Types Of Contracts

Before analyzing the various types of contracts, one should be familiar with the terminology found in them.

• The target cost or estimated cost is the level of cost that the contractor will most likely obtain under normal performance conditions. The target cost serves as a basis for measuring the true cost at the end of production or development. The target cost may vary for different types of contracts even though the contract objectives are the same. The target cost is the most important variable affecting research and development.

• Target or expected profit is the profit value that is negotiated for, and set forth, in the contract. The expected profit is usually the largest portion of the total profit.

• Profit ceiling and profit floor are the maximum and minimum values, respectively, of the total profit. These quantities are often included in contract negotiations.

• Price ceiling or ceiling price is the amount of money for which the government is responsible. It is usually measured as a given percentage of the target cost, and is generally greater than the target cost.

• Maximum and minimum fees are percentages of the target cost and establish the outside limits of the contractor's profit.

• The sharing arrangement or formula gives the cost responsibility of the customer to the cost responsibility of the contractor for each dollar spent. Whether that dollar is an overrun or an underrun dollar, the sharing arrangement has the same impact on the contractor. This sharing arrangement may vary depending on whether the contractor is operating above or below target costs. The production point is usually that level of production above which the sharing arrangement commences.

• Point of total assumption is the point (cost or price) where the contractor assumes all liability for additional costs.

Because no single form of contract agreement fits every situation or project, companies normally perform work in the United States under a wide variety of contractual arrangements, such as:

• Cost-plus percentage fee

• Cost-plus guaranteed maximum

• Cost-plus guaranteed maximum and shared savings

• Cost-plus incentive (award fee)

• Cost and cost sharing

• Fixed price or lump sum

• Fixed price with redetermination

• Fixed price incentive fee

• Fixed price with economic price adjustment

• Fixed price incentive with successive targets

• Fixed price for services, material, and labor at cost (purchase orders, blanket agreements)

• Time and material/labor hours only

• Bonus-penalty

• Combinations

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