What value should be in the contract CLIN. Should it reflect the total value of $1.8M or should it reflect the actual funding available of $400K?
Strictly speaking under the FAR, the value must match the funded amount. The FFP Contract Line Item Structure CLIN structure is important to the answer. If you buying quantity one at $400K or $1.8M each, then the extended amount should match at $400K or $1.8M. When we award a FFP unit-priced contract, we fully fund the contract up to the value of the specified or estimated quantities at the time of award. Why? Because we've hired the company to do something, build something, and we have either specified or estimated the quantities of work that the contractor must do, and we have told them that we will pay them to do that much work. Thus, we have obligated ourselves to that extent and must record that obligation and have enough funds to make good on our promise.
The FAR only mentions incremental funding with respect to cost reimbursement contracts. FAR 52.232-22 is used for solicitations and contracts if an incrementally funded cost reimbursement contract is contemplated.
Worse, most contract writing systems will not support an incrementally funded FFP contract. The checks and balances may force you to describe the FFP as the funded amount. Most will not allow partial billing. Structure the contract with priced units of production that total to the 1.8M, base quantity sums to equates to 400K at a set price. The remaining optional/unfunded units of production would sum to the $1.8M. Sorry to have you check with your agency personnel for history.
Some agency regulations talk about incrementally funded fixed price contracts - NASA only for research and development and as you pointed out, DoD DFAR 232.703-1. DFARS 232.703-1 permits this under certain circumstances, as stated "General.(1) A fixed-price contract may be incrementally funded only if?(i) The contract is funded with research and development appropriations;(ii) Congress has otherwise incrementally appropriated program funds; or (iii) The head of the contracting activity approves the use of incremental funding for either base services contracts or hazardous/toxic waste remediation contracts. (2) Incrementally funded fixed-price contracts shall be fully funded as soon as practicable after full funding is available."
I don’t know what you are trying to buy, but WIFCON describes “Firm-fixed-unit-price” contracts that are used when it is difficult or impossible to predict the amount of work that the contractor will have to do. They are an alternative to cost-reimbursement contracts and are similar to a labor hour pricing arrangement except that payments are based on units of output (e.g. cubic yards of excavation), rather than units of input (e.g., labor hours). These kinds of contracts are very standard in both government and the private construction sector. They explained that a firm-fixed-unit-price contract is not the same thing as a T&M or cost reimbursable contract.
A FFUP contract does not compensate the contractor on the basis of its "cost experience." The contractor's cost experience is not relevant to the payment determination. It compensates the contractor for its production. Thus, a firm-fixed-unit-price contract does provide an incentive to control costs. Construction supervisors are concerned with equipment operators with inefficient production. The company is getting paid per unit of production, not per hour, and heavy equipment rental is expensive. The contractor cannot control how many units he has to produce, but he can and must control how much input he uses to produce those units, or he'll go broke. However, firm-fixed-unit-price contracts are administratively more burdensome than lump sum contracts.
I found a lot of information on WIFCON. http://www.wifcon.com/discussion/index.php?/topic/361-funding-fixed-unit-price-contract-line-items/
A couple of other past threads on the topic: Civilian Agency Incremental Funding of Fixed Price CLINs http://www.wifcon.com/discus/messages/8520/10308.html
Incremental funding of fixed price O&M service contract http://www.wifcon.com/discus/messages/8521/8918.html
Thomas S. Campbell, CPCM,
Professor of Contract Administration,
Defense Acquisition University,
9820 Belvoir Road, Bldg. 206, Rm 206
Fort Belvoir, VA 22060-5565