Risk Management Flashcards
FAR Parts 9, 11, 16, 28, 32, and 49
Risk Management:
Risk Management:
FAR Parts 9, 11, 16, 28, 32, and 49
FAR Part 9 - Contractor Qualifications
FAR 11 - Describing Agency Needs
FAR Part 16 - Types of Contracts
FAR Part 28 - Bonds and Insurance
FAR Part 32 - Contract Financing
FAR Part 49 - Termination of Contracts
The Bonds statute requires performance and payment bonds for any construction contract valued in excess of _________?
$150,000
$650,000
$1,000,000
$2000
FAR 28.102-1(a)
$150,000
Which agency operates SAM?
Department of Defense (DoD)
General Services Administration (GSA)
Government
Accountability Once (GAO)
Department of State (DOS)
FAR 9.404
General Services Administration (GSA)
Government
A contractor may assign monies due or to become due under a government order/contract only when the contract value totals _________ or more.
$25,000
$1,000
$100
$500
FAR 32.802
1,000
A letter contract may be used when the schedule will provide definitization of a contract no greater than _____ days after the date of the letter contract.
180
150
120
365
FAR 16.603
180
Which of the below is the correct order of preference under FAR Part 32: Contract Financing?
Private financing without government guarantee, loan guarantees, customary contract financing, advance payments, unusual contract financing.
Customary contract financing, unusual contract financing, loan guarantees, advance payments, private financing without government guarantee.
Advance payments, loan guarantees, private financing without government guarantee, customary contract financing, unusual contract financing.
Private financing without government guarantee, customary contract financing, loan guarantees, unusual contract financing, advance payments.
FAR 32.106
Private financing without government guarantee, customary contract financing, loan guarantees, unusual contract financing, advance payments.
FAR 32.106
The least preferred method of contract financing is:
Loan guarantees
Advance payments
Unusual contract financing
Private financing
FAR 32.106
Advance payments
What occurs when the final cost exceeds the price ceiling in a fixed-price incentive fee type contract?
Contractor absorbs the difference as a loss
Final costs are recouped at contract closeout
Final costs are increased through a change order
Government absorbs the difference as a loss
FAR 16.403
Contractor absorbs the difference as a loss
First Article testing and approval is NOT normally required for:
Products normally sold in the commercial market
Products larger than a bread basket
Products offered by AbilityOne sellers
Products with more than a 2-year warranty
FAR 9.304
Products normally sold in the commercial market
What is the difference between Debarment and Suspension?
Suspension is for a temporary period and Debarment generally does not exceed three years, but may be for a period not to exceed ?five years if the contractor violated the provisions of the Drug-Free Workplace Act of 1988.
Suspension is for two years and Debarment is for three years.
There is no real difference.
Suspension is for a temporary period pending the completion of investigation and any ensuing legal proceedings and Debarment is permanent.
FAR 9.406/9.407
Suspension is for a temporary period and Debarment generally does not exceed three years, but may be for a period not to exceed ?five years if the contractor violated the provisions of the Drug-Free Workplace Act of 1988.
The terminating contracting officer shall recommend the release of excess funds to the contracting officer within how long after the receipt of the termination notice?
30 days
3 months
10 days
14 days
FAR 49.105-2
30 days
Which of the following is NOT a potential organizational conflict of interest?
A contractor gains an unfair competitive advantage due to required access to proprietary information.
A contractor prepares and furnishes specifications or work statements that favor its own products or capabilities.
A contractor’s contract for the evaluation of offers for products or services includes evaluation of its own offer for products or services or those of a competitor.
An incumbent contractor submits a proposal for a follow-on or renewal contract.
FAR 9.505
An incumbent contractor submits a proposal for a follow-on or renewal contract.
Which bond type secured performance and fulfillment of the contractor’s obligation under a contract?
Payment bond
Performance bond
Advance payment bond
Bid guarantee
FAR 28.001(6)
Performance bond
ayment from the government will be based on receipt of a proper invoice and ____________.
Interest
Payment due dates
Delivery criteria
Satisfactory contract performance
FAR 32.905
Satisfactory contract performance
What is the customary progress payment rate for a large business concern?
25%
50%
80%
15%
FAR 32.501-1
80
A ___________ means a form of security assuring that the bidder will not withdraw a bid within the period specified for acceptance and will execute a written contract and furnish required bonds within the allotted time following award.
bid guarantee
deposit
bond
insurance
FAR 28.001
bid guarantee
What type of contract is a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing service?
Labor-Hour Contract
Letter Contract
Times & Materials Contract
Basic Agreement Contract
FAR 16.603
Letter Contract
The objective when negotiating contract type and price is to negotiate one that will result in:
Lowest price for the government
Reasonable contractor risk and greatest incentive for efficient and economical performance
Reasonable risk to the government and greatest incentive for cost savings
Reasonable incentive for fast delivery and lowest risk to the government
FAR 16.103
Reasonable contractor risk and greatest incentive for efficient and economical performance
A ___________________ is required only when a performance bond is required and it is determined to be in the government’s best interest to use them.
bid bond
payment bond
surety bond
performance bond
FAR 28.103-3(a
payment bond
What is the customary progress payment percentage rate for small business concerns?
10%
50%
85%
15%
FAR 32.50
85
What is a payment for accepted supplies or services, including payments for accepted partial deliveries?
Delivery payments
Final/partial acceptance
Commercial payments
Progress payments
FAR 32.001
Delivery payments
A ____________ ensures payment as required by law to all persons supplying labor or material in the prosecution of the work provided for in the contract.
Bid bond
Performance bond
Payment bond
Patent infringement bond
FAR 28.001
Payment bond
If a Small Business concern’s over that would otherwise be accepted is to be rejected because of a determination of non-responsibility, the Contracting over shall refer the matter to the Small Business Administration (SBA) who will decide whether or not to issue a:
Compliance Certificate
Certificate of Competency
Performance rating audit score
Determination of Responsibility
FAR 9.104-3
Certificate of Competency
_______________ provides for upward or downward revision of the state contract price upon occurrence of specified contingencies
Fixed-Price with prospective price determination
Cost-Plus-Fixed-Fee contracts
Fixed ceiling price with retroactive price determination
Fixed-Price with economic price adjustment
FAR 16.203
Fixed-Price with economic price adjustment
Payment by the government is made on the _______ day after the designated billing office receives a proper invoice.
30th
13th
3rd
10th
FAR 32.904(b)
30
he use of cost-reimbursement contracts is prohibited for the acquisition of __________.
Research & Development (R&D)
Supplies and services below the simplified acquisition threshold
Services below the micro-purchase threshold
Commercial items
FAR 16.301-3
Commercial items
Which of the following is required for the Government to effect a no-cost settlement in lieu of a termination for convenience or default?
