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3 Tips for Choosing the Right Procurement Contract

by Lucy Morgan on November 29, 2017
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Orange Tips and Tricks Button on Computer Keyboard. Internet Concept..jpegHave you heard it? There has been a lot of chatter about the changes to procurement with the advent of 2 CFR Part 200 (aka Uniform Guidance). And it’s true that this section of the Administrative Requirements has changed more than any other part of the new grant regulations. (In fact, the recent changes to the micro-purchase method has led me to call the Procurement Standards the “not-so” Uniform Guidance section of 2 CFR Part 200!) 

But with all the focus on the extension of the grace period for implementation and the five new procurement methods, there is an oft-overlooked part that I still get many questions about as I train grant managers: 

What type of procurement contract should I use with my federal grant?

In this article, I want to share some grant management tips on how to choose the right type of procurement contract for purchasing goods and services for your federal grant.

Tip 1: Determine the Best Fit for Your Needs

There are lots of decisions to make when you need to purchase goods or services for your federal grant.

  • Do you have enough information in the solicitation to get the best proposals without unduly limiting competition?
  • Have you taken affirmative steps to include small business, women-owned and minority-owned businesses in the procurement process?
  • Have you avoided conflicts of interest or prohibited transactions with suspended or debarred parties?
  • And there are many more requirements!

It can feel overwhelming!

When it comes to choosing the right procurement contract, the first thing you need to look at is the amount of certainty you have in the results you want to achieve.

For example, if you know you need ten tablet devices with USB ports delivered in two weeks, that is pretty straightforward. But what if you need to hire a contract worker to cover for an unexpected medical emergency of a valued program staff member? In this case, there is likely certainty about the hourly rate, but there may not be the same confidence about the length of time you need the contractor.

When it comes to determining the best fit for your procurement needs, start by asking yourself:

  • Can I describe the desired results with a high degree of certainty?
  • Is the time frame for completion of those results reasonably predictable?
  • Can you realistically estimate the frequency that you need the goods or services?
The next step is to pick the right type of procurement contract to support those needs.

What Are Procurement Contracts?

Let’s first look at the options. Quite simply, procurement contracts are the legal agreement between the grant recipient and the third-party contractor. (Notice that I use the term “contractor” rather than “vendor.” One of the changes in the Uniform Guidance was the elimination of the term “vendor” and the consistent use of “contractor” to describe the other party in the contract.)

There are many types of agreements in the world, but fortunately, grant recipients can narrow the list by referring to the primary types of contracts described in the Uniform Guidance. But watch out: Just as the Guidance describes the common types of contracts, it also limits the use of certain types of procurement contracts.

What Procurement Type Should I Use?

There are two main types of procurement contracts used with federal grants:

  • Firm Fixed Price
  • Time and Materials

When the grant recipient can estimate the total effort or cost with sufficient certainty, then a firm fixed price contract is the preferred one to use. As the name implies, the price is a fixed amount, and the contractor bears the risk of cost overruns rather than the grant recipient. This procurement type also creates a built-in incentive for the contractor to be efficient in the use of labor and materials. It is appropriate to use a firm fixed price contract when you can determine a fair and reasonable cost for the work before the work begins.

The second procurement type is a time and materials contract. This type of contract is also called a "cost reimbursement" contract. Use this type of contract when it is difficult to estimate the magnitude or length of the project. For example, in the areas of research and development, these types of contracts are more prevalent due to the high degree of uncertainty involved in achieving results.

Because there is little incentive for the contractor to keep the costs down, grant recipients must recognize the inherent risk of cost overruns with this type of contract; it needs to be managed more closely than a firm fixed price contract. The Uniform Guidance also states in §200.318, General Procurement Standards, Subpart (j)(1):

“The Non-Federal entity may use a time and materials type contract only after a determination that no other contract is suitable and if the contract includes a ceiling price that the contractor exceeds at its own risk.”

In other words, time and materials contracts must have a “not to exceed” amount built into the contract. Pick a time and material contract only after you have determined that a firm fixed price contract won’t work for the project. But fair warning-be prepared to go the extra mile to document and defend the choice of this contract type to your auditor and funding agency.

Tip 2: Plan for the Unexpected

Sometimes when you need to purchase goods or services for your federal grant, you can identify most of the moving parts, but there is a high degree of uncertainty about something that neither you nor the contractor can control. Like fuel prices. Like labor rates in an unusually hot labor market.

