From Defense Procurement and Acquisition Policy - Contract Pricing Reference Guide:

COST RISK AND CONTRACT TYPE _________________________________________________ ________________________________

Cost Risk Requirement Definition Production Stages

High Vague Concept Studies & Basic Research

Low Well-defined

Exploratory Development CPFF

Test/ Demonstration Full-scale Full Production Development CPIF, FPIF, or FFP FFP, FPIF, or FPEPA Follow-on Production FFP, FPIF, or FPEPA

Contract Type



Comparison of Major Contract Types Fixed Price (FP) Fixed-Price Economic Price Fixed-Price Adjustment Incentive Fee (FPEPA) (FPIF) Unstable market Moderately prices for labor or uncertain contract material over the life labor or material of the contract. requirements. The market prices at A ceiling price can risk are severable be established that and significant. The covers the most risk stems from probable risks industry-wide inherent in the contingencies nature of the work. beyond the The proposed profit contractor's control. sharing formula The dollars at risk would motivate the outweigh the contractor to control administrative costs to and meet burdens of an other objectives. FPEPA. A fixed-price, A ceiling price Target cost ceiling on upward Target profit adjustment, and a Delivery, formula for quality, and/or adjusting the price other up or down based performance on: targets (optional) Established Profit sharing prices. formula Actual labor or material costs. Labor or material Fixed-Price Awardfee (FPAF) Risk that the user will not be fully satisfied because of judgmental acceptance criteria. Judgmental standards can be fairly applied by an Award-fee panel. The potential fee is large enough to both:

Provide a

Fixed-Price Prospective Redetermination (FPRP) Costs of performance after the first year because they cannot be estimated with confidence. The Government needs a firm commitment from the contractor to deliver the supplies or services during subsequent years. The dollars at risk outweigh the administrative burdens of an FPRP.

Principal Risk None. Thus, the to be Mitigated contractor assumes all cost risk Use When...

The requirement is


Contractors are

experienced in meeting it. Market conditions are stable. Financial risks are otherwise insignificant.

meaningful incentive. Justify related administrative burdens.

A firm fixed-price. Standards for


A firm fixed-price for each line item or one or more groupings of line items.

evaluating performance. Procedures for calculating a fee based on performance against the standards

Fixed-price for the first period. Proposed subsequent periods (at least 12 months apart). Timetable for pricing the next period(s).

indices. Provide an acceptable deliverable at the time and place specified in the contract at the adjusted price. Generally realizes an Generally realizes Contractor an additional dollar Incentive (other additional dollar of profit for every dollar of profit for every than that costs are reduced. dollar that costs are maximizing reduced. goodwill) 1 Contractor is Obliged to: Provide an acceptable deliverable at the time and place specified in the contract at or below the ceiling price. Realizes a higher profit by completing the work below the ceiling price and/or by meeting objective performance targets. Commercial supplies Long-term contracts Production of a Typical and services. for commercial major system based Application supplies during a on a prototype period of high inflation Generally NOT Must be justified. Must be justified. Principal Must be negotiated. Limitations in appropriate for R&D. Contractor must FAR Parts 16, have an adequate 32, 35, and 52 accounting system. Cost data must support targets. Firm Fixed-price Successive Targets Variants Level of Effort.


Provide an acceptable deliverable at the time, place and price specified in the contract.

Perform at the time, place, and the price fixed in the contract.

Provide acceptable deliverables at the time and place specified in the contract at the price established for each period.

Generally realizes an additional dollar of profit for every dollar that costs are reduced; earns an additional fee for satisfying the performance standards. Performance-based service contracts.

For the period of performance, realizes an additional dollar of profit for every dollar that costs are reduced.

Long-term production of spare parts for a major system.

Must be negotiated.

MUST be negotiated. Contractor must have an adequate accounting system that supports the pricing periods. Prompt redeterminations. Retroactive Redetermination

Goodwill is the value of the name, reputation, location, and intangible assets of the firm.

Comparison of Major Contract Types Cost-Plus Cost-Plus Cost-Plus Cost or Incentive-Fee Award-Fee Fixed-Fee Cost- Sharing Time & Materials (CPIF) (CPAF) (CPFF) (C or CS) (T&M) Principal Risk Highly uncertain and speculative labor hours, labor mix, and/or material requirements (and other things) to be Mitigated necessary to perform the contract. The Government assumes the risks inherent in the contract -benefiting if the actual cost is lower than the expected cost-losing if the work cannot be completed within the expected cost of performance. The contractor No other type of contract An objective Objective incentive Relating fee to Use When.. performance (e.g., to expects is suitable (e.g., because relationship can be targets are not substantial established between feasible for critical actual costs) would costs are too low to be unworkable or of compensating justify an audit of the the fee and such aspects of benefits for marginal utility. contractor's indirect measures of performance. absorbing part of expenses). performance as Judgmental standards the costs and/or actual costs, delivery can be fairly applied.1 dates, performance Potential fee would foregoing fee or benchmarks, and the provide a meaningful The vendor is a like. incentive. non-profit entity Elements

Target cost Performance Target cost Standards for Target cost Fixed fee Target cost If CS, an A ceiling price A per-hour labor rate

targets (optional)

A minimum,

maximum, and target fee A formula for adjusting fee based on actual costs and/or performance

evaluating performance A base and maximum fee Procedures for adjusting fee, based on performance against the standards

agreement on that also covers the overhead and profit Provisions for Government's share of the cost. reimbursing direct No fee material costs

Contractor is Obliged to:

Make a good faith effort to meet the Government's needs within the estimated cost in the Schedule.

