What are the differences between Cost Plus Fixed Fee (CPFF), Firm Fixed Price Level of Effort (FFP-LOE) and Time and Material (T&M) contract types?
I am sure you have read the descriptions of each contract type found in FAR 16 as part of your research leading to this question, so I won’t restate the extensive guidance you’ve already read. In selecting the appropriate contract type, the contracting officer should use good business judgment to select a contract type that results in reasonable contractor risk and provides the contractor with the incentive for efficient performance.
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The cost plus fixed fee contract is often used (but not exclusively) in the early stages of research and development. In this type of contract the parties negotiate an estimated cost of performance of the work and pre-establish the amount of fee to be paid for the performance of the work regardless of the final cost, which could be higher or lower than the estimate. The fee will not vary unless the contractor is required to perform additional work not initially described in the contract. FAR 16.306(b) describes two situations where this type of contract is appropriate:
(i) The contract is for the performance of research or preliminary exploration or study, and the level of effort required is unknown; or
(ii) The contract is for development and test, and using a cost plus-incentive-fee contract is not practical.
The CPFF contact type describes the work in terms of the end product to be delivered or the services to be performed. Alternatively at times work can be described in terms of the level of effort to be expended by the contractor (not the delivery of a product). In this type of contract, the contractor receives the compensation called for by the contract upon the expenditure of the required hours of effort. In this case the parties can agree to fixed hourly rates for specified classes of labor with payment based on the number of actual hours incurred. These rates include the contractor’s indirect costs and profit (instead of a fixed fee as in a CPFF). If this type of contract calls for labor only, it is called a “labor-hour” contract, FAR 16.602. If it includes the purchase of materials as well as labor, it is called a “time-and-materials” contract, FAR 16.601. A T&M contract may only be used when the contracting officer signs a D&F stating that no other contract type is suitable and then obtain the HCA’s approval of the D&F.
The FFPLOE contract type provides a stated amount of compensation for the incurrence of a specified number of labor hours over a fixed period of time, FAR 16.207. In this case, the contractor is paid the price upon the incurrence of the labor hours while in a CPFF the contractor is paid the fixed fee plus the actual costs incurred. The actual costs of a CPFF are not known until the final costs are determined after completion of the effort (including determination of final overhead rates), but the labor rates are fixed in both T&M and FFPLOE contract types at the time of contract award.
My research of this question found the following explanation of the difference between FFPLOE and T&M contract types on the Wifcon site authored by Mr. Vern Edwards:
“FP/LOE pays a lump sum for delivery of a number of hours employed in the pursuit of a task, the end of which is not in sight. The LOE is necessary to establish the scope of what might otherwise be a boundless undertaking. It is appropriate when you want a contractor to conduct a study to which it could devote a lifetime if somebody didn't tell it when to stop. The contractor must deliver the entire level of effort in order to get paid. The hours in the level of effort are not separately deliverable and payable. Failure to deliver the entire level of effort would be default. The LOE should be established on the basis of what process can be carried out with that LOE, not what result can be achieved through that process. You get a final report, which says something like: This is what we did, and this is what we learned before the LOE ran out.
T&M pays by the hour to undertake a job the end of which is clearly in sight: a car that wasn't running is running just fine. You pay by the hour, because even though you have a sense of how long it will take (ceiling price), you can't be sure. The contractor won't agree to a firm-fixed-price and you don't want to cover all cost contingencies by using a cost-reimbursement contract. If the contractor finishes sooner than expected, then you pay it only for how long it took to finish the job. If the contractor can't finish within the ceiling, you can raise the limit or take the parts and go home.”
As I stated above the ultimate selection of contract type for an acquisition requires the contracting officer to exercise sound business judgment in order to create a business arrangement which will result in an equitable distribution of risk, an incentive for the contractor to achieve or exceed the performance requirements of the contract, at a fair and reasonable price.