There are no outstanding debts due to the Government
The price of the contract is less than $5,000
Government property was furnished
The contractor has outstanding obligations
FAR 49.109-4
There are no outstanding debts due to the Government
Which of the following contract types puts the most risk on the buyer?
Cost Plus Fixed Fee
Time & Material
Firm Fixed Price
Fixed-Price with Incentive Fee
FAR 16.101
Cost Plus Fixed Fee
Acceptable forms of security include all of the following except:
Certified cashier’s checks
Credit card
U.S. bonds or notes
Cash
FAR 28.203-2(a)
Credit card
________________ Contracts place maximum risk and full responsibility for all costs and resulting profit and loss upon the Contractor.
Firm-Fixed-Price
Incentive
Cost Reimbursement
Time & Material
FAR 16.202
Firm-Fixed-Price
What bond secures fulfillment of the Contractor’s obligations under a patent provision?
Advance payment bond
Annual bid bond
Performance bond
Patent infringement bond
FAR 28.001(4
Patent infringement bond
Which contract financing arrangement places the obligation on the agency?
Advance Payment for non-commercial items
Advance Payment
Loan Guarantee for defense production
Private Financing
FAR 32.303
Advance Payment for non-commercial items
No officer or employee of the Government may create or authorize an obligation in excess of funds available, otherwise they have violated the:
Anti-Deficiency Act
Prompt Payment Act
Beeker Act
Availability of Funds clause
FAR 32.702
Anti-Deficiency Act
Under the Anti-Deficiency Act, no officer or employee of the Government may create or authorize an obligation in excess of available funds, nor may they obligate the Government in advance of appropriations. Violating this act is a serious offense.
Which of the following is not a type of surety?
Co-surety
Individual
Corporate
Multiple
FAR 28.001
Multiple
“Multiple” is not a recognized type of surety under FAR. The three types of sureties recognized in FAR are:
Co-surety
Individual
Corporate
Which of the following contract types is prohibited by the FAR?
Cost Plus Percentage of Cost
Cost Plus Award Fee
Firm Fixed Price
Fixed ceiling price with retroactive price redetermination
FAR 16.102
Cost Plus Percentage of Cost
FAR prohibits Cost Plus Percentage of Cost contracts because they provide no incentive for contractors to control costs. The other contract types are allowed under specific circumstances.
Which of the following terms means a list of products that have been examined and tested, and have satisfied all applicable requirements?
Procurement list
Evaluated products list
Federal Supply Schedule
Qualified products list
FAR 9
Qualified products list
A Qualified Products List (QPL) refers to a list of products that have been examined, tested, and found to meet all applicable requirements before being approved for procurement.
Commercial Advance Payment shall not exceed what percentage of the contract price?
10%
15%
5%
1%
FAR 32.202-1(b)(6)
15
____________ are written instruments of understanding that contain terms and conditions that apply to future orders, a description of supplies and services to be provided, and methods for pricing, issuing, and delivering future orders.
Indefinite-Delivery Arrangements
Blanket Purchase Agreements
Basic Ordering Agreements
Fixed-Price Contracts
FAR 16.703
Basic Ordering Agreements
Basic Ordering Agreements are written instruments of understanding that contain terms and conditions that apply to future orders, a description of supplies and services to be provided, and methods for pricing, issuing, and delivering future orders.
The Government prefers to issue multiple awards for which of the following?
Requirement contracts
Basic Ordering Agreements
Indefinite Delivery
Indefinite Quantity Contracts
Letter Contracts
FAR 16.5
Indefinite Delivery
Indefinite Quantity Contracts
FAR PART 9, CONTRACTOR QUALIFICATIONS
FAR Part 9 explains how federal contractors qualify for contracts by the contracting officer’s determination of “responsibility.”
What is a responsibility determination?
To issue your company a contract, the government must determine that your company is responsible. This decision about your company’s “responsibility” is called a responsibility determination.
FAR PART 9, CONTRACTOR QUALIFICATIONS
FAR Part 9 explains how federal contractors qualify for contracts by the contracting officer’s determination of “responsibility.”
What federal employee performs the responsibility determination?
Government contracting officers perform responsibility determinations. Sometimes, the contracting officer will conduct a thorough review of your company to determine your responsibility. However, in most cases, the contracting officer simply checks your company’s status in the System for Award Management (SAM) registration website for federal contractors. If nothing bad shows up, your company is assumed to be responsible.
Whenever a contracting officer signs a government contract, the signature by the contracting officer acts as a (positive, acceptable) responsibility determination. If the contracting officer signs your contract, the contracting officer effectively determines that your company is responsible.
FAR PART 9, CONTRACTOR QUALIFICATIONS
FAR Part 9 explains how federal contractors qualify for contracts by the contracting officer’s determination of “responsibility.”
How does the government contracting officer decide if a company is responsible?
Contracting officers use the following factors to determine whether your company is responsible and therefore eligible for federal contracts:
Does your company have adequate financial resources-or the ability to get them?
Is your company able to comply with the delivery or performance schedule?
Does your company have a satisfactory record of past performance?
FAR PART 9, CONTRACTOR QUALIFICATIONS
FAR Part 9 explains how federal contractors qualify for contracts by the contracting officer’s determination of “responsibility.
What are the databases the government checks to determine the responsibility of my company?
The government is supposed to check the status of your company in the System for Award Management (SAM). (When SAM was being upgraded and integrated with other systems, the government temporarily called it Beta.SAM.)
FAR PART 9, CONTRACTOR QUALIFICATIONS
FAR Part 9 explains how federal contractors qualify for contracts by the contracting officer’s determination of “responsibility
What is CARS?
CPARS is incredibly important for the success (or failure!) of your company in government contracting. Every federal contract above a certain dollar threshold requires the contracting officer to record an assessment of the performance of your company into CPARS.
Therefore, CARS is an online database of past performance of federal contractors.
Other contracting officers and other federal agencies will look up the past performance evaluations of your company within CPARS. If you have negative evaluations or disagreeable information in CPARS, other federal clients will see it and will avoid your company like the plague.
FAR PART 9, CONTRACTOR QUALIFICATIONS
FAR Part 9 explains how federal contractors qualify for contracts by the contracting officer’s determination of “responsibility
Can my company monitor what the
government records in CPARS?
Yes, and your company should carefully monitor any CPARS action. Find out the timelines for when your government client will enter information into CARS. Immediately read and analyze the information about your company in CPARS, which will be made available to you. If you find negative information, do your best to rebut or respond to the negative information.
If you are persistent and lucky, maybe you can convince the government to change or remove your negative commentary and other information.
FAR PART 9, CONTRACTOR QUALIFICATIONS
FAR Part 9 explains how federal contractors qualify for contracts by the contracting officer’s determination of “responsibility
Are you saying it is difficult and unlikely for my company to change the negative information entered into CPARS?
Yes, it is difficult and unlikely for your company to succeed in changing CARS information.
