Under law and regulation, there is an order of preference in contract types used for performance-based contracting, as follows:
Agencies must take care implementing this order of precedence. Be aware that a firm-fixed price contract is not the best solution for every requirement. "Force fitting" the contract type can actually result in much higher prices as contractors seek to cover their risks.
- (i) A firm-fixed price performance-based contract or task order.
- (ii) A performance-based contract or task order that is not firm-fixed price.
- (iii) A contract or task order that is not performance-based.
This view is upheld by FAR 16.103(b) which indicates, "A firm-fixed-price contract, which best utilizes the basic profit motive of business enterprise, shall be used when the risk involved is minimal or can be predicted with an acceptable degree of certainty. However, when a reasonable basis for firm pricing does not exist, other contract types should be considered, and negotiations should be directed toward selecting a contract type (or combination of types) that will appropriately tie profit to contractor performance."
Clearly, the decision about the appropriate type of contract to use is closely tied to the agency's need and can go a long way to motivating superior performance -- or contributing to poor performance and results. Market research, informed business decision, and negotiation will determine the best contract type.
One final point: The decision on contract type is not necessarily either-or. Hybrid contracts -- those with both fixed-price and cost-type tasks -- are common.