Sealed Bidding vs. Negotiation, Contract types

Sealed bidding employs competitive bids, public bid opening (in the case of Government), and awards based on price when bidder is “responsive” and “responsible”, meaning it responds to the requirement without taking exception, and has a documented history of responsible business conduct.

Normally considered for use when five conditions are met: 

• The dollar value of the purchase must be large enough to justify the investment in time and resources to accomplish the process
• Time permits solicitation, submission, evaluation and possible resolution of bids
• Award will be made on the basis of price
• Discussions with offerors not necessary
• Reasonable expectation of receiving more than one sealed bid exists (in other words, technically acceptable competition will occur)

 In Government procurements, sealed bidding was once considered the preferred method; however, negotiation is now sometimes encouraged, especially for complex procurements and when contracting officer determines it to be in the Government's best interests.

Major objectives of Negotiation: 

• Obtain fair and reasonable price (need cost/price analysis)
• Obtain required delivery schedule
• Include controls over supplier performance:
• Man-hours of effort
• levels of technical talent
• Special equipment, testing requirements
• Nature of sub-contracted effort (may require a special sub or may wish to limit subcontractors)
• (Supplier performance includes compliance with quality, quantity, delivery, and service terms.)
• Obtain supplier cooperation (two way street: supplier expects timely payment, fair treatment, contract compliance, future orders)
• Develop a sound  and continuing relationship between buyer and seller

Any others suggested by the class?

        Negotiation is normally indicated when: 

• Acquisition is complex or vague
• Risks cannot be accurately determined (i.e. first time effort)
• Protracted production time
• Sole-source of supply is required
• When contracting for production effort, not a specifically delivered item

When using negotiated procurement process: 

• Evaluation criteria should be clear, stated, and rank ordered by importance 
• Evaluation must be based upon stated criteria 
• Discussions may be conducted with all or selected offerors

For each term and condition to be negotiated, negotiator should develop an objective position (negotiator's expectation of seller's actual cost plus a fair profit). Furthermore, the negotiator should: 

• Organize the issues to be on the agenda
• Rank in order of importance
• Verify opponent's authority
• Negotiate on home grounds
• Determine concessions and compromises
• Keep the initiative
• Be positive
• Listen well
• Be considerate, preserve opponent's dignity.
• Never give anything away
• Seek mutual, not equal benefit

CONTRACT TYPES (Refer to reference materials for more information about K types)

Classified by method of contractor compensation or reimbursement: 

(Fixed price or Cost) 

Fixed price:

Firm fixed price

• Specific sum paid for specific performance
• Maximum risk on contractor

Fixed-price with economic price adjustment

• Adjusted up or down based upon predetermined contingencies
• Used to minimize concerns about risk (i.e. incentivize vendors to do business)when market conditions are unstable

Fixed-price with redetermination

• Adjustments made based upon Quantity variation in labor or materials (as opposed to costs as in EPA, above)
• Adjustments may be limited to either upward, downward, or flexible movement of price

Fixed-price with incentive

• Used to incentivize a specific outcome (i.e. cost savings, delivery, MTBF, etc.)
• May simply be an agreement to share savings

Cost Contracts:

Provide for reimbursement of costs (allowable and allocable) incurred by contractor.

Cost plus fixed-fee

Fixed-fee is profit (since fee is fixed, little cost saving incentives exist.)

Cost plus percentage-of cost

A questionable way to contract for anything and specifically prohibited In Federal Government contracting although allegedly used in some commercial and state/local construction contracts.

Cost plus incentive-fee

• Used to incentivize a particular outcome (same as discussed above)
• Target, minimum, maximum fees are negotiated                                             

Award-fee contract (may be used in either fixed-price or cost reimbursement contracts)

Award fee, when properly used, is a valuable tool. Its application is intended to motivate the contractor’s performance in those areas critical to program success (e.g., technical, logistics support, cost, and schedule) that are susceptible to judgmental/qualitative measurement and evaluation. This subjective evaluation of contractor performance can be supported, however, by objective measurement as well. Award fee provides for a pool of dollars that can be earned based upon the Government’s evaluation of the contractor’s performance in those critical areas.

• Incentivizes contractor performance in predetermined area(s) as discussed above
• Fee is subjectively determined based upon specified criteria to be evaluated (quality, cost control, etc.)
• Consists of base fee and award amount (limits on the base fee are imposed upon government contracts (i.e. 3%).