CARS is a tool designed, created, and maintained for the government’s benefit, so the government wants its employees to have broad discretion to be honest and candid about CPARS evaluations.
FAR PART 9, CONTRACTOR QUALIFICATIONS
FAR Part 9 explains how federal contractors qualify for contracts by the contracting officer’s determination of “responsibility
What can my company do about negative
CPARS information?
Your company has the right to respond, in writing, to the CPARS evaluation. Make sure you respond before the deadline. Commit significant resources to your formal response, as if the future of your company depends on it —because it does!
FAR PART 11, DESCRIBING AGENCY NEEDS
FAR Part 11 explains how the government describes what it wants to buy.
What is the government’s policy for describing what it wants to buy?
The government has several policy goals when describing what it wants to buy from industry, including:
Using market research to formulate an intelligent description of what it wants Promoting full and open competition
Using restrictive conditions only as necessary
Encouraging commercial supplies or services
Describing requirements in terms of functions to be provided, performance
specifications, or essential physical characteristics
FAR PART 11, DESCRIBING AGENCY NEEDS
FAR Part 11 explains how the government describes what it wants to buy
What does it mean to describe requirements in terms of functions to provide, performance specifications, or essential physical characteristics?
The goal of these policies is to shape government solicitations towards objective outcomes or characteristics so that any qualified contractor can win and perform the contract. Avoid using a brand name or proprietary technology in the description of the requirement so that many companies can compete, instead of just one or few.
For example, let’s discuss the agency’s need for laptop computers. We will start with a very poor, anticompetitive description of the agency’s needs:
“The agency needs an Apple-branded laptop computer that has smooth edges.”
This description is anticompetitive because only Apple can manufacture the laptop. There are no required functions or performance specifications. Also, having smooth edges sounds like a personal preference, not an
FAR PART 11, DESCRIBING AGENCY NEEDS
FAR Part 11 explains how the government describes what it wants to buy
What
is
the
common
theme
shared between performance specifications, required functions, and essential physical characteristics?
The common theme is these factors are objective needs (rather than subjective preferences) and can be satisfied by almost any company, rather than a single company. These factors are not proprietary or monopolized by a single brand or company. Any company can evaluate these objective characteristics to determine whether they can provide the item. As such, the revised statement of what the government needs will attract more companies and proposals and therefore, more competition.
FAR PART 11, DESCRIBING AGENCY NEEDS
FAR Part 11 explains how the government describes what it wants to buy
Why does the government prefer commercial, rather than custom, solutions?
Commercial solutions are available immediately and have been sold (or offered) to the open market-not just to the government. Developing a new product or new service includes, of course, development and testing costs. The customdeveloped item may not work as reliably as solutions that go back many years. Finally, the custom-developed item will usually have a price higher than a commercial solution because the custom item has only one potential customer— the government.
FAR PART 11, DESCRIBING AGENCY NEEDS
FAR Part 11 explains how the government describes what it wants to buy
Does the government buy commercial items using a different method of contracting?
Yes, the federal government has commercial procedures for procuring commercial items.
These commercial procedures significantly speed up the government contracting process.
Therefore, commercial procedures are preferred by law and regulation. Remind the government of the preference for commercial items and commercial procedures whenever possible. For more information, read Part 12, Acquisition of Commercial Items.
FAR PART 11, DESCRIBING AGENCY NEEDS
FAR Part 11 explains how the government describes what it wants to buy
Does the term “commercial items” include goods and services?
Yes, the term commercial items include products and services. Your company’s products and your company’s services may be classified as
“commercial items” for government contracting purposes. Remember: Commercial items include both physical goods and intangible services.
FAR PART 11, DESCRIBING AGENCY NEEDS
FAR Part 11 explains how the government describes what it wants to buy
Can the government restrict the contract competition to a particular brand name?
Yes, some government contract solicitations will restrict competition to a particular brand name.
Other competitions will restrict competition to brand name or equal, which allows a contractor to provide a comparable substitute.
FAR PART 11, DESCRIBING AGENCY NEEDS
FAR Part 11 explains how the government describes what it wants to buy
What rules must the government follow to restrict the solicitation to a brand name?
If the solicitation is restricted to a particular brand name only, the government must say so explicitly and explain its justification. It is acceptable to limit competition to a brand name, but there must be a reason the government
needs the brand name. It cannot be based solely on a brand preference. There must be some other relevant or “salient” characteristic of the brand name that benefits the government.
Requiring Apple products is an example of a government contract competition restricted to a brand name. The justification could be that the entire information technology system of the government is compatible only with Apple products. However, the justification cannot be that the government employees simply “like”
Apple products.
FAR PART 11, DESCRIBING AGENCY NEEDS
FAR Part 11 explains how the government describes what it wants to buy
Why would the government restrict the solicitation to brand name or equal?
Brand name or equal allows slightly broader competition than a solicitation limited to a specific brand name. If the government knows that the objective specifications of a brand-name product will meet the requirement, reliance on brand name or equal could make sense.
Whenever possible, the government should restrict to brand name or equal rather than brand name only.
The government does not need the specific brand, but it knows that the performance characteristics of a particular brand will satisfy its needs. If there is some other brand or manufacturer that can provide at least the same objective specifications, the government will have no problem contracting with the alternative brand or manufacturer.
For example, the government could restrict competition to something brand name or equal to the Apple iPhone X. The government could list the objective specifications of the Apple iPhone X, which the contractor must meet or exceed to win the contract. Apple can win this competition by supplying the iPhone X.
However, any Apple competitor can also win this competition if it supplies a cell phone that meets or exceeds the same specifications. In this way, brand name or equal provides more competition,
FAR PART 11, DESCRIBING AGENCY NEEDS
FAR Part 11 explains how the government describes what it wants to buy
Is a brand name restriction the same as a sole-source contract?
A sole-source government contract means that one company alone on planet Earth can provide the goods or services. The government must write, sign, and publicize a special justification to restrict competition to only one source. Read more about this special justification in Part 6, Competition Requirements.
Sole source is not the same as brand nameonly. For example, Honda cars can be sold many different car dealerships. Many Honda dealerships are not owned by Honda.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts.
What do you mean by contract type?
Always pause and ask yourself and anyone what they mean when they refer to a “contract type.” Contracts have many different attributes, including payment type, delivery type, and the type of goods or services delivered or provided under the contract. Do not mix up the different
“types of types.”
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts.
“Types of types!” What on Earth are you talking about?
If I asked you what type of car you drive, you could respond in several ways: “I drive a Honda.”
“I drive a blue car.” “I drive an old car.” “I drive a car with an automatic transmission.”
