Contract Types

Today’s podcast is all about types of federal contracts.  We won’t cover all of the details, but enough to give you a basic understanding and be able to look up more information easily.

There are really three main contract types – Fixed Price, Time & Materials and Cost Plus contracts.

A Fixed Price contract is used when the scope of work is clear, and there are reasonable ways to estimate the schedule for the work and the costs.  It is typically for work that you could repeat over and over, and that would cost about the same each time.

For example, if you were having work done at your home, like having a new pool filter installed, you would expect the contractor doing the work to have a good idea of how long the project would take and how much labor and materials would be required.  You would also expect that you could get several bids for the work and they would be fairly comparable.   So it’s a well-defined scope and something done frequently so it’s easy to come up with a fixed price.

While in the commercial world, a fixed price contract could be paid for up front, in the federal world it is less likely to see full payment at the beginning of the contract.  The exception would be smaller projects, maybe under $25,000 or projects paid for using government credit cards.

More frequently, you’ll arrange payment terms with the contracting officer, so that there are installment billings, usually the contract value for the job divided by the period of performance in months.  Some contracts may use Milestone billings, where a billing is sent based on agreement between the contracting officer and the company that certain work has been completed and accepted.

The nice thing about Fixed Price contracts is that they are usually not subject to audit by the government.  Cases where an audit could occur would be when the contract is terminated early or the initial pricing has been questioned.

A Time & Materials contract, or T&M for short, is based on the hours worked times a billing rate.  The billing rate covers all the costs and the profit.  There are skills levels listed in defined Labor Categories, so you have to review your employees or proposed new hires and make sure that they match the labor category descriptions.  Many times, you will also have to submit resumes and even offer letters.  You’ll need to keep an active recruiting process and resume database, and stay in contact with proposed employees.

Usually, the T&M labor rates will cover the contracting periods, with a rate increase built into the rates each year.  As you build up your rate estimates, you’ll want consider labor rates for different locations, and you may get the rate escalation from the Bureau of Labor Statistics or similar source.  The biggest risks are that you are estimating over several years, and that pay rates can fluctuate depending on where the work actually takes place.  Over the last few years, changes in health insurance costs and even the changes to the overtime rules in the Fair Labor Standards Act (FLSA) have had an impact on these costs, not that contractors could have done anything to put those cost estimates into their pricing!

A big part of bidding T&M work is looking at where the work will be done, not just considering the different pay scales by location, but also will the work be done at your company’s location or at the client’s location, either “onsite” or “offsite.”  Beware – those terms are used interchangeably: sometimes onsite means at the client’s site and sometimes onsite means at the company’s site.  Take into account that whatever billing rate is highest must be the one that includes your facility costs.  Or, see which one is lower and that will be the rate for work performed at the client site, where your company does NOT provide office space and support.

When work is issued under a T&M contract, you’ll want to review the details of the Task Order or document authorizing a specific project.  It will have a contract value for the total effort, but many times it will also specify how many hours are expected for each labor category, so you’ll have to manage who works the project in order to stay within the budgeted hours.  Some contracts allow flexibility within the labor category budgets and others may require strict adherence to the budgeted hours.  Requesting modifications to update the hours budgets may delay payment, or in some cases be treated as a non-reimbursable overrun.    Be sure to have your systems set up to track hours by labor category as well as the overall contract value.

Most T&M contracts will have a master schedule showing labor categories and billing rates for each contract year.  There will be an annual price change, meaning the billing rates change – at the beginning of each contract year.  That change usually ends up happening in the middle of a timesheet period, so be prepared to have new charge number ready and possibly adjust the billings for these annual updates.

You will also have to watch out for Task Orders that cross the contract years, because you could have some hours for the same labor category worked in both contract years. For example, you could have a Program Manager (PM) with a bill rate of $100 per hour through June 26, 2016, that goes to $105 on June 27, 2016.  In some cases, your task order only authorizes the $100 per hour rate, while in others, you start billing at $105 per hour for hours on June 27 or later.

Many times there are contract modifications or even timesheet corrections that could impact these billings, you can see you need to have some detailed ways to track the employee, the hours, the dates and the labor category codes in the charge number structure.  If you are a subcontractor under a prime contractor, remember that there can be delays while waiting for clarification and approvals, and those delays will hold up your billing process, delaying payment of your invoices and slowing down your cash flow.

Cost Reimbursable or Cost Plus contracting requires a higher level of cost tracking, reporting and billing, because you have to track indirect rates by fiscal year and prepare an Incurred Cost Submission annually to settle differences between your indirect billing rates and your actual indirect rates.  You usually won’t go after this type of work until you have some experience in federal contracting, because it takes more effort to bid and win these projects.  However, Cost Plus contracts tend to be longer term, like five years, and may be set up to with a base year and four option years.

Cost Plus contracts are used when the scope of work is known but the costs cannot be estimated as accurately.  Cost Plus contracts are used for base operations, program management, engineering services and research and development contracts, because essentially the contractor maintains a work force to deliver the services needed, and the costs of the work force fluctuate with headcount, skill level and pay scales.