Make a good faith effort to meet the Government's needs within the ceiling price.


Realizes a higher fee Realizes a higher fee Realizes a higher

If CS, shares in the

Incentive (other than maximizing goodwill)1 Typical Application

Principal Limitations in FAR Parts 16, 32, 35, and 52

by completing the by meeting rate of return (i.e., cost of providing a work at a lower cost judgmental fee divided by total deliverable of and/or by meeting performance cost) as total cost mutual benefit other objective standards. decreases. performance targets. Research and Large scale research Research study Joint research with development of the study. educational prototype for a institutions. major system. The contractor must have an adequate accounting system. The Government must exercise surveillance during performance to ensure use of efficient methods and cost controls. Must be negotiated. Must be justified. Statutory and regulatory limits on the fees that may be negotiated. Must include the applicable Limitation of Cost clause at FAR 52.232-20 through 23.

Emergency repairs to heating plants and aircraft engines. Labor rates must be negotiated. MUST be justified. The Government MUST exercise appropriate surveillance to ensure efficient performance. Labor Hour (LH)


Completion or Term.

Contract Pricing Reference Guides

The Contract Pricing Reference Guides are a set of five reference volumes that were developed jointly by the Federal Acquisition Institute (FAI) and the Air Force Institute of Technology (AFIT). The Guides are now maintained by the Office of the Deputy Director of Defense Procurement for Cost, Pricing, and Finance (DP/CPF). The Guides were developed to provide instruction and professional guidance for contracting personnel. They provide detailed discussion and examples applying pricing policies to pricing problems. To improve the value of the Guides as a reference source, we have converted all five volumes to an HTML format that will enable easier and faster navigation to particular topics of interest within the five volumes. The Guides are maintained with the assistance of pricing professionals from AFIT, all the Military Departments, and the civilian agencies. However, we also need your input to ensure we are meeting your needs and providing a useful source of pricing information. If you have comments or suggestions, just click on "feedback" which can be found on the navigation bar at the top and bottom of every page. The following is a chapter listing for all five volumes of the Pricing Guides. You can go directly to the chapter you are interested in or you can view an expanded listing that shows chapter sections and subsections by clicking on the volume title. Download the Guides We have made the guides available for download. The ZIP compressed package includes all the HTML pages available on the website. Volume 1 - Price Analysis 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Introduction to Contract Pricing (PDF) Conduct Market Research for Price Analysis (PDF) Maximize Price Competition (PDF) Price-Related Data From Offerors (PDF) Developing Award Criteria for Pricing (PDF) Applying Price-Related Factors (PDF) Comparing Prices (PDF) Account for Differences (PDF) Price-Related Decisions in Sealed Bidding (PDF) Price-Related Decisions in Negotiations (PDF) Documenting Pricing Actions (PDF)

Volume 2 - Quantitative Techniques for Contract Pricing 1. Using Price Index Numbers (PDF)

2. 3. 4. 5. 6. 7. 8. 9.

Using Cost-Volume-Profit Analysis (PDF) Using Statistical Analysis (PDF) Developing and Using Cost Estimating Relationships (PDF) Using Regression Analysis (PDF) Using Moving Averages (PDF) Using Improvement Curves (PDF) Using Work Measurement (PDF) Using Net Present Value Analysis (PDF) Volume 3 - Cost Analysis

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Defining Costs and Cost Analysis (PDF) Obtaining Offeror Information for Cost Analysis (PDF) Identifying Considerations Affecting Cost Allowability (PDF) Collecting Information to Support Cost Analysis (PDF) Defining and Evaluating Work Design for Contract Performance (PDF) Analyzing Direct Material Costs (PDF) Analyzing Direct Labor Costs (PDF) Analyzing Other Direct Costs (PDF) Analyzing Indirect Costs (PDF) Analyzing Facilities Capital Cost of Money (PDF) Analyzing Profit or Fee (PDF) Preparing for Negotiation (PDF) Volume 4 - Advanced Issues in Contract Pricing

1. 2. 3. 4. 5. 6. 7. 8.

Establishing and Monitoring Contract Types (PDF) Evaluating Indirect Costs (PDF) Reviewing the Contractor's Pricing and Accounting Practices (PDF) Forecasting Cost Overruns (PDF) Recognizing and Adjusting for Defective Pricing (PDF) Pricing Equitable Adjustments and Settlements (PDF) Pricing Termination Settlements (PDF) Conducting Cost Realism Analyses (PDF)


Performing Financial Analyses (PDF)

Volume 5 - Federal Contract Negotiation Techniques 1. 2. 3. 4. 5. 6. 7. 8. Introduction to Negotiations (PDF) Exchanges Prior to Negotiations (PDF) Negotiation Preparation (PDF) Noncompetitive Negotiations (PDF) Nonverbal Communication (PDF) Bargaining Techniques (PDF) Bargaining Tactics (PDF) Conducting Discussions (PDF)

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