Friday, February 3, 2012

Contract Management 101: A FFP contract is not T&M

One thing that I have seen a lot of is the misapplication of performance-based contracting tenets, especially when it comes to requirements. Basically, some requirement offices slap “Performance Work Statement” as the title, delete “Statement of Work,” and maybe add some metrics and measures. Voila, a “performance-based contract” is born.

However, the contract line item numbers (CLINs) is really where I see performance-based acquisition (PBA) fall off the tracks. This text is straight out of a recent solicitation for a services contract on Federal Business Opportunities, commonly referred to as “fedbizopps” or FBO:
The Offeror shall provide their proposed firm-fixed price for this project by completing the CLIN Listing, in its entirety, as provided in the RFP. Additionally, the Offeror shall also provide a basis for the price, identifying all prospective labor categories, showing labor rates for all labor categories and discounts offered. (The Offerors shall also show profit, and any overhead costs if not included in the labor rate). Lack of detail may result in a rating of a higher risk by the Selection Authority in the selection process. 
Significant discounts are considered highly desirable. Discounts offered must be explicit. (There is no page limit for this factor, however Offerors are encouraged to only provide that cost and pricing data mandatory to a comprehensive review and that data which would allow the evaluation team to determine price reasonableness.)
Certainly great material to include in my classes when I teach PBA, Contracting Officer Representative (COR), or FAC P/PM courses on how not to structure CLINS under a PBA, or for a Firm Fixed Price (FFP) contract.

For starters, why do you care about this information? You shouldn’t. As a project manager (PM) or COR, you care about performance. Period. The other contract management efforts that will be expended on managing labor rates, labor categories, expenditures, etc. is inappropriate for this contract type, it adds extra administration and complexity into the contract management function, and takes the focus away on what you really care about; performance.

Further, the main objective of a FFP contract is to transfer risk to industry, with the assumption on a FFP contract type that the requirements are clearly defined and baselined. This model wants to eliminate that risk premium, and further drive prices down by threatening to add risk if these factors, which you shouldn’t care about, are not deemed “reasonable?” Protest anyone?

This model is creating a culture of “buying in,” deemed an improper business practice per FAR Subpart 3.5, but now a necessity as a result of budget cuts and the pressure to cut contracts.

PBA is about performance, and incentivizing industry to exceed requirements through a strategic partnership of trust and communication for both parties to excel. Let’s focus on that, and leave the administrative burdens where they belong.


  1. I hear that there are certain topics that procurement professionals know they have studied in the past, but, after years of experience, are too embarrassed to ask anybody about as they feel they should already know the answer.

  2. Experience is usually the best education. However, if the training was inadequate, and you do not have the proper level of accountability and leadership to help take risks and do the "time-consuming" things, which of course are the better ways of doing business most often.

    Acquisition shops focus on throughput and paper velocity, and not quality. That is one of the inherent problems of the profession that the training hopes to reverse, or remind.

  3. Jaime, great post. I actually work for an agency representing a client (iGate) who recently wrote a blog post hitting on some similar key points you mentioned above. Here is the link

    In their post however, iGate is actually challenging the FFP type of contract by suggesting a different approach in which the contractor must hit certain metrics as opposed to inputs. It is arguing about how the FFP type of contracts do not fully shift the burden over to the contractor since the agencies still have to pay when the deliverable s are met, regardless of their satisfaction. Would love to hear what your thoughts are regarding this, and if measuring by certain metrics is something that can actually work?

  4. Eric,

    What is paramount to the government in transferring risk is the ability to established fixed, base-lined requirements. Firm-fixed priced (FFP) contracts can then transfer the entire burden on the contractor, and the government can focus on the management and the quality performance of the contract and its outcomes.

    Regretfully, this rarely happens, as the government has a hard time defining what it truly needs to the point where requirements can be fixed, as they need to be. As a result, contract modifications are the norm for FFP contracts; in addition to pricing adjustments for contractors that cannot perform at the ridiculously low prices they are forced to offer to win the contract in the first place. The government has, in effect, mandated “buying in,” contrary to FAR Subpart 3.5.

    FFP should always be constructed as performance-based, where outcomes and metrics are used to gauge acceptable levels of quality per established criteria in the quality assurance surveillance plan (QASP). The QASP should outline what is acceptable, but more important, what the objectives are to incentivize performance. As a government manager, you want to help the contractor get that bonus, as it requires a higher level of performance, and better outcomes.

    There is no excuse for a contractor to get paid regardless of outcomes, but it happens everyday.