Usually, Cost Plus contracts have been established and will be re-competed every three to five years.  For example, in my first job in federal contracting, I worked for Boeing.  We had a contract at that time to manage the communications among all the NASA centers – putting in fax machines, building out net networks, and managing data transmissions.  You can tell this was a long time ago – before the internet, before cell phones, before Microsoft windows even.  I ran the payroll and accounting functions on that contract for several years.  The contract, or some variation of it, has continued since that time, with changes in the prime contractor and the scope of work, but still with many of the same people.  Just a few years ago, I was out at the NASA offices on another project, and recognized people who I had worked with on that same project over 20 years before.  They were still part of the contract work force, even though their badges had changed.

When you are going after a Cost Plus contract, you’ll be watching for the re-compete to come out and tracking it from the earliest stages.  You’ll need to research the different teams to join and work with them on the proposal activity and strategy, plus really understand the customer and requirements.  With Cost Plus contracting, there is an expectation that each contractor will retain most of the work force, and these employees are called incumbent employees.  You’ll have to connect with these prospective employees and be able to bid them on the contract, including their benefits costs, and even recognizing their service dates and seniority for the leave accruals and other costs.

Most Cost Plus contract have Phase-In periods of about thirty days, but these are far from seamless.  You have to be prepared to onboard new employees, get their benefits set up, even while they are still working for the outgoing contractor.  If there was equipment or software on the contract, you’ll have to get the new equipment and software set up and running, even though you may not yet have access to many sections of the building.

Your accounting systems need to be ready to go, while you are still waiting for contracting paperwork that outlines the reporting requirements.  Some of that information will come from the proposal, but not all of it.  You’ll also have to set up a timesheet process, train the new employees, and make sure they have access from day one.  If you have subcontracts, similar requirements will need to be shared with them and set up.

There may be weekly or monthly reports required under these Cost Plus contracts.  The reporting requirements are usually defined in the proposal.  For example, NASA contracts have a 533 Report which is the current reporting period, year to date, cumulative and projected costs.  Many contracts have Funds and Man-hour Reporting requirements, called FMERs, required on a monthly basis.  Most contract teams are also creating coordinated reporting systems, such as having all subcontractors using a common online timesheet, in order to provide more current and accurate reporting.

Cost Plus contracts may be covered by the Service Contract Act, which has minimum pay rates established for clerical, administrative and technical positions that are covered under the Fair Labor Standards Act (FLSA.)  The minimum pay rate listing is a Wage Determination, which is set up by the Department of Labor for metropolitan areas and counties.  You can go to the Department of Labor website to get the Wage Determination, which will list pay rates such as occupation code 01011 Accounting Clerk I of $14.55 or 12040 Emergency Medical Technician of $17.13.  In addition to their minimum pay rates, the Wage Determination will also list a Health & Welfare benefit, currently $4.27 per hour but which will increase annually, plus a vacation and holiday requirement.  There are changes that will affect these requirements in the future, from the change in the Fair Labor Standards Act that will make many previously exempt positions into non-exempt positions, plus Executive Order 13706 related to Sick Leave.  There is also lots of discussion of the requirements for the Health & Welfare payment: while it can be made as a “cash in lieu of benefits” payment, most contractors are moving toward putting these payments into 401K contributions, which effectively is a pay cut for the employees who are used to having the payment as part of their paychecks.  The Affordable Care Act has also had an impact on these benefit costs and programs, so be sure to research the latest information with a benefits expert familiar with federal contracting.

Cost Plus contracts will also have a separate fee pool.  You’ll be reimbursed for your direct costs plus applied Fringe, Overhead and General and Administrative (G&A), plus a fee percentage.  Cost Plus contracts may be fixed fee, award fee or incentive fee.  Fee percentages on Cost Plus contracts typically range from 6% to 8%.

With Cost Plus contracts, you’ll usually have a clause called the Allowable Cost and Payment Clause, FAR 52.216-7, which requires preparation of an annual Incurred Cost Submission, also known as the ICE, or Incurred Cost Electronically.  The ICE has over 20 schedules and requires you to report your actual indirect rates, compared to the provisional indirect rates you used for contract billing.  The ICE is due six months after the close of the fiscal year.  Each year, you should settle up the differences between your provisional indirect rates and the actual indirect rates, which is called a Variance Voucher.  If the variance Voucher is an additional amount to bill, you submit it as part of the normal billing process.  However, if the variance voucher shows that your company has overbilled, you’ll need to write the government back a check with the submittal of the voucher.

IDIQ Contracts are Indefinite Delivery Indefinite Quantity Contracts.  These are basically large contracts that cover multiple years, multiple contract types and may have very high contract ceilings, such as over $10Million.  IDIQ contracts are most often used for service contracts, and are used to create master schedules, or contract vehicles, so contracting organizations can easily issue Task Orders to buy from the master schedules.  GSA Contracts are an example of IDIQ contracts.  The purpose of setting up IDIQ contracts is to streamline the contract process, so that negotiations for services can be worked out with selected contracts.

SUMMARY

Today, we’ve covered some general guidance related to contracting types, but all of this is just the very basics.  There are always new rules and new trends coming out, so you have to keep up with changes and keep learning.  Federal contracting is a unique industry.  The accounting practices for federal contracts are very specialized, so you need to be turning to accounting professionals with extensive industry experience when researching these topics.