eager contractor might be willing to accept lower margins, the government must mitigate the risk that the contractor won’t have sufficient resources to deliver on time.

Not harnessing the current market dynamics for contract success can result in an unsatisfactory situation for either or both parties.

Many agencies and contractors are capable of successful creative contracting. All it requires are knowing your and your partner’s capacity to manage the contract, being familiar with the latest market research, understanding the tenets of contract law, and having ingenuity and a willingness to take measured risks.

About the Author

Ray Bjorklund is senior vice president and chief knowledge officer at Deltek FedSources.

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Reader comments

Wed, Sep 4, 2013 Hen Baju Anak

Which one better fundamental types: cost reimbursement or fixed price?

Thu, Oct 27, 2011 Tom tyler Event planning jobs

Get the business cooperation with the government is my goal, because we can help many people. But look at my age is still 21 years, maybe it's still a long way to get it. But i'll keep going and never give up to make my dream come true. "All is started from a dream"

Sat, Jun 25, 2011 Jaime Gracia Washington, DC

Although I agree with Mr. Bjorklund's premise, selection of contract type comes down to the two R's: risk and requirements. What seems to be making inroads is the desire to use more Firm Fixed Price (FFP) contracts, without the subsequent baselining of requirements or understanding of what risk is involved. It is just a knee-jerk reaction to OMB guidance without a clear understanding of the consequences or critical success factors (e.g. metrics) for meeting cost, schedule, and performance targets. I do believe the CLIN strategy would go a long way to better contracts, but the level of understanding of how to implement this strategy seems to be lost on the procurement community. Innovation in execution requires a level of innovation of training the workforce, as the education of market dynamics and understanding of better ways to conduct business is woefully inadequate at both DAU and FAI. Let's build the 21st century acquisition workforce, and tech them the tools to execute innovative contracting.

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