There are multiple ways to bake a cake, and in this same vein, there are numerous ways to win government contracts. In this article, we will detail the various kinds of popular government contracts that businesses can vie for in the federal marketplace: set-asides, fixed price, cost reimbursement, incentive, time-and-materials, labor-hour, and letter contracts. A small business must register with the System for Award Management (SAM) to participate in any of the contracting frameworks listed above to be eligible to win federal contract work. Let’s get started.
Set-Aside Contracts
The government is motivated to help small businesses in the United States as this fuels overall economic growth. And as such, the government takes various measures to ensure small business growth. In addition to small business certifications, the government creates set-aside contracts. Set-aside contracts limit competition for government contract work to provide small businesses equal opportunities to win said contracts. There are two types of set aside contracts: competitive set-aside and sole source set-aside.
Competitive Set-Aside
When more than one small business can perform the work required or provide the necessary goods needed by the government, government agencies reserve the right to engage in this work with only eligible small businesses. Typically if a government contract is less than $150,000, it will be rendered as a small business set aside, and if multiple companies can complete the work, it will be marked as competitive.
Sole-Source Set-Aside
As the name might suggest, sole-source contracts are those that are awarded without a competitive procurement environment meaning they are to be completed by one company and there isn’t any sub-contracting. Commonly sole-source contracts are deployed when only one business can fulfill a contract’s specifications. This is advantageous for such companies as they can virtually guarantee to win the contract.
Fixed-price Contracts
Again as the name might suggest, a fixed price contract guarantees that the contract’s price will not change. This can lead to risk for the small businesses that take them on. If the price doesn’t move, the small business could lose profitability on the contract if the costs of fulfilling the contract balloon. This type of contract is beneficial to the government because it has a fixed cost for budgeting purposes. The small business engaging in this type of contract will be best served to monitor the costs associated rigorously.
Cost-Reimbursement Contracts
For those contracts that are labeled cost-reimbursement, the costs associated with the contract will be paid by the federal government after the expenses are incurred. When the contract is being developed, the firm and the government will agree on various authorized expenditures that will be reimbursed up to an agreed-upon set limit. These contracts have risk protection as the costs associated with the contract cannot balloon without both parties consenting to increased costs. A federal officer may also have unilateral control to prevent charges from growing. Particular types of cost-reimbursement contracts are detailed in the numbered list below:
- Cost contracts
Here the contractor is not compensated for their incurred costs in any way. Frequently these will be deployed for research and development projects as costs here can exceed initial projections.
- Cost-sharing contracts
Suppose a contractor is open to bearing a portion of the costs associated with a project in exchange for a high upside in compensation. In that case, a cost-sharing contract can be deployed. A cost-sharing contract is where the contractor is reimbursed for a portion of the agreed-upon costs in lieu of a fee.
- Cost-plus-incentive-fee contracts
Here an initial cost is agreed upon after opening negotiations. However, using a mutually agreed-upon formula, the reimbursement can increase depending on the total permissible costs incurred throughout the project.
- Cost-plus-award-fee contracts
Here if the contractor’s work is exemplary enough–an award might be dispersed to the contractor from the federal government and the costs that are reimbursed.
- Cost-plus-fixed-fee contracts
A cost-plus-fixed-fee contract is where the contractor receives an agreed-upon fee at the project’s outset. This is a very straightforward structure for both parties.
Incentive Contracts
Incentive contracts are deployed when the government wants to match the amount of profit for the contractor with the contractor’s overall performance. Furthermore, typically the government will engage in incentive contracts when the benefits of the complete project could theoretically be obtained for a cheaper cost, at a quicker rate, or with superior overall performance. The incentivized party will have an opportunity to secure a sizeable fee if the contractor can exceed targets, decrease costs, and display technical prowess and excellence. While most contracts are structured to defend against rising costs, the incentive-based contract is focused on the value created by the associated project.
Time-and-Materials Contracts
Contracts denoted for time and materials do not have a fixed price. Instead, they are the antithesis of a fixed-price contract. As the name might suggest, the contract is structured around the time needed to complete the project and the costs associated with the materials involved. Usually, these contracts are deployed within the construction and product development industries.
Labor-hour Contracts
Labor-hour contracts function similarly to time-and-materials. However, in this case, the contractor does not furnish the material associated with the project. The federal government will review material prices and provide them to the contractor. The government will set a per-hour labor rate with a price ceiling, and the project will commence.
Letter Contracts
Letter contracts are expedient. They are a documented preliminary contract that affords work to be completed right away. Suppose something is pressing that the government demands should be addressed immediately, or there has been a lengthy contract negotiation process without any progress towards a resolution. In that case, a letter contract can be deployed. If the federal government awards a letter contract, they will ensure that the overall price of the preliminary agreement is capped.
FAMR Provides Excellent Guidance on Working with the Federal Government
Are you feeling overwhelmed by the sheer number of government contract structures? The Federal Award Management Registration professionals will ensure that your business is correctly set up to vie for the federal contracts detailed above. If you want to learn more about government contracting, check out FAMR’s guide to government contract bidding!