Contract Types

By Bruce K. Easley & Associates

The U.S. government is the largest buyer in the world. Federal agencies buy just about every category of commodity and service available. Government wide procurement goals encourage opportunities for small businesses. Certain government procurement programs only apply to small businesses. Small business size standards are generally determined by the number of employees or annual business receipts/revenue. At least 23% of all government buys are intended to go to small firms. Within the total 23% for small businesses, the makeup is Women-owned businesses (5%), Small disadvantaged business (5%), Firms located in HUB Zones (3%), and Service disabled veteran -owned businesses (3%).

Government purchases use standardized buying procedures and rules outlined in the Federal Acquisition Regulations (FAR). These statutory and regulatory provisions dictate, for example, what method or process an agency must use to solicit a contract; how the agency is to negotiate or award a contract; and under certain circumstances, what costs the Government will reimburse and how a contractor must account for those costs. Key Small Business Parts of the FAR include:

  • Subpart 8.4 – Federal Supply Schedules
  • Part 13 – Simplified Acquisitions
  • Part 15 – Contracting by Negotiation
  • Part 19 – Small Business Programs

The Federal government lists contract opportunities over $25,000.00 online at Subcontracting or teaming can be profitable; performing as a subcontractor can prepare you to be a prime contractor in the future. SBA maintains a database of subcontracting opportunities. This searchable database is called SUB-Net ( Several contracting methods are employed by the Government:


  • Individual government purchases under $3000.00
  • Competition not required
  • Government credit-cards are often used
  • Micro-purchases are not reserved for small businesses

Simplified Procedures

  • In 1994, Federal law streamlined government purchasing for buys under $10,000.00
  • Instead of full and open competition, simplified procedures can be used
  • Purchases above $3000.00 but under $10,000.00 are reserved for small businesses

Sealed Bidding

  • Competitive buying method for specific and clear government requirements
  • Invitations for Bids (IFBs) is the method used for the sealed bid process
  • Contract is awarded to the lowest bidder who is fully responsive

Consolidated Purchasing Programs

  • Most government agencies have common purchasing needs
  • Centralized purchasing or procurement vehicles are used to realize economies of scale
  • Multiple Award Schedules, such as General Service Administration (GSA) Schedules or Government Wide Acquisition Contracts (GWACs) are important contracting vehicles

Competitive Contract Negotiations

  • Preferred method in many federal procurement actions
  • Typically used for contracts that will exceed $100,000.00 and when highly technical products and services are being sought
  • Requests for Proposals (RFPs) and  Requests for RFQs are primary request vehicles
  • The Contracting Officer may engage in discussions with offerors, proposal evaluation may also consider non-cost factors (such as managerial experience, technical approach, and/or past performance) and award the contract using the other factors and the price
  • Types of contracts include:

a)      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/loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties.

b)      A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and establishing the final contract price by a formula based on the relationship of final negotiated total cost to total target cost.

c)      A cost-reimbursement type of contract provides for payment of allowable incurred costs, to the extent prescribed in the contract. (Cost-reimbursement contracts such as indefinite delivery/ indefinite quantity (IDIQ contracts) are suitable for use when uncertainties involved in contract performance do not permit costs to be estimated with accuracy

d)     A cost-plus-incentive-fee contract is a cost-reimbursement contract that provides for an initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs.

e)      A cost-plus-award-fee contract is a cost-reimbursement contract that provides for a fee consisting of (a) a base amount (which may be zero) fixed at inception of the contract and (b) an award amount, based upon a judgmental evaluation by the Government, sufficient to provide motivation for excellence in contract performance.

f)       A cost-plus-fixed-fee contract is a cost-reimbursement contract that provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed under the contract.

g)      A cost-plus-fixed-fee contract may take one of two basic forms—completion or term. (1) The completion form describes the scope of work by stating a definite goal or target and specifying an end product. This form of contract normally requires the contractor to complete and deliver the specified end product (e.g., a final report of research accomplishing the goal or target) within the estimated cost, if possible, as a condition for payment of the entire fixed fee. (2) The term form describes the scope of work in general terms and obligates the contractor to devote a specified level of effort for a stated time period. Under this form, if the performance is considered satisfactory by the Government, the fixed fee is payable at the expiration of the agreed-upon period.

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