When supporting decisions to bid or not to bid on a federal contract, your company’s development and sales staff members may focus on the potential amount of the sale, as well as your enterprise’s ability to deliver the goods or perform the work.

However, when forecasting profit margins, the hidden costs of complying with federal contracts should also be weighed carefully. The nature of the solicitation and contract can significantly affect the scope and cost of the bid and the terms of the contract. For that reason, your organization must understand the government’s contracting arrangements and its approach to purchases.

  • Contract types are not specific to contract-solicitation methods. Contract types can refer to:
  • Compensation arrangements.
  • Ordering arrangements.
  • The nature of the deliverable (the supply or services contract).
  • A combination of the above.

Each of these results in different solicitation and compliance requirements that depend on the combination of solicitation method and arrangement used in awarding and executing contracts.

There are three contracting methods, or acquisition procedures, defined in the Federal Acquisition Regulations (FARs):

  1. Simplified Acquisition Procedures (FAR Part 13) – The simplified methods cut administrative costs and improve opportunities for small businesses to obtain government contracts. The simplified procedures are aimed at promoting efficiency and economy in contracting and avoiding unnecessary burdens for agencies and contractors.
  1. Sealed Bidding Procedures (FAR Part 14) – These are competitive bids submitted in response to an invitation to bid (ITB). The invitation describes in clear, accurate and complete terms the needs requirements and constraints related to the goods or services being acquired. Contracts are awarded based on price and price-related factors. Fixed-price compensation is customary and usually most appropriate for this method.
  1. Contracting by Negotiation (FAR Part 15) – Contracting by negotiation can be used for both competitive and noncompetitive purchases of both commercial and non-commercial goods and services. Negotiated contracts are those using procedures other than sealed bidding. Evaluation of the bid is primarily related to overall value rather than price. As with the simplified procedures, any compensation arrangement can be appropriate based on variables described in FAR Part 16.

The bid and proposal costs associated with preparing an offer in response to a solicitation for a negotiated procurement can be substantial, including the costs for preparing the proposal, audit and other pricing support and attending negotiations.

The selection of the proper process depends on the nature of the acquisition. A common misconception is that procedures for awards based on commercial items are another acquisition process. The policies for acquiring commercial items are outlined in FAR Part 12. Commercial acquisition policies apply in addition to the procedures for the particular acquisition. In the event of conflict, the FAR Part 12 policies are supposed to prevail.

Contract compensation arrangements can vary according to:

  • The degree and timing of the risk and responsibility the contractor assumes for performance.
  • The amount and nature of the profit incentive offered for achieving or exceeding specified standards or goals.

Compensation arrangements are classified in two categories:

  1. Firm fixed-price contracts are typically priced prior to performance or soon after the work begins. These contracts may include features to adjust the price for economic uncertainty or superior performance. Adjustment features usually are not based on the contractor’s actual costs.
  1. Flexibly priced contracts cannot be established until after a contract is fulfilled. Prices are based on actual costs, actual effort or both. These compensation arrangements usually result in the highest degree of audit and oversight. Consequently, they require adequate financial and administrative infrastructure to comply with the contractual terms and conditions.


  • Understand the acquisition method and the compensation arrangement.
  • Know what your solicitation compliance requirements are for submission