Your car is an old, blue, Honda with an automatic transmission. We just covered four different attributes about your car (and we did not even get to the model of the car, e.g., Accord!). We also just covered four different
“types of types” of cars:
Brand type (Honda)
Color type (blue)
Age type (old)
Transmission type (automatic)
Government contract types pose the same problem of classification, which you can avoid by asking or answering precise questions about contract type.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts.
How can I ask about payment type?
You can ask, “What is the payment type of this contract-is it fixed-price, cost-reimbursement, or time and materials?”
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts.
How can I avoid confusion when discussing contract type?
Decide what you want to learn or share. Pause and think about whether you are exploring the payment type, delivery type, or the type of goods or services, for example.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts.
How can I ask about the delivery type?
You can ask, “Is this an indefinite-delivery, indefinite-quantity (IDIQ) contract or a contract with fixed delivery dates and quantities?”
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts.
How can I ask about the goods or services?
You can ask, “Is this contract for products?” or “Is this contract for services?” or “Is this a government contract for commercial items?”
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts.
I’m still confused about contract types. Can you provide more guidance?
This example will be my last to explain the different “types of types” of contract.
You can find
a government contract
that is cost-reimbursement (payment type);
that is indefinite-delivery, indefinite-quantity or IDIQ (delivery type); that deliversproducts (as opposed to services); and that delivers noncommercial items (as opposed to commercial items).
When someone asks a vague question about this contract- “What type of contract is it?”— what will be your answer? My answer will be: “The payment type is cost-reimbursement.
The delivery type is IDIQ. The contract delivers products, and the products are noncommercial.
Did you want to know about any other aspects of the contract?” Be precise!
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts.
What are the first two “families” contract payment types?
The first two “families” of contract payment types are (1) fixed-price and (2) cost-reimbursement.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts.
What is the third “family” of contract payment types?
The third “family” of contract payment type is the time and materials contract, which we will discuss after fixed-price and cost-reimbursement contracts
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts.
What are the basics of a fixed-price contract?
The bottom line is that a fixed-price contract provides your company a specific amount ofmoney. No matter how much money your company actually spends to complete the contract, your company will only receive the originally specified amount. In contrast, cost-reimbursement contracts will pay your company based on your actual costs incurred. If yourcompany spends more money than expected to complete the contract, your company might receive more money than was negotiated originally.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts.
What are the basics of a cost-reimbursement contract?
Cost-reimbursement means the government will reimburse your costs in performing the contract, as long as they are reasonable, allowableand allocable. For more info about reasonableallowable, and allocable costs, read Part 30, CostAccounting Standards Administration and Part
31, Contract Cost Principles and Procedures.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts
What is a cost overrun in a cost-reimbursement contract?
If your company is reimbursed for costs greater than originally negotiated, this situation is called a cost overrun. The actual, reimbursed costs of the contract have overrun the original estimated costs.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts
Does the government accept more risk when using a cost-reimbursement contract?
Cost-reimbursement contracts make the government nervous. The nature of the work is too complex or difficult to define properly. If the government could define exactly what work needs to be performed, your company would instead receive a fixed-price contractWhenever the project or work is vague and ill-defined, the government may decide to pay your company for its best efforts, rather than for a specified deliverable. Your company gets paid for all its allowable, allocable, and reasonable costs.
This makes the government nervous because there is a very probable risk of a cost overrun.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts
What are the downsides for my company when performing cost-reimbursement contracts?
Your company faces higher levels of administrative oversight, documentation requirements, and accounting controls with cost-reimbursement contracts. The government wants to minimize the risk of a cost overrun and avoid reimbursing any inappropriate costs. To achieve these government goals, your company will be subject to a heavy administrative burden.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts
What types of cost accounting burdens come with cost-reimbursement contracts?
Cost-reimbursement contracts are where your
company will experience the dreaded Cost Accounting Standards or CAS. In plain English, CAS is an entirely different set of accounting rules that applies only to government contracting. CAS compliance creates significant overhead costs that you will not incur for any other type of contract. You should not use a standard accountant trained in Generally Accepted Accounting Principles. Now your company needs a specialized government contracting accountant who understands CAS.
For more info, read Part 30, Cost Accounting Standards Administration and Part 31, Contract Cost Principles and Procedures.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contracts
Do I need to transform the accounting department of my company to perform cost-reimbursement contracts?
Yes, you probably need to spend money and time to get your accounting practices into compliance. For this reason, many government contractors choose to avoid cost-reimbursementcontracts. The additional costs of complyingwith CAS, hiring a specialized governmentcontracting accountant, and dealing with the , complicated accounting requirements can overwhelming. Before you accept your first cost- reimbursement contract, perform an economic fee. analysis to see if the benefits outweigh the costs.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
is a cost plus fixed fee or CPFF contract?
Cost plus fixed fee or CPFF is the most common type of cost-reimbursement contract. In addition to the reimbursement of all reasonable, allowable, and allocable costs, your company will receive an additional fee. Your fee will be a fixed dollar amount that does not change based on your cost expenditures, unless there are new requirements added to the original contract.
This means your profit margin decreases if you commit a cost overrun.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
Why will cost overruns decrease my profit margin?
Here’s the financial mathematics of an overrun. If your company spends more thanthe estimated cost ceiling to get the job donethis cost overrun increases the total cost ofthe contract, but it does not increase the fixedfee. Your original fee is a fixed dollar amount.Therefore, the ratio of the fixed fee relative to the total cost decreases, which decreases your profitmargin.
For example, the total estimated cost of the contract is $1 million, and the fixed fee is $100,000. This means your fixed fee is 10 percent of the total cost. If your company commits a cost overrun, now the total cost of the contract is $1.5 million. Your company receives an extra $500,000 in reimbursed costs, which is helpful. However, now your fixed fee is less than 7 percent of the total cost. Cost overruns provide your company more revenue, but likely slimmer profit margins.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What is a cost ceiling?
In cost-reimbursement contracts, your company will be subject to an estimated cost ceiling.
The government is not liable to pay for and you are not liable to perform work beyond this cost ceiling, unless you receive a contract modification.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What are the “Limitation of Funds” and
“Limitation of Cost” clauses?
Your contract will have a Limitation of Funds or Limitation of Cost clause which forces you and the contracting officer to closely monitor the cost ceiling. Only the contracting officer has the authority to increase the cost ceiling and obligate more money on the contract. These clauses require your company to provide written notice to the government when you approach or know you will surpass the estimated cost ceiling.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What happens when my company notifies the government that our costs are close to the estimated cost ceiling?
When you notify the government that your company will exceed the cost ceiling, the government has a choice. The government can either add more money to your contract, or do nothing, which means your company will need to eventually stop work. Be sure you have written authorization to proceed from the contracting officer before you spend any money beyond the cost ceiling. Even better, wait until you receive a signed modification to the contract. Remember, the government is not liable to pay for and you are not liable to perform work beyond the cost ceiling. Unless the cost ceiling is increased, your company will be working at risk of not being paid back or reimbursed.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
Besides CPFF, are there other types of cost-reimbursement contracts?
