Understanding Government Contracts

If you invest in companies that earn their income as federal government contractors, you need to understand the basics of federal contracting. When companies put out press releases publicizing their latest contract win, you should understand the terminology they are using to describe the contract in order to better understand what the company has actually won and what the risks of the contract may possibly be. Malyszek & Malyszek is here to help you fully understand the various types of government contracts.

The most basic type of contract is the Fixed Price contract. In a fixed price contract, the government negotiates a set price for a set quantity of items or services. The government tends to favor this type of contract because most of the risk is on the contractor. The most common variety is the Firm Fixed Price (FFP) contract, but there are other varieties that may include inflation adjustments, incentives, and material reimbursements.

The next variation of contract is the Cost Reimbursement contract. The contractor performs the task specified, and the government reimburses the company afterwards for their actual costs. The government is trying to move away from these contracts because the risk for cost or schedule overruns is now on the government. The most common variety of Cost Reimbursement contract is the Cost Plus Fixed Fee (CPFF) contract, giving the contractor a fixed profit margin, or the Cost Plus Award Fee (CPFA), in which the company's profit margin depends on incentives for meeting performance goals.

Time & Materials (T&M) contracts are mainly used for providing service employees to the government. An hourly rate is negotiated, the time required for the task is estimated, and a time period for the performance of the work is set. The cost of other materials that are required to perform the work may be reimbursed as well. Time & Materials is actually a specialized type of Cost Reimbursement contract where the contractor's overhead and profit margin are baked into the hourly labor rates. Therefore, T&M contracts have the same risks to the government for cost overruns or incomplete work. There are some risks to the contractor as well, though. The labor rates are all negotiated up front based on today's usual wages; if personnel depart and have to be replaced at a higher wage a few years down the road, the company's profit margin could shrink or go negative.

However government contracts provide that the government may terminate your contract if:
• You fail to make delivery within the time specified
• You fail to make progress so as to endanger performance of the contract
• You fail to perform any requirements of the contract

Before terminating a contract for default, however, the contracting officer must give you an opportunity to remedy deficiencies in your performance or show why your contract shouldn’t be terminated.

The federal government has exact specifications for most of the products and services it buys on a regular basis. In all likelihood, your contract will contain such precise specifications. In fact, the specifications were contained in the invitation for bids or request for proposals on which you based your bid or proposal.

Once an award is made to your company, you are contractually bound to deliver the product or service described in the specifications. Sometimes, the basic specifications will make reference to and incorporate other Federal specifications. You are bound by the terms of these specifications as well as the basic specifications. Failure to deliver a product meeting these terms may result in termination of your contract by default. Never bid on a contract unless you have read and understood all of the specifications. Read the specifications again before you start work under the contract.

Being awarded a contract is an important responsibility, because if you can’t perform according to the terms of the contract, the government will not get the product or service it needs and you may find yourself in financial difficulty as well. Call Malyszek & Malyszek for more information about the responsibilities of government contracts.