In today’s government contracting world, long term contracts are widespread. Given the length and complexity of the source selection process, many agencies will opt for long term contracts to reduce the burden on their contract office resources. As a contracting officer, I have used long term contracts for both services and hardware acquisitions. I do have some advice for both the government personnel and contractors who read these blogs.
The length of the contract will have the most impact on price in the request for proposal. Contractors need to consider several factors in developing their proposed price. Since most government funding is only approved for use in the current year, the government will buy one year at a time using the options each following fiscal year. In hardware contracts, materials and labor are the two primary drivers of price. In most cases, hardware will be a firm fixed price for the base and option years of the contract. In estimating your hardware cost, take into account all inflationary factors associated with your materials. No one can predict inflationary factors, but there are indices available to track commodity prices for the option years.
For labor pricing in both hardware and service contracts, if there is a contract with your employees, then estimating cost is manageable. Remember those labor categories that fall under wage determinations must meet the government levels. For those labor categories that don’t have scheduled wage increases or a new contract is scheduled for negotiation, factor those costs into the option year pricing. Proposals that do not take into account the potential for material or wage increases, without supporting documentation, may be considered to have unrealistic pricing.
As a reminder, let’s go over an important rule of priced option contracts. The option clause 52.217-9 Option to Extend the Term of the Contract allows for the government to exercise a priced option unilaterally, as long as the contractor receives written notice of the intent to exercise within the time period in the clause. This rule means that a contractor must accept the extension and if fixed price, there is no recourse for price adjustment (other than DOL wage adjustments). This clause does place the contractor at some risk and mitigating that risk may take the form of increased profit for the option years.
For government contracting officers, I caution you not to automatically go with a base and four options in long term contracts. In today’s dynamic economy, much can change in five years that could impact pricing. Large companies struggle to predict cost beyond 2 or 3 years, and they have an army of accountants and price estimators. Smaller businesses have fewer resources to estimate costs. The amount of business that a company has will impact overhead rates and predicting how much work small businesses will have from year to year can be risky. In my experience, three years was the longest I felt most contractors could predict costs and prices with reasonable accuracy.
Lastly, for contracting officers – in doing your price analysis for the follow-on contract, it’s important to remember that prices for the last year of the contract were not estimated that year. Depending on the length of the contract, all the prices were estimated in the first year. Pricing for the new contract may go up more from the last year than average inflation would predict. Some contractors, in my experience, have run as low as 7-8% profit that last year because their pricing was poorly prepared. Contractors may attempt to recoup lost profits in the new prices, but the government should not allow for increases of that type. However, the new prices will be higher, and your price analysis will have to explain why pricing jumped a higher percentage than average.