What are Undefinitized Contract Actions?

This is an update to previously posted articles on Undefinitized Contract Actions. To read previous posts, see Undefinitized Contract Actions (UCAs) and Undefinitized Contract Actions? Government May Lower Profit Percentages.

A Government contract is considered 'definitized' where there is agreement on (i) contract terms, (ii) specification, and (iii) price. An undefinitized contract then means any contract action for which the contract terms, specifications, or price are not agreed upon before performance is begun under the contract.

Undefinitized contract actions allow the contractor to begin work before there is a finalized contract in place. However, since undefinitized contract actions represent a risk to the Government, they are to be used only in rare and select circumstances.

Generally, undefinitized contract actions are to be used only when (i) the negotiation of a definitive contract action is not possible in sufficient time to meet the Government's requirements; and (ii) the Government's interest demands that the contract be given a binding commitment so that contract performance can begin immediately.

Contracting officers normally cannot enter into Undefinitized Contract Actions (UCAs) without higher level approval. UCA agreements must include a not-to-exceed price. This is necessary to ensure there is a limitation to the Government's financial exposure. UCAs must be definitized by the earlier of (i) 180 days (six months) or (ii) the date on which the amount of funds paid to the contractor under the contract action is equal to more than 50 percent of the not-to-exceed price.

UCAs should be rare occurrences but are more common than one would suppose (see GAO report: Observations of Air Force's Use of Undefinitized Contract Actions). Examples where UCAs are utilized include major acquisition programs with long-lead material purchases and where the Government needs to quickly respond to tragedies such as fires, hurricanes, and floods.

The one possible downside to contractors under the UCA process is the potential profit to be made. Sometimes performance is practically completed before the contract can be definitized making a firm-fixed price contract almost a cost-reimbursable contract. The farther down the performance period a contract goes before definitization, the less risk there is to the contractor (in the Government's view) which reduces risk to the contractor and a reduction in the profit percentage.

Undefinitized Contract Actions? Government May Lower Profit Percentages

Undefinitized Contract Actions (UCAs) are those contract actions for which the contract terms, specifications, or price are not agreed upon before contract performance begins (see DFARS 217.7401). UCAs are used when the negotiation of a definitive contract action is not possible in sufficient time to meet the Government's requirements and the Government's interest demands that the contractor be given a binding commitment so that contract performance can begin immediately.

Normally, UCAs must be definitized withing 180 days (six months) but there are provisions for a 90 day extension, if warranted. UCAs however cannot be definitized until the contractor submits a "qualifying proposal".

A "qualifying proposal" means a proposal containing (i) sufficient data for the DoD to do complete and meaningful analyses and audits of the data in the proposal and (ii) any other data the contracting officer has determined DoD needs to review in connection with the contract (definition at DFARS 217.7401(c)). . So, for example, if a contractor's proposal passes the proposal adequacy checklist found at DFARS 252-215-7009, we would presume it to be a "qualifying proposal".

Contractors need to submit their qualifying proposals as soon as possible. Waiting runs the risk of reduced profits. Why? Because the longer you wait, the less uncertainty there is in final cost of the contract. Costs are more likely to be based on actual costs because they've already been incurred rather than estimates of future costs.

Under the proposed regulations, the contracting officer shall assess the extent to which costs have been incurred prior to definitization of the contract action. When costs have been incurred prior to definitization, contracting officers are instructed to generally regard the contract type risk to be in the low end of the designated range. If a substantial portion of the costs have been incurred prior to definitization, the contracting officer may assign a value as low as zero percent, regardless of contract type. Zero percent profit seems pretty extreme and probably is. We've never seen a negotiated profit rate that low, regardless of circumstances.

But suppose that the reason for not definitizing a contract in a timely manner is the Government's fault. It happens. Is it fair to penalize a contractor under those circumstances? No, and the proposed regulations provide for that.

However, if a contractor submits a qualifying proposal to definitize an undefinitized contract action and the contracting officer for such action definitizes the contract after the end of the 180-day period beginning on the date on which the contractor submitted the qualifying proposal, the profit allowed on the contract shall accurately reflect the cost risk on the contractor as such risk existed on the date the contractor submitted the qualifying proposal. 

For this reason, as we stated above, it is important for contractors to submit "qualifying proposals" as soon as possible. Failure to do so jeopardizes the profit potential of the contract.

What are Undefinitized Contract Actions (IUCAs)

 Undefinitized Contract Actions (UCAs) are contracting vehicles that allows contractors to begin work on a contract before a formal contract is issued. There are many reasons who UCAs are necessary but most of the time its because of an urgent need for a particular item or service. The process from drafting a solicitation to awarding a contract can take many months depending upon complexity. We've seen cases that exceed a year. Some UCAs are change orders where the Government needs to change some element of a contract specification but does not want to unavoidably delay production.

UCAs are generally considered high risk to the Government because by the time negotiations commence, many of the costs have already been incurred. That makes UCAs very similar ot cost-type contract.

Because of the high risk nature of UCAs, there is a high bar for contracting. The contracting officer must prepare an approval package that includes:

1. Documentation for why a UCA is required,
2. A detailed explanation for the need to begin performance before definitization,
3. Address the adverse impact on agency requirements that would result from delays in beginning performance,
4. Identify the risk of using a UCA and the means by which the Government will mitigate such risk,
5. Identify and justify the specific contractual instrument to be used
6. Establish limitations of the obligation of funds, and
7. Provide the definitization schedule of agreed-upon events that support timely definitization.

Sometimes the Government will request the contractor to help prepare the documentation package - especially for establishing price ceilings (need estimates that only a contractor can provide) and definitization milestone schedules (need to make sure that the contractor will /can support the schedule). It wouldn't be prudent for the Government to establish a milestone schedule independent of the contractor.