Yes, although cost plus fixed fee or CPFF is the most common type of cost-reimbursementcontract, you may encounter two other types:
incentive fee and award fee.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What is an incentive fee contract?
Incentive fees are inversely proportional to the total reimbursed cost. If you commit a cost overrun, your incentive fee decreases. If you finish the contract using fewer costs than originally negotiated, your company gets a higher incentive fee.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What is an award fee contract?
Award fees are administratively decided by government committee. Every few weeks or months, the government decision makers huddle into a room and decide how much award fee to give your company. As crazy as this award fee sounds, the idea is that your company will constantly want to please the government because the next award fee meeting is just around the corner.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contrac
What does it mean to say that costs must bereasonable, allowable, and allocable?
In cost-reimbursement contracts, the government will reimburse your costs only if they are reasonable, allowable, and allocable.
The contracting officer decides if the costs are reasonable, and the determination is mostly used as a check on ridiculous prices or unnecessary expenses. Allocable means you can tie the costs or a portion of the costs to the particular contract you’re charging them against. The cost might be 100% allocable to a single contract
—a direct cost. Alternatively, the cost might be spread across several contracts-in other words, an indirect cost. The good news is the government will reimburse you for both direct and indirect costs.
Allowability is more complicated. The FAR lists allowable and unallowable costs in FAR Part 31, Contract Cost Principles and Procedures.
Don’t forget that your contract itself might also preclude certain costs from being reimbursed,and that contract language will trump any other guidance you find. In other words, if CAS or the FAR says the cost is allowable but your contract says the cost is unallowable, the cost is unallowable. To read more about these concepts, check out Part 30, Cost Accounting Standards Administration and Part 31, Contract Cost Principles and Procedures.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What are the benefits of fixed-price contracts?
Fixed price contracting is the land of opportunity. With greater risk comes greater reward and higher profit margins. In firm fixed price or FFP contracts, the government will only pay you a specified amount of money. If you must spend more to complete the job, it’s your problem. Your profitability decreases and you can actually lose money.
On the bright side, if you can find a way to successfully perform while needing less money than the fixed price, your profit margins can be sky-high when compared to a cost-reimbursement contract. For this reason, many government contractors prefer fixed-price contracts. Furthermore, fixed-price contracts are much simpler to set up than cost-reimbursement contracts. Fixed-price contracts do not require special accountants, extra documentation, and compliance with Cost Accounting Standards.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
Can the pursuit of fixed-price versus cost-reimbursement contracts change my entire organizational strategy?
Yes, the business strategies behind fixed-price and cost-reimbursement contracts are not just about economics and profit margins. Cost-reimbursement contracts require a massive amount of oversight, accounting, compliance, and record-keeping. Make sure you have the office staff or the outside consultants to help you stay compliant.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
Which is simpler and requires less “back office help”—a fixed-price contract or a cost-reimbursement contract?
For most fledgling small businesses, a cost-reimbursement government contract is not a good option. Fixed-price contracts are much simpler. The transition to the first cost-reimbursement government contract should be deliberate and methodical. Plan your company growth and financial operations in a way that makes sense for the types of government contracts you expect to win.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What is a time and materials contract?
Time and materials government contracts are very similar to contracts you see for plumbers, attorneys, or car mechanics. You pay your attorney by the hour, and you pay for your attorney’s costs, such as postage or court filing fees. You pay your plumber by the hour, and you pay for your plumber’s costs, such as pipes, equipment, and new toilets.
When the government is the client, the government pays your company by the hour, and the government also pays for your materials used in the contract. This is the time and materials contract.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What is a labor-hour contract?
Labor-hour contracts are a subset of time and materials contracts. Labor-hour contracts are basically the same, except they involve no materials.
The government pays your company only by the hour, for labor. No materials exist in a labor-hour contract. For example, your labor-hour contract pays your company an hourly rate for every hour of work your employee completes onsite at the government building.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What is a fully loaded labor rate?
The fully loaded labor rate is the rate you bill your clients. When you win a time and materials or labor-hour government contract, you need todecide how much to bill the government per hour of work. This rate must be higher than the direct labor rate your company pays the employee. Otherwise, how can you make any money?
If you win a government contract based on time and materials, the “time” will be measured in labor hours. Your company will be paid for each hour of work and for any materials used. Each hour of work will be classified according to a labor category and labor rate. Your experienced employees will have a more expensive labor rate because they cost you more to employ. Your cheaper employees will have a cheaper labor rate.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What is a wrap rate?
The wrap rate is the multiplier your company uses to transform the employee’s direct, hourly cost into a fully loaded labor rate. In the earlier example, the wrap rate is calculated by dividing the fully loaded labor rate by the direct cost of $50 per hour.
Wrap rate = fully loaded labor rate / direct labor
rate
1.3 = $65 / $50
$65 is 130% of $50
n this example, the wrap rate or wrap multiplier is 1.3 or 130%. The fully loaded labor rate is 130% of the direct labor rate your company pays the employee. If you multiply the direct labor rate by 1.3, you arrive at the fully loaded labor rate.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What is an indefinite-delivery, indefinite-quantity or IDIQ contract?
An indefinite-delivery, indefinite-quantity or IDIQ contract allows agencies the flexibility to place orders for the amounts they need when the need arises. If the agency knew it needed 1,000 computers in 30 days, the agency could sign a simple purchase order for 1,000 computers. This purchase order would have a definite quantity (1,000) and a definite delivery schedule (within the next 30 days).
But what if the agency knows it needs between 1,000 and 1,000,000 computers at various
points within the next 5 years? Enter the IDIQ contract, which establishes a minimum and maximum quantity (between 1,000 and 1,000,000) and an ordering period (today through the next 5 years). Through this IDIQ contract, the agency can easily satisfy its needs for computers whenever they arise. Next month, the agency can order 2,000 computers. The following month, the agency can place zero orders. At the end of next year, the agency can order 30,000 computers. This flexibility is very convenient for the agency and the contracting office.
If you remember our earlier discussion about the “types of types” of contracts, the IDIQ description pertains to the delivery type.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
Can an IDIQ contract have different payment types?
Great question! You understood the earlier lesson about “types of types.” Yes, IDIQ contracts can have fixed-price or cost-reimbursement payment types. So, there are fixed-price, IDIQ contracts and there are cost-reimbursement,
IDIQ contracts.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What is a single-award, IDIQ contract?
A single-award, IDIQ contract is held by one company, rather than multiple companies. For example, company ABC wins the only IDIQ contract to deliver computer laptops. Company ABC will “win” every order placed against the single-award IDIQ contract.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What is a multiple-award, IDIQ contract?
