OTHER CONTRACT TYPES

Other contract types include time-and-materials, labor-hour, indefinite-delivery, letter, basic agreement, and basic ordering agreement.

Time-and-Materials Contract

A time-and-materials (T&M) contract provides for acquiring supplies or services on the basis of: (1) direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative (G&A) expenses, and profit; and (2) materials at cost, including, if appropriate, material handling costs. A time-and-materials contract provides little positive profit incentive to the contractor for cost control or labor efficiency. T&M rates are sometimes referred to as “wrap-rates” because all costs are included in the price per labor hour.

Materials and other direct costs are paid on a cost-reimbursement basis without a fee. All appropriate indirect costs allocated to direct materials in accordance with the contractor’s usual accounting procedures consistent with Part 31 are permitted. This includes G&A expenses and indirect material handling costs—only if the contractor has an established material handling cost pool.

T&M contracts have been popular for inspect-and-repair-as-needed (IRAN) contracts. Under these contracts, the contractor is paid a fixed hourly rate for labor and related costs, and actual costs for materials identified as needed for repairs. The purpose of the contract not allowing a profit on materials is to avoid an incentive for a contractor to identify repairs that might be of questionable need.

Whether a T&M contract is a fixed-price type contract or a cost-type contract is an ongoing disagreement between the government and some nongovernment people. The government considers these contracts to be cost-type because the ultimate price is based on the quantity of goods or services delivered, which the government views as being at the discretion of a contractor rather than determined by the government buyer. The opposing view is that a T&M contract is both fixed-price and cost-type. The time portion is a fixed unit cost per item delivered. The materials portion is cost-reimbursement.

In the late 2000s it became necessary to segregate T&M contracts into two categories, commercial and non-commercial, for purposes of establishing whether subcontracted work should be invoiced as time or materials under a prime contract. The ramifications of this distinction are clear: A prime contractor receives no profit or fee on work performed by a subcontractor if the work is treated as a subcontract. For commercial T&M contracts, the labor for the prime contractor, subcontractors, and affiliates of the prime contractor may be invoiced to the government based on the labor rate specified in the prime contract. For T&M contracts awarded based on adequate price competition for other than the Department of Defense, the labor may also be invoiced in this manner. For the Department of Defense, such contracts must be invoiced as non-commercial items would be invoiced. For non-commercial items the labor of subcontractors and affiliates is invoiced based on actual cost, i.e., as the materials portion of the T&M contract.

Labor-Hour Contract

A labor-hour contract is a variation of a time-and-materials contract, differing only in that no materials are to be supplied by the contractor.

Indefinite-Delivery Contract

The indefinite delivery (ID) contract type relates to multiple awards of indefinite-quantity contracts. The two categories of ID contracts are: (1) a delivery-order contract, which does not procure or specify a firm quantity of supplies (other than a minimum or maximum quantity) and which provides for the issuance of orders for the delivery of supplies during the period of the contract; and (2) a task-order contract, which does not procure or specify a firm quantity of services (other than a minimum or maximum quantity) and which provides for the issuance of orders for the performance of tasks during the period of the contract.

There are three types of indefinite-delivery contracts: (1) definite-quantity contracts; (2) requirements contracts; and (3) indefinite-quantity contracts. Indefinite-quantity contracts and requirements contracts permit flexibility in both quantities and in delivery scheduling and ordering of supplies or services after requirements materialize. Indefinite-quantity contracts limit the government’s obligation to the minimum quantity specified in the contract. Requirements contracts may permit faster deliveries when production lead time is involved, because contractors are usually willing to maintain limited stocks when the government will obtain all of its actual purchase requirements from the contractor.

Definite-Quantity Contract

A definite-quantity contract provides for delivery of a definite quantity of specific supplies or services for a fixed period, with deliveries or performance to be scheduled at designated locations upon order. A definite-quantity contract is often used when it can be determined in advance that a definite quantity of supplies or services will be required during the contract period, and the supplies or services are regularly available or will be available after a short lead time.

Requirements Contract

A requirements contract provides for filling all actual purchase requirements of designated government activities for supplies or services during a specified contract period, with deliveries or performance to be scheduled by placing orders with the contractor. The solicitation and resulting contract state that an estimated quantity will be required or ordered, or that conditions affecting requirements will be stable or normal. The contract may also specify maximum or minimum quantities that the government may order under each individual order and the maximum that it may order during a specified period of time.

