New Definition Proposed for "Multiple-Award Contracts

The FAR councils are proposing to add a new definition to FAR 2.101 to define "multiple-award" contracts. One really has to wonder why a definition is needed here since we already have FAR Part 38, Federal Supply Schedule Contracting, and FAR 16.5, Indefinite-Delivery Contracts which covers those types of contract in detail. But, reading through the fine print, we find that it is a requirement embedded into the Small Business Jobs Act of 2010.

Although this is a proposed rule, the definition of multiple award has already been incorporated into the SBA rules at 13 CFR 125.1(k).

Here is the new proposed definition:

A Multiple-award contract means a contract that is

1. A Multiple Award Schedule contract issued by GSA (e.g. GSA Schedule Contract) or agencies granted Multiple Award Schedule contract authority by GSA as described in FAR part 38;
2. A multiple-award task-order or delivery-order contract issued in accordance with FAR subpart 16.5, including government-wide acquisition contracts; or
3. Any other indefinite-delivery, indefinite quantity contract entered into with two or more sources pursuant to the same solicitation.

Undefinitized Contract Actions (UCAs)

To meet urgent needs, federal agencies, including DoD, can authorize contractors to begin work and incur costs before reaching final agreement on contract terms, specifications, or price, using an undefinitized contract action.

Such types of contractual actions are considered risky for the Government because contractors have little incentive to control costs as the Government normally reimburses contractors for all allowable costs incurred during the undefinitized period. Further, the Government may incur unnecessary costs if requirements change before the contract is definitized.

To help minimize these risks, defense acquisition regulations generally require undefinitized contract actions (UCAs) to be definitized within 180 days of issuance or before more than 50 percent of the estimated contract price is obligated, whichever occurs first.

The GAO (Government Accountability Office) recently issued a report on the Air Force's practices with respect to UCAs. Between 2010 and 2014, the Air Force obligated $14 billion on UCAs. For UCAs reviewed by GAO, the most common reason cited for awarding them was to meet urgent needs. The GAO didn't have a problem with the rationale or justification. They did find however that the Air Force never met the definitization time frames for the UCAs under review.

As mentioned, the Government (and particularly contract auditors) consider UCAs to be high risk procurement actions. Auditors are instinctively suspicious that contractors will try to dump everything, including the kitchen sink, onto the contract. With little or no incentive to control costs, prior to definitization, contractors tend to be less concerned with expenditures.

As a result of the GAO findings, contractors with UCAs can expect heightened awareness and more oversight of UCAs. DoD, at least, will be tightening up its policies with respect to definitization time frames. And, with DCMA (Defense Contract Management Agency) buildup of pricing capabilities, the turn-around time to conclude negotiations should decrease significantly.

Contract Options

Contract options allow the Government, for a specified time and at a specified price, to purchase additional supplies and services called for in a contract. Options seem like a pretty good deal - contractors increase their sales when the Government exercises options - but they are not without some risk. Sometimes its very difficult to predict prices three to five years in the future. A lot of contractors got hit hard when fuel price increased substantially in the late 90s. Its sometimes difficult to predict the availability of the type of labor needed for a particular project. If there's a local building boom going on, the wage scales and availability of construction workers is impacted. 

Generally, the contract period including all options may not exceed five years. This is not to be confused with delivery period which may exceed the five year limitation. 

Options are not automatic. The Government has a little homework to do before exercising options. The contracting officer must

• ensure that funds are available
• the requirement fills an existing need
• the exercise of the option is the most advantageous method of fulfilling the Government's need, price and other factors considered. This includes determinations that
• a new solicitation fails to produce a better price or more advantageous offer or 
• an informal analysis of the market indicates the option is more advantageous
• the time between contract award and exercise of the option is so short that the option is most advantageous

The decision to exercise options is the sole discretion of the Government. Decisions not to exercise are not typically protestable. So, contractors cannot count on the Government's exercising options to support plant expansions or long term labor contracts. There's no guarantees when it comes to options.

When proposing and negotiating option prices, contractor's need to ensure that there is sufficient provisions in the option prices to cover known and unknown market conditions. If the Government sees a bargain price, its going to take it as opposed to opening up the bidding process again. And, a bargain price for the Government is likely to hurt the contractor.

What are "Letter Contracts"?

A "Letter Contract" (also known as an Undefinitized Contract Action or UCA) is a type of contract. Its a temporary contract that allows contractors to get started on a project before a "real" contract can be negotiated. Letter contracts are used rarely and only when the Government's interests require that work start immediately because there is insufficient time to negotiate a definitive contract. We see these used in contingency operations (e.g. Iraq & Afghanistan) or in natural disasters (Katrina) to get supplies or relief rolling. Letter Contracts are also used to allow contractors to procure "long lead" items that need to be ordered immediately in order to complete production by a specified due date.

The use of a letter contract must be approved, in writing, by the head of the contracting activity (HCA). This approval must include a finding that no other contract is suitable (see FAR 16.603-3). The letter contract must also include a NTE (not-to-exceed) price. Herein lies the risk for both the Government and contractor. If the Government does not have time to negotiate a contract, the contractor probably doesn't have sufficient time to prepare an adequate estimate of costs. Significant oversights could lead to unanticipated financial burden. On the other hand, since the contractor does not have sufficient time to prepare an adequate estimate, the tendency is to throw everything including the kitchen sink into the NTE price (defective pricing does not apply at this point in the contracting process). If any of those costs have been incurred at the time of contract definitization, the Government is hard -pressed to question them.

The Government and the contractor are required to definitize  a letter contract (agree upon contractual terms, specifications, and price) by the earlier of

• 180 day period after the date of the letter contract, or 
• The date on which the amount of funds obligated under the contract action is equal to more than 50 percent of the negotiated overall ceiling price for the contractual action.

Letter contracts do not obligate the Government to pay up to the amount of the NTE price. The maximum liability of the Government is the estimated amount necessary to cover the contractor's requirements for funds before definitization, but shall not exceed 50 percent of the estimated cost of the definitive contract unless approved in advance by the official who authorized the letter contract.

There are a few restrictions on the use of letter contracts. They cannot be used to

• Commit the Government to a definitive contract in excess of funds available at the time of contract.
• Be entered into without competition when required.
• Be amended to satisfy a new requirement unless that requirement is inseparable3 from the existing letter contract.

Profit on T&M Contracts

Contractors can earn profit on the labor component of T&M contracts but not on the material component.

The Government uses time-and-materials (T&M) contracts when it is not possible at the time of placing a contract to accurately estimate the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. A T&M contract provides no positive profit incentive to the contractor for cost control or labor efficiency. Therefore, the Government usually increases its level of surveillance of contractor performance to provide reasonable assurance that efficient methods and effective cost controls are being used. T&M contracts are quite common even though the use of T&M as a contracting mechanism, is discouraged within FAR.

T&M contracts have a labor component and a materials component. The labor component consists of separate fixed hourly rates that include wages, fringe, overhead, general and administrative expenses and profit for each category of labor. The materials component is more broadly defined than what is typically considered material costs. Materials, in a T&M scenario, include direct materials, supplies, and other direct costs (e.g. incidental services for which there is not a labor category specified in the contract, travel, computer usage charges, etc.) and applicable indirect costs (FAR 16.601(a)). Note the absence of “profit” in this definition of materials. The actual contract clause included in T&M contracts, states it more specifically; “…the Government will not pay profit or fee to the prime Contractor on materials.”