Multiple-award, IDIQ contracts are awarded to two or more companies, rather than a single company. For example, the government wants to diversify its suppliers of computer laptops. So, the government awards three multiple-award, IDIQ contracts to company DEF, company XYZ, and company QRS.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
How does the government decide which of the three companies wins each order?
Usually, the government will compete each order among the three companies. The terms of the multiple-award, IDIQ contract will usually require the government to give each of the three companies a fair opportunity.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What is “fair opportunity?”
Fair opportunity is a special standard of competition that applies to multiple-award contracts, like multiple-award, IDIQ contracts.
This competition standard of fair opportunity is different from the “full and open competition” required by FAR Part 15 and the “maximum extent practicable” required for simplified acquisition procedures under FAR Part 13.
The competition standard of fair opportunity applies exclusively to multiple-award contracts.
Under fair opportunity, the government must notify each contract-holder, but not any other companies. Therefore, if your company failed to win one of the original multiple-award contracts, you are ineligible to win any orders placed against the multiple-award contracts. Only the contract-holders have a “fair opportunity” to win the orders.
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What is an indefinite-delivery, definite-quantity contract?
An indefinite-delivery, definite-quantity contract is very similar to an IDIQ contract. The important difference is the government knows the exact quantity of supplies or services but does not know when they need to be delivered or performed. This difference is spelled out in the names:
Indefinite-delivery, indefinite quantity (IDIQ): “I don’t know how much I need or when I need it.” Indefinite-delivery, definite quantity: “I know how much I need, but I don’t know when I need it.”
FAR PART 16, TYPES OF CONTRACTS
FAR Part 16 is a useful reference guide for the myriad types of contracts and explains how the government places orders against IDIQ contract
What is a requirements contract?
A requirements contract is awarded to a single company to provide all the government’s needsfor a supply or service during a specific period.
You should celebrate if your company wins a requirements contract.
FAR PART 28, BONDS AND INSURANCE
FAR Part 28 explains how and when the government requires bonds or insurance.
What does “bid” mean within FAR Part 28, Bonds and Insurance?
Bid means any response to a solicitation, including a proposal or offer. So, your bid is what you send to the government to win a competitive contract.
FAR PART 28, BONDS AND INSURANCE
FAR Part 28 explains how and when the government requires bonds or insurance.
What is a bid guarantee?
A bid guarantee is a form of security assuring that the bidder (1) will not withdraw its bid and
(2) will get any required bonds for the contract.
Think of a bid guarantee as an insurance policy that protects the government against the possibility that a bidder will “chicken out” by failing to honor and follow through with its bid.
The government needs reassurance that it can rely upon your bid to move forward with the
deal. The government also wants assurance that if selected, your company will take all required steps to sign the contract, including obtaining any required bonds.
So, a different company guarantees your company’s bid. This different company assures the government of two things. First, your company will not withdraw its bid before the window of time closes for acceptance. Second, your company will follow through with its bid by signing a contract and securing any other bonds required by the government solicitation.
FAR PART 28, BONDS AND INSURANCE
FAR Part 28 explains how and when the government requires bonds or insurance.
What is a bond?
Let’s start with a type of bond you may have read about in the news or noticed in a movie about criminals. If the accused criminal-the defendant—is released after arrest and allowed to go free before the trial, the justice system wants a guarantee that the person will show up for trial. Let’s say the judge sets bail at $1,000,which means the defendant must pay $1,000 to walk free before the trial.
The bail bondsman provides the valuable service of guaranteeing that the person will show up for court. The defendant does not have $1,000 on hand, so the bail bondsman posts the bail bond for the defendant, who pays the bail bondsman ten percent ($100) of the full bond ($1000). The other 90 percent ($900) is covered by collateral, such as a house, car, jewelry, or other valuables.
So, the bail bondsman pays the bail bond-the full $1,000. The defendant pays 10 percent-just $100-and provides other property or valuables as collateral.
If the defendant shows up to court as promised, the bail bond is dissolved, and the collateral is returned to the owners). The bail bondsman keeps the 10 percent ($100) as a service fee.
If the defendant fails to show up, the bail bondsman keeps not just the $100, but also the collateral (the house, car, jewelry, or other valuables that covered the remaining 90 percent or $900).
FAR PART 28, BONDS AND INSURANCE
FAR Part 28 explains how and when the government requires bonds or insurance
Can you tell me how this detour into criminal law relates to government contracting?
Back to government contracting and other types of bonds. Your company is like the defendant (sorry!). The government is like the judge. The surety company-which provides the bond for your company-is like the bail bondsman. The government wants assurance that your company will follow through with its obligations to the government, just like the judge wanting assurance that the defendant will keep the promise to show up before the judge in court. In both cases, the bond assures fulfillment of promises made by one party to another. In this way, bonds are somewhat like an insurance program because they share and distribute risk.
The government requires bonds in a variety of situations to limit, mitigate, or eliminate various risks in government contracting, just like thejudge requiring bail (or a bail bond) to make sure the defendant shows up in court. When two parties do not trust each other enough, bonds fill in the gap and make the deal go through.
FAR PART 28, BONDS AND INSURANCE
FAR Part 28 explains how and when the government requires bonds or insurance
What is a surety company?
The surety company provides the bond.
FAR PART 28, BONDS AND INSURANCE
FAR Part 28 explains how and when the government requires bonds or insurance
How does the bond, issued by the surety company, protect the government?
The bond is a written instrument (contract) between the surety company and a contractor.
The terms of the bond will state that if the contractor fails to fulfill its obligations to the government, the surety company will pay a certain amount of money to compensate the government for its loss. In this way, a bond is somewhat like an insurance policy.
FAR PART 28, BONDS AND INSURANCE
FAR Part 28 explains how and when the government requires bonds or insurance
What types of bonds are relevant to government contracting?
Bid bond: This type of bond serves as a bid
guarantee, discussed earlier.
Annual bid bond: Instead of executing a series of individual bid bonds, a contractor can provide an annual bid bond that covers all its bids within the same year.
Advance payment bond: Sometimes the government pays a contractor before completing the work. The government wants assurance that the contractor will finish the work (that was already paid for). The advance payment bond covers the cost of the contractor’s obligations.
Performance bond: This type of bond provides coverage for the possibility that the contractor fails to complete performance of the contract.
Be careful to distinguish a performance bond from a bid bond. The bid bond assures against a bidder failing to honor its bid (before beginning work on the contract). The performance bond assures against a contractor failing to complete its contract (after the contract is signed).
Annual performance bond: Instead of executing a series of individual performance bonds, a contractor can provide an annual performance bond that secures performance for all the contractor’s contracts within the same year.
Payment bond: This type of bond assures that the contractor will pay its employees and subcontractors involved in the government contract.
Patent infringement bond: This type of bond secures fulfillment of the contractor’s obligations under a patent clause in a contract.
