May a the contracting agency evaluate a proposed contract type as an evaluation factor if it was included as such in the solicitation? If so, are there methods recommended for conducting such an evaluation as part of the trade-off process?
1. The FAR and DFARS references quoted below in pertinent part is applicable to this response.
FAR Subpart 15.3 -- Source Selection
FAR 15.304 -- Evaluation Factors and Significant Subfactors
(b) Evaluation factors and significant subfactors must --
(2) Support meaningful comparison and discrimination
between and among competing proposals.
(c) The evaluation factors and significant subfactors that apply to an acquisition and their relative importance are within the broad discretion of agency acquisition officials
, subject to the following requirements:
(1) Price or cost to the Government shall be evaluated in every source selection
(d) All factors and significant subfactors
that will affect contract award and their relative importance shall be stated clearly
in the solicitation.
FAR 15.305 -- Proposal Evaluation
(a) Proposal evaluation is an assessment of the proposal and the offeror’s ability to perform the prospective contract successfully. An agency shall evaluate competitive proposals and then assess their relative qualities solely on the factors and subfactors specified in the solicitation
(1) Cost or price evaluation
. Normally, competition establishes price reasonableness. Therefore, when contracting on a firm-fixed-price … basis, comparison of the proposed prices will usually satisfy the requirement to perform a price analysis, and a cost analysis need not be performed. ... Cost realism analyses may also be used on fixed-price incentive contracts (see 15.404-1(d)(3)
FAR 15.404-1 -- Proposal Analysis Techniques
(d) Cost realism analysis.
(1) Cost realism analysis is the process of independently reviewing and evaluating specific elements of each offeror’s proposed cost estimate to determine whether the estimated proposed cost elements are realistic for the work to be performed; reflect a clear understanding of the requirements; and are consistent with the unique methods of performance and materials described in the offeror’s technical proposal.
(3) Cost realism analyses may also be used on competitive fixed-price incentive contracts … when new requirements may not be fully understood by competing offerors, there are quality concerns, or past experience indicates that contractors’ proposed costs have resulted in quality or service shortfalls. Results of the analysis may be used in performance risk assessments
and responsibility determinations.
FAR 16.103 -- Negotiating Contract Type
(a) Selecting the contract type is generally a matter for negotiation and requires the exercise of sound judgment. Negotiating the contract type and negotiating prices are closely related and should be considered together
FAR Subpart 16.2 -- Fixed-Price Contracts
FAR 16.201 -- General
(a) Fixed-price types of contracts provide for a firm price or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both.
FAR 16.403-1 -- Fixed-Price Incentive (Firm Target) Contracts
. A fixed-price incentive (firm target) contract specifies a target cost, a target profit, a price ceiling (but not a profit ceiling or floor), and a profit adjustment formula. These elements are all negotiated at the outset. The price ceiling is the maximum that may be paid to the contractor, except for any adjustment under other contract clauses. When the contractor completes performance, the parties negotiate the final cost, and the final price is established by applying the formula. When the final cost is less than the target cost, application of the formula results in a final profit greater than the target profit; conversely, when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss. If the final negotiated cost exceeds the price ceiling, the contractor absorbs the difference as a loss
. Because the profit varies inversely with the cost, this contract type provides a positive, calculable profit incentive for the contractor to control costs.
. A fixed-price incentive (firm target) contract is appropriate when the parties can negotiate at the outset a firm target cost, target profit, and profit adjustment formula that will provide a fair and reasonable incentive and a ceiling that provides for the contractor to assume an appropriate share of the risk. When the contractor assumes a considerable or major share of the cost responsibility under the adjustment formula, the target profit should reflect this responsibility.
DFARS 216.403-1 -- Fixed-Price Incentive (Firm Target) Contracts
(1) The contracting officer shall give particular consideration to the use of fixed-price incentive (firm target) contracts, especially for acquisitions moving from development to production.
