Previously, I discussed the four basic things the government purchases: Research and Development (R&D), Services, Hardware, and Construction. Purchasing products, from pencils to nuclear weapons, falls under the Hardware category. The contract type and acquisition process for pencils is very different from that of a nuclear bomb.
If you were to survey most contracting officers and ask which contract type should be used to purchase products, the answer, overwhelmingly, would be fixed price. The FAR says:
16.202-1 Description.
A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties.
The FAR further states that a fixed price is appropriate for commercial products. The reason the FAR recommends using a fixed price is that the product itself is defined and in production, and all risks associated with its production are known and quantified. The item has a stable design, it has been produced multiple times, and the costs of labor and materials are reasonably fixed.
The FAR then covers:
16.202-2 Application.
A firm-fixed-price contract is suitable for acquiring commercial products or commercial services (see parts 2 and 12) or for acquiring other supplies or services on the basis of reasonably definite functional or detailed specifications (see part 11) when the contracting officer can establish fair and reasonable prices at the outset, such as when-
(a)There is adequate price competition;
(b)There are reasonable price comparisons with prior purchases of the same or similar supplies or services made on a competitive basis or supported by valid certified cost or pricing data;
(c)Available cost or pricing information permits realistic estimates of the probable costs of performance; or
(d)Performance uncertainties can be identified and reasonable estimates of their cost impact can be made, and the contractor is willing to accept a firm fixed price representing assumption of the risks involved.
Let’s talk about these four “tests”. Adequate price competition is defined in 15.403-1 (c) (1):
Two or more responsible offerors, competing independently, submit priced offers that satisfy the government’s expressed requirement;
(B)Award will be made to the offeror whose proposal represents the best value (see 2.101) where price is a substantial factor in source selection.
This is the simplest form of price analysis. We all do it every day. Does Shell or Exxon have a lower gas price? What grocery store has the lowest milk price? Most commercial products that the government buys fall into this category. When the CO conducts market research and determines that there are multiple products that meet the requirement, the decision to use a fixed-price contract is easy.
Price comparison usually entails a prior history where the product has been purchased from a different supplier or where the prior purchase had competitive offers. A CO may also use published prices offered to the public even though that company did not make an offer.
CO can request supporting data to conduct a cost and price analysis. If the value of the acquisition is below the $2 million threshold for verified cost and pricing data, the CO can still request cost data sufficient to support the price offered. It, however, does not have to be certified. Requesting supporting price data occurs when a CO thinks they are going to receive more than one offer and do not, and the item is not commercially priced.
The last test is applied to all decisions involving the use of fixed prices. Risk is present in the simplest of acquisitions. For simple items, the risk is sometimes more about on-time delivery than the contractors’ ability to produce the product. Amazon built an empire on on-time delivery. All CO should consider risk for even a SAP purchase.
Over the life cycle of hardware, the government may use other contract types. R&D contracts for hardware development may be cost-type arrangements because of the unknown. As problems are discovered and resolved, and the design becomes more stable, a fixed price becomes the best option.
I started in the logistics world, buying small nuts and bolts used on military systems. At the end of my career, I was purchasing military systems. Over that span, I would estimate that more than 95% of the contracts I signed for hardware were fixed-price. The number of zeros was just larger on the systems purchases.