FAR PART 28, BONDS AND INSURANCE
FAR Part 28 explains how and when the government requires bonds or insurance
What types of insurance should I explore to protect my company while performing government contracts?
Many! You need to find an excellent insurance broker, agent, or professional to give you insurance advice. Remember, my book is not legal advice, nor is it tax advice, and it is not insurance advice. Contact a qualified professional insurance advisor to meet your insurance needs. This book provides you only the broad strokes to start you on your journey.
As a government contractor, your company probably needs several types of insurance. Even if your company has no government contracts and participates only in the private sector, your company probably needs insurance. Let’s explore the different types:
General liability insurance protects against risks like bodily injury or property damage, which are physical, tangible risks. For example, general liability insurance may cover your company for litigation claims if your employee hurts someone else or destroys someone else’s computer while performing work. General liability is important for any company, including government contractors.
Professional liability insurance protects against abstract risks like errors or omissions in the services your company provides. For exampleprofessional liability insurance may cover your
compensation requirements, but your company
company for litigation claims if your employees
is required to pay these costs to employees
provide inaccurate advice
and commit
who get hurt “in the course and scope” of
negligence. Just like general liability insurance,
their job. If you have no workers’ compensation
professional liability insurance is important for
insurance, your company must pay these costs
any company providing professional services,
out-of-pocket. If you have insurance, the insurer
including government contractors.
pays these costs (in exchange for your monthly premiums). Many states require companies to
Workers’ compensation insurance pays for
carry workers’ compensation insurance.
medical expenses, lost wages, and rehabilitation costs to your employees who become injured or sick at work. Each state has different workers’
FAR PART 32, CONTRACT FINANCING
FAR Part 32 explains financing policies for government contracts.
What is the lifeblood of any business?
Cash flow is the lifeblood of any business, including government contractors.
If your company is a federal contractor or subcontractor, you will learn this lesson quickly or go bankrupt slowly. Learn about cash flow.
FAR PART 32, CONTRACT FINANCING
FAR Part 32 explains financing policies for government contracts.
What is contract financing?
Contract financing consists of different ways to help your company’s cash flow by giving you money when you need it so you can perform the contract. There are several types of contract financing.
FAR PART 32, CONTRACT FINANCING
FAR Part 32 explains financing policies for government contracts.
Are prime contractors required to pay small business subcontractors faster?
Yes, at least sometimes. The federal.government’s Office of Management and Budget
(OMB) released a memo called “Providing PromptPayment to Small Business Subcontractors.” This policy memo requires that prime contractorsthat receive accelerated payment schedules from the government client must also pay small business subcontractors on an accelerated schedule. The idea is that if the primecontractor gets money faster, the prime contractor is supposed to pay any small business subcontractors faster.
FAR PART 32, CONTRACT FINANCING
FAR Part 32 explains financing policies for government contracts
What is the Prompt Payment Act?
Congress passed a law requiring agencies to pay contractors within 30 days of submitting a proper invoice. Be careful to note that not just any invoice qualifies. Your company must submit a
“proper invoice” by complying with any required format, delivery, or content requirements.
Although you may have submitted an invoice 30 days ago, the Prompt Payment Act does not start unless your invoice qualifies as a proper invoice.
If the agency fails to pay your company within 30 days of a proper invoice, your company receives interest penalties, which discourages the government from dragging its feet.
FAR PART 32, CONTRACT FINANCING
FAR Part 32 explains financing policies for government contracts
What are advance payments?
Advance payments are like a special favor to your company. You get payment before you complete the contract. Advance payments are not measured by performance or progress, your company just gets the money early, perhaps to pay subcontractors or for some other reason.
Advance payments seem like a great deal but remember that any advance payments will be subtracted from any later payments you are owed. You will not get paid twice for the same work.
FAR PART 32, CONTRACT FINANCING
FAR Part 32 explains financing policies for government contracts
What are performance-based payments?
Performance-based payments are based on your company’s performance as measured by objective measurements, accomplishment of defined events, or other quantifiable standards or results.
FAR PART 32, CONTRACT FINANCING
FAR Part 32 explains financing policies for government contracts
What are progress payments?
Progress payments are based on costs your company incurs during the contract. Progress payments are not based on the percentage or stage of completion, nor are they based on performance, nor are they based on partial delivery. Instead, progress payments are tied to your company’s costs (not its results).
FAR PART 32, CONTRACT FINANCING
FAR Part 32 explains financing policies for government contracts
What is a “pay when paid” provision and why should I avoid it like the plague?
As a subcontractor, always try to negotiate to remove a pay when paid provision. Examine your payment terms and try to decipher if any of the timelines for payment are contingent upon the prime contractor getting paid first. If you need help with this analysis, email me at Christoph@ChristophLLC.com.
The subcontractor starts with a cash flow disadvantage. As a subcontractor, you always worry about getting paid on time. First, the prime contractor must be paid by the federal agency. Then, the subcontractor gets paid by the prime contractor. But wait! Is this sequence the only possible order of operation?
Pay when paid provisions between the prime contractor and subcontractor are disturbingly dangerous for the subcontractor. If the prime contractor does not get paid by the federal agency, the subcontractor does not get paid. If the government pays the prime contractor late, the subcontractor’s payment is delayed even further.
FAR PART 32, CONTRACT FINANCING
FAR Part 32 explains financing policies for government contracts
What are the “Limitation of Funds” and
“Limitation of Cost” clauses?
Your cost-reimbursement contract will have a Limitation of Funds or Limitation of Cost clause that forces you and the contracting officer to closely monitor the cost ceiling.
Only the contracting officer has the authority to increase the cost ceiling and obligate more money into the contract. These clauses require your company to give written notice to the government when you approach or know you will surpass the estimated cost ceiling. Read more about these topics in Part 16, Types of Contracts.
FAR PART 49, TERMINATION OF CONTRACTS
FAR Part 49 explores the scariest clause in all of government contracting, and explains the difference between termination for default (or cause) and termination for convenience.
What is a termination clause?
Termination clause doesn’t sound very appealing, does it? Death, destruction, ending, finality, time-traveling cybernetic organisms with Austrian accents!
You may be familiar with termination clauses in your apartment lease or cell phone contract.
When you want to move early or switch cell phone providers, you read your termination clauses to determine your rights and how to proceed.
FAR PART 49, TERMINATION OF CONTRACTS
FAR Part 49 explores the scariest clause in all of government contracting, and explains the difference between termination for default (or cause) and termination for convenience.
How does a termination clause work in government contracting?
In government contracting, the Termination clauses allow the government to abruptly fire or terminate your company. You need to understand the three types of Termination clauses: convenience, default, and cause.
FAR PART 49, TERMINATION OF CONTRACTS
FAR Part 49 explores the scariest clause in all of government contracting, and explains the difference between termination for default (or cause) and termination for convenience.
What is the scariest clause in all of government contracting?