(2) The contracting officer shall pay particular attention to share lines and ceiling prices for fixed-price incentive (firm target) contracts, with a 120 percent ceiling and a 50/50 share ratio as the point of departure
for establishing the incentive arrangement.
2. In accordance with FAR 15.304(c)
, the establishment of evaluation factors and significant subfactors and their relative order of importance that may apply to a given competitive acquisition are within the broad discretion of agency acquisition officials. As indicated in FAR 16.103(a)
, the negotiation the contract type and prices are closely related and should be considered together. Pursuant to FAR 15.304(d)
and FAR 15.305(a)
, an agency shall evaluate competitive proposals and then assess their relative qualities solely on the factors and subfactors specified in the solicitation. Therefore, the contracting agency can consider the contract types proposed by the offerors as a criterion to be considered in the source selection decision, provided that such is included in the solicitation as an evaluation factor or a significant subfactor.
3. There are no standard methods specified in the regulations, or other agency source selection guides that we could find in our research, that address any particular technique for evaluating proposed contract type as part of the source selection process. Nevertheless, because FAR 15.305(a)
states that contract type and price are closely related and should be considered together, we believe that the consideration of “proposed contract type” could be stated as a significant subfactor under the “cost or price”
factor which must be evaluated pursuant to FAR 15.304(c)(1)
and FAR 15.305(a)(1)
during the “trade-off” proposal evaluation process. However, pursuant to FAR 15.304(b)(2)
, the use of “proposed contract type” as a significant subfactor under “cost or price”
must still support a meaningful comparison and discrimination between and among competing proposals.
4. We note from this inquiry that one of the contracting activity’s main objectives for this source selection appears to be limiting the Government’s cost risk. We believe that the only effective way to limit the Government’s cost risk is to award some type of fixed-price contract, versus any form of cost-reimbursement type contract, as a result of this source selection. In this regard, we would suggest that the Contracting Officer consider the use of a Fixed-price Incentive Firm Target (FPI(F)) type contract, a flexibly-priced fixed-price contract as described in FAR 16.403-1,
as a possibility in addition to the use of an FFP type contract, in order to broaden the number of potential offerors that may be willing to submit proposals in response to the solicitation.
5. The DOD and NASA Incentive Contracting Guide (Oct 1969), which can be downloaded from https://acc.dau.mil/CommunityBrowser.aspx?id=189615
, provides an excellent description of the FPI(F) contract type. Even though this Guide still refers to superseded regulations (i.e., the ASPR vs the FAR), many contracting experts still consider this document to be the definitive textbook for structuring FPI(F) contracts. More summarized information concerning the FPI(F) contract type can also be found in the Contract Pricing Reference Guides, Vol. 4, Chapter 1 – Establishing And Monitoring Contract Type at: https://acc.dau.mil/CommunityBrowser.aspx?id=379603#1.3
6. Under this suggested acquisition approach, offerors may submit either FFP or FPI(F) offers in response to the RFP. Under the “cost/price”
evaluation factor, the contracting activity would evaluate each offeror’s proposed price and contract type combination in terms of the lowest overall cost risk to the Government as part of the “trade-off” proposal evaluation process. In comparing FFP to FPI(F) offers, the FFP prices would be compared to the ceiling prices of FPI(F) offers. The proposed costs of FPI(F) offers would be evaluated in accordance with FAR 15.404-1(d)
. In addition, the proposed incentive structures of the FPI(F) offers could be compared to a standard FPI(F) structure set forth in the solicitation. For example, the standard FPI(F) structure described at DFARS 216.403-1(b)(2)
could be used. Alternatively, the solicitation could specify a similar standard in the solicitation based on its technical analysis of the appropriate share ratios and ceiling price percentages that are appropriate for this acquisition.
7. In summary, we believe that the use of this suggested acquisition approach could result in a meaningful comparison and discrimination between and among competing proposals as required by FAR 15.304(b)(2)
, the achievement of the contracting activity’s objective to reduce it cost risk, and increase the number of offerors willing to submit proposals in response to the RFP while still providing for the contractor to assume an appropriate share of the risk.