Award-term Contract

The award term concept is an adaptation of the commercial industry practice of establishing long-term relationships with quality contractors. The appeal to the Government of this business arrangement incentive is a continued relationship with a proven and reliable producer of quality goods or services. For the contractor, the motivation is the possibility of maintaining a stable, partnering relationship in their business base.

Award term can be best described as a derivative of award fee. The difference is that the contractor earns additional periods of performance instead of award fee. The process for rewarding the contractor with the additional contract term is identical to award fee. An Award Term Review Board (ATRB) uses an Award Term Plan (ATP) to evaluate contractor performance and makes a recommendation to a Term Determining Official (TDO). The TDO is responsible for making the final decision on the contractor’s score for that period. Based on the contractor’s cumulative score the contract’s performance period can be extended or reduced. Due to the additional administrative and management effort and cost of maintaining the award term process, an analysis should be performed before implementing a contract with an award term clause. The analysis should show that the additional effort and cost to administer and evaluate performance associated with the award term process is justified by the expected benefits.

Award term benefits both the customer and the contractor. It rewards quality contractors. It facilitates process improvements and capital investments, which in turn should result in lower contract prices. It communicates the "health" of contract performance to the contractor through continuous and in-depth performance assessments. A successful, long-term contractual relationship provides the added benefit of reducing the manpower intensive effort of frequently reacquiring the services or supplies provided.

Performance-Based Contract

 Performance-Based contracting is intended to allow the contracting activity to take advantage of industry’s ability to bring innovative solutions to meet the activities needs.  In performance-based contracts, the SOW (called a “Performance-based Statement of Work or PBSOW) contains performance requirements (WHAT) and eliminates process-oriented requirements (HOW) and includes only minimally essential reporting requirements. If the level-of-effort, staffing levels or skill mix of workers are specified, then the contract is NOT performance based.  Other attributes of performance based contracts (be they for services or products), include:

• The SOW/specification contains explicit, measurable performance standards usually portrayed in a section of the RFP called the performance requirements summary.
• The contracting activity employs a measurement method, (e.g., quality assurance surveillance plan or QASP, and/or an incentive or award fee/term performance evaluation plan), and that method is clearly communicated to the contractor. The contractor is held accountable for failure to meet minimum requirements, e.g., monetary consideration (positive monetary incentives for performance exceeding contract requirements that benefits the contracting activity can also be included). Deduction schedules may be used where appropriate; and

• The solicitation and contract convey logical, easily understood flow among performance requirements and standards, the measurement method and incentives; and

• The contract is a completion form of contract (something is accomplished) as opposed to a term/level-of-effort form of contract (effort is expended). The contracting officer determines the appropriate contract type.  Paramount to performance based contracting is the concept of firm product deliverables as by its nature, a performance-based contract is “outcome based”, not level of effort.

Time and Materials Contract

Time and Materials contracts are used extensively by the Federal Government for consulting and other professional services contracts where an indeterminate “level of effort” is desired.

• Used for indeterminate effort (repair of equipment, general consulting services)
• Consists of hourly charge which includes all labor, overhead, profit
• Materials supplied at cost plus handling

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Case:

Ruhling Manufacturing Company

 Additional Reading:

Contract type’s exercise included with Class 5 materials (below)

Federal Acquisition Regulations, Part 16

CONTRACT TYPE SCENARIOS

Based on your experience, reading, and our discussion of Contract Types, what type(s) of contract could or should be applicable to the six situations below:

• The roof has blown off the Commissary Warehouse and $5,000,000 in merchandise could be at risk.

• The V-22 Osprey is ready to start the Initial Production Phase.  As the program is a political football, it is essential that the contractor perform within the $2.5 billion project budget.

• It has been determined that a contract will be placed for Military Family Housing maintenance.  The activity head is particularly concerned with compliance with a 4-hour response to emergency work and a 48-hour response time on routine, non-emergency work.

• 20 each AN/MLQ-40 Prophet Ground communications intelligence and electronic warfare systems have been deployed to Iraq.  Contractor calibration and maintenance must be performed semiannually and emergency maintenance, repairs beyond the capability of the Army technicians must be performed within 6-hours of a system going down.

• A contract is needed for maintenance and repair of 500 hand-held portable radios at Andrews Air Force Base.  Historical data indicates that between 15% and 20% of the radios will require some type of repair during any given year.

• A requirement exists for portable toilets to be placed at ball fields, visitor’s gates, and other locations on a military base.  An additional 100 are needed on a one-time basis for the Armed Forces Day Open House.

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