Similarly, you may be working on a project expected to cause large amounts of public disruption, like road construction, or maybe there is a critical public need, like getting power restored after a disaster. In these cases, you may want to motivate the contractor to “pull out all the stops” to get the project completed.

These are just a few examples of when you may want to explore some of the various “flavors” of the two primary contract types.

Recognize that whenever you move from a basic “vanilla” types of contract, you must ensure that you have all your documentation in place to support your rationale for the contract type. Finally, take the time to review the prior-approval requirements just in case your funding agency requires it for that type of procurement.

Variations of Firm Fixed Price Contracts

Within the two main types of contracts, there are additional variations in each category. When it comes to firm fixed price contracts, here are the three most common “flavors.”

  • Firm Fixed PriceFirm fixed price contracts are the basic “vanilla” contract that specifies the total amount to pay the contractor for the work.
  • Firm Fixed Price with Escalation: A firm fixed price contract with escalation recognizes that certain costs may go up over time and these cost increases are outside the control of the contractor. For example, there could be an escalation clause in the firm fixed price contract when fuel costs go above a certain cost threshold.
  • Firm Fixed Price with Incentive: A firm fixed price contract with incentives is for contractors who achieve predetermined overall cost, schedule, and technical performance requirements. For example, if the project is to replace a bridge washed out by a natural disaster, the contract may include incentives to encourage the contractor to complete the work sooner rather than later while still maintaining high-quality work and cost controls.

Variations on Time and Material Contracts

Like firm fixed price contracts, time and material contracts also have a few variations from the basic “vanilla” flavor.

  • Time and Material Contract: A basic time and material contract allow the contractor to bill for every dollar spent on labor and materials. Grant recipients should always include a cost ceiling on this type of contract.
  • Time and Material Contract with Fixed Fee: Time and material contracts with a fixed fee include a pre-negotiated fixed fee (typically profit). An example of when this contract type makes sense is when there is a considerable risk to the contractors. Like other time and material contracts, there is little incentive for contractors to keep costs down.
  • Time and Material Contract with Incentive: Time and material contracts with incentives are a variation that includes financial inducements for contractors to keep the labor costs under budget and look for better pricing on materials. The target costs for the project and any fee adjustment formula are negotiated ahead of time to create an incentive for the contractor to manage the scope of work cost-effectively.

Tip 3: Avoid Problem Contracts

The federal government wants you to avoid problem contracts and makes it easy to understand what types are prohibited or will get you into trouble if you aren’t paying attention to these common issues.

Prohibited Procurement Contract

First of all, the cost plus a percentage of cost and percentage of construction cost methods of contracting are prohibited contract types. In these contract types, in addition to the contractor’s costs such as time and materials, a percentage is added to the contractor costs to cover the contractor’s overhead costs. Federal grant regulations in §200.323, Contract Cost and Price, prohibit this contract type.

Subrecipient vs. Contractors

Next, using a procurement contract for a subrecipient relationship will also land you in hot water with your funding agency. If you are contracting for services, make sure you review the criteria for subrecipient and contractor determinations under section §200.330, Subrecipient and Contractor Determinations.

If you make the wrong choice in classification, you risk disallowed costs. Review service contracts closely because the substance of the relationship—in other words, what the contractor is doing in support of the program—is more important than what you choose to call the services agreement.

Here’s the bottom line. Subaward agreements typically require the prior approval of your funding agency, whereas most procurement contracts do not, unless they are non-competitive procurements. If you misclassify the contract type, you may not have the required prior approvals for the costs to be allowable. Yikes!

Conclusion

As Albert Einstein observed, “We cannot solve problems with the same thinking we used to create them.” The age of “black-boxing” how to manage grants into the hands of a select few staff members is shifting with this new age of accountability for grant recipients. It is exciting to see how the array of sources for professional development has broadened from blogs to videos to more formalized training programs.

Grant recipients face increasing challenges as the full implementation of the procurement standards in 2 CFR 200 draws near. Federal agencies are placing greater demands on organizations to ensure their staff is adequately trained to understand the nuances hidden within complex regulations. As we explore how to choose the right type of procurement contract for purchasing goods and services for your federal grant in this article, I hope you will help others by sharing this article with your colleagues in the larger grant community as well.

Topics: Grants Management Best Practices

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