Indefinite-Quantity Contract

An indefinite-delivery, indefinite-quantity (IDIQ) contract provides for an indefinite quantity, within stated limits, of supplies or services to be furnished during a fixed period, with deliveries or performance to be scheduled by placing orders with the contractor.

The contract requires the government to order and the contractor to furnish at least a stated minimum quantity of supplies or services, and requires the contractor to furnish any additional quantities ordered, not to exceed a stated maximum. To ensure that the contract is binding, the minimum quantity must be more than a nominal quantity, but it should not exceed the amount that the government is fairly certain to order. The contract may also specify maximum or minimum quantities that the government may order under each task or delivery order and the maximum that it may order during a specific period of time.

There are two types of IDIQ contracts—single awardee and multiple awardee. For a single awardee contract, only one contractor is selected for award and the contract operates as described. A multiple-awardee contract results in several awardees being selected as eligible to bid on delivery orders or task orders issued subsequent to contract award. For orders issued under multiple-delivery order contracts or multiple-task order contracts, each awardee is to be provided a fair opportunity to be considered for each order in excess of $2,500. Winning a multiple-award contract is similar to “winning air.” There is no guarantee of any work unless the awardee is successful in the individual order competition stage. In most instances, a contractor may not protest an agency award of an individual order.

Letter Contract

A letter contract is a written contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services. A letter contract may be used when the government’s interests demand that the contractor be given a binding commitment so that work can start immediately and negotiating a definitive contract is not possible in sufficient time to meet the requirement. However, a letter contract should be as complete and definite as feasible under the circumstances. When a letter contract is awarded, the contracting officer will include an overall price ceiling in the letter contract.

Each letter contract must specify a definite schedule, including: (1) dates for submission of the contractor’s price proposal, required cost or pricing data, and, if required, make-or-buy and subcontracting plans; (2) a date for the start of negotiations; and (3) a target date for definitization, which is to be the earliest practicable date. The schedule will provide for definitization of the contract within 180 days after the date of the letter contract or before completion of 40 percent of the work to be performed, whichever occurs first.

However, the contracting officer may, in extreme cases and according to agency procedures, authorize an additional period. In practice, many definitizations take much longer than 180 days. Generally, this delay is more advantageous to the government than the contractor because the letter contract contains a not-to-exceed (NTE) or ceiling price. Thus, if the cost estimate decreases, the price will likely be negotiated downward, but if the cost estimate increases, the price may not be negotiated in excess of the ceiling. Contractors are advised to avoid letter contracts.

Basic Agreement

A basic agreement is a written instrument of understanding, negotiated between the government and a contractor, that: (1) contains contract clauses applying to future contracts between the parties during its term; and (2) contemplates separate future contracts that will incorporate by reference or attachment the required and applicable clauses agreed upon in the basic agreement. Importantly, a basic agreement is not a contract. A basic agreement is used when a substantial number of separate contracts may be awarded to a contractor during a particular period. Basic agreements are used with negotiated fixed-price or cost-reimbursement contracts.

Basic agreements provide for discontinuing their future applicability upon 30 days’ written notice by either party. A basic agreement will not obligate funds, state or imply any agreement by the government to place future contracts or orders with the contractor, or be used in any manner to restrict competition. Each contract incorporating a basic agreement includes a scope of work and price, delivery, and other appropriate terms that apply to the particular contract.

Basic Ordering Agreement

A basic ordering agreement (BOA) is a written instrument of understanding, negotiated between an agency, contracting activity, or contracting office and a contractor, that contains: (1) terms and clauses applying to future contracts (orders) between the parties during its term; (2) a description, as specific as practicable, of supplies or services to be provided; and (3) methods for pricing, issuing, and delivering future orders. Importantly, a basic ordering agreement is not a contract.

A basic ordering agreement is used to expedite contracting for uncertain requirements for supplies or services when specific items, quantities, and prices are not known at the time the agreement is executed, but a substantial number of supplies or services covered by the agreement is anticipated to be purchased from the contractor. The use of these procedures can result in economies in ordering parts for equipment support by reducing administrative lead-time, inventory investment, and inventory obsolescence resulting from design changes.

A basic ordering agreement does not state or imply any agreement by the government to place future contracts or orders with the contractor or be used in any manner to restrict competition. Each basic ordering agreement describes the method for determining prices to be paid to the contractor for the supplies or services. Common application is for ordering spare parts. The agreement may provide a formula for pricing spare parts based on agreed-upon direct labor rates and indirect cost rates plus other factors.