The scariest clause in all of government contracting is Termination for Convenience of the Government. This clause allows the government to abruptly fire or terminate your company without paying the rest of the money from the remaining contract. To put this in perspective, let’s contrast it with private sector contracts.
You sign a contract with Donald Trump for $500 million worth of supplies across 5 years, $100 million per year. Your company provides the supplies, Donald Trump provides the $500 million. At the end of the first year, Donald Trump delivers his famous line, “You’re fired!”
There is no reason for the termination. It occurs simply for the convenience of The Donald.
In private sector contract law, you are entitled now to sue Donald Trump for at least some of the remaining money on the contract. You spent millions of dollars preparing for this 5-year contract. You hired hundreds of professionals.
By breaking the deal and violating the contract, The Donald harmed your company or deprived it of future revenue. You can sue The Donald for this future revenue-it’s called expectation damages. Expectation damages can be thought of as the dollars you expected to receive if The Donald had carried out the terms of the contract rightfully to its conclusion.
Contrast this private sector example with the frightening realm of government contracting.
Instead of The Donald, you sign a government contract with the Department of Justice for $500 million worth of services over 5 years, $100 million per year. At the end of the first year, the Department of Justice contracting officer writes you an email that states: “You are hereby terminated for the convenience of the government.” Guess what? You cannot sue the government or Department of Justice for the future revenue you lost. You can try, but you will lose. You are not entitled to the expectation damages of the broken deal.
Now you see the reasoning behind why the Termination for Convenience of the Government is the scariest clause in government contracting.
Although you can get paid for a few things after your company is terminated for convenience, you are not entitled to expectation damages.
Aside from some minor costs your company incurred to wind down the contract, the government walks away with zero liability. This extraordinary power of the government can bankrupt your company.
Terminations for convenience are a risk that almost every government contractor assumes, whether knowingly or in ignorance. You must price in the risk of these terminations for your long-term business plans. Every day thesun rises is another day the government can terminate your entire contract and not pay your company for breaking the deal. Technically, the
“deal” or contract says the government can do this and your company agrees!
FAR PART 49, TERMINATION OF CONTRACTS
FAR Part 49 explores the scariest clause in all of government contracting, and explains the difference between termination for default (or cause) and termination for convenience.
If my prime contract contains the Termination for Convenience clause, should I include something similar in any subcontracts?
Yes. If your prime contract with the government has the Termination for Convenience clause, you need to flow down a version of this clause to your subcontractors. If you do not, then the government can terminate your prime contract, but you are still on the hook to pay all your subcontractors. Remember, your subcontractors can sue you for expectation damages. You will be left holding the bag when the government terminates your company for convenience.
To avoid this disastrous situation, include a Termination for Convenience clause flow-down in your subcontracts. Stipulate that your company can use the Termination for Convenience clause against the subcontractor if the government uses the Termination for Convenience clause against your company.
FAR PART 49, TERMINATION OF CONTRACTS
FAR Part 49 explores the scariest clause in all of government contracting, and explains the difference between termination for default (or cause) and termination for convenience.
What if my company is the subcontractor performing work for a prime contractor?
If your company is the subcontractor, you should check your subcontract to see if the prime contractor has the right to terminate your company for convenience. If so, you should negotiate to change the subcontract terms to allow the prime contractor to terminate your company only if the government terminates the prime contractor.
In other words, do not give any prime contractor the discretion to terminate your subcontract.
Allow the prime contractor to terminate your company only to comply with a termination by the government. Include a requirement for the prime contractor to show proof of this termination.
FAR PART 49, TERMINATION OF CONTRACTS
FAR Part 49 explores the scariest clause in all of government contracting, and explains the difference between termination for default (or cause) and termination for convenience.
What is the Termination for Cause clause?
When the government procures commercial items (which can be products or services), the government is supposed to use a different clause that does not allow terminations for default.
Commercial government contracts should include a clause that allows for terminations “for cause.”
Terminations for cause in commercial government contracts must be based on some failure of your company. This process differs completely from the scary Termination for Convenience of the Government clause. Contract language about termination for cause is nothing to lose sleep over, but actually getting terminated for cause is a nightmare! You can read more about terminations for default to understand why you must avoid terminations for cause or for default.
FAR PART 49, TERMINATION OF CONTRACTS
FAR Part 49 explores the scariest clause in all of government contracting, and explains the difference between termination for default (or cause) and termination for convenience.
What is the Termination for Default clause?
In noncommercial government contracts, the contracting officer is supposed to use a version of the Termination clause that allows for termination “for default.” Just like the commercial version (Termination for Cause), any termination “for default” requires some failure of your company-hence the word
“default.” Your company has “defaulted” on its responsibility or its ability to fulfill the contract.
If your company is terminated for default, this termination may be a death sentence.
The termination for default will appear on your company record for years. Other potential government clients will review this information before they decide to award you a contract.
At all costs your company must avoid being terminated by default.
FAR PART 49, TERMINATION OF CONTRACTS
FAR Part 49 explores the scariest clause in all of government contracting, and explains the difference between termination for default (or cause) and termination for convenience
If my company is terminated for default, can I fight back in any way?
One way to dodge a termination for default is to convert the bitter pill into a terminationfor convenience. When government contractors litigate or challenge terminations for default, they’re sometimes settled, transformed, or ruled by a judge to be a termination for convenience.
This change saves the company’s reputation in government contracting. That outcome is what your company will want, so try to negotiate a termination for convenience rather than a termination for default.
FAR PART 49, TERMINATION OF CONTRACTS
FAR Part 49 explores the scariest clause in all of government contracting, and explains the difference between termination for default (or cause) and termination for convenience
What are the warning signs that the government plans to terminate my contract?
The government may send you two warning signs before terminating your company. If you see any correspondence with the words Cure Notice or Show Cause, you need to go on red alert. Assemble your company’s chain of command and get in touch with your expert for government contracting.
FAR PART 49, TERMINATION OF CONTRACTS
FAR Part 49 explores the scariest clause in all of government contracting, and explains the difference between termination for default (or cause) and termination for convenience
What is a Cure Notice?
The Cure Notice provides your company a
written warning that something is wrong. Your company is doing something or failing to do something that may breach the contract and result in a termination for default.
FAR PART 49, TERMINATION OF CONTRACTS
FAR Part 49 explores the scariest clause in all of government contracting, and explains the difference between termination for default (or cause) and termination for convenience
What is a Show Cause Notice?
Show Cause is a more urgent notice that your company may soon be terminated for default.
It warns your company to spell out any reasons.why the government should not terminate you for default. Usually the Cure Notice comes before the Show Cause Notice, which comes just before your oncoming termination for default.
Receiving a Show Cause Notice is like hearing the ominous question, “Any last words?” or “What do you want on your tombstone?” It is your last opportunity for rescue before termination.
