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Other Contract Types

What are time-and-materials and labor, hour contracts, and what are the risks involved in using these contracts?

In a time-and-materials (T&M) contract, the government assumes all risks except for fluctuations in per-hour wage rates and indirect costs. Labor-hour (LH) contracts are fixed on a per-hour basis with regard to the amount the contractor will be paid per hour. There is a "ceiling price," but it functions more like the "limitation of costs" provision of a cost reimbursement contract.

The government uses T&M contracts in much the same way that private citizens acquire car repair services. The contractor will be paid the cost of material and the cost of labor by the hour. The government insists that it be charged only for the cost of materials, without additional charges for overhead and profit. This is meant to discourage the contractor from attempting to make a higher profit through repair by replacement, that is, making the repairs by furnishing new materials (and charging overhead and profit on them) rather than troubleshooting, determining the malfunction, and using labor hours at the fixed rates to make the repairs. However, when the contractor loads the labor hours, care must be taken that the work is not slowed for the same goal of higher profits. Therefore, T&M and LH contracts demand the ultimate in COR monitoring responsibilities.

Contemplate award of a T&M or LH contract when the resources that will be required to perform the work (e.g., labor hours, labor mix, material requirements) are highly uncertain at the time of award. Also contemplate a T&M or LH contract when the expected cost of the work is too low to justify an audit of the contracting firm's indirect expenses.

T&M or LH contracts are often used in lieu of cost reimbursement contracts for markets in which price competition typically occurs on the basis of per-hour rates (e.g., repair services).

What are indefinite delivery contracts?

There are three types of indefinite delivery contracts:

1. Definite quantity. Provides for delivery of a definite quantity of specific supplies or services for a fixed period, with deliveries or performance to be scheduled at designated locations upon order (task order or delivery order).

2. Indefinite quantity. Provides for an indefinite quantity, within stated limits, of supplies or services for which the government places orders for individual requirements during a fixed period. Quantity limits (a minimum and a maximum) may be stated as number of units or as dollar values. The contract requires the government to order (and the contractor to furnish) at least a stated minimum quantity of supplies or services, but not to exceed the stated maximum.

3. Requirements. A contract that establishes what goods or services will be bought if and when they are needed by the government. The government must use a requirements contract if it has a need that can be satisfied by using it.

What is a letter contract?

A letter contract is a written preliminary contractual instrument that authorizes the contractor to immediately begin manufacturing supplies or performing services.

A letter contract may be used when:

The government's interests demand that the contractor be given a binding commitment so that work can start immediately and

Negotiating a definitive contract is not possible in sufficient time to fulfill the requirement.

The FAR states that a letter contract should be as complete and definite as possible under the circumstances. Each letter contract should contain a negotiated definitization schedule, including:

Dates for submission of the contractor's price proposal

A date for the start of negotiations

A target date for definitization, which must be within 180 days after the date of the letter contract or before completion of 40 percent of the work to be performed, whichever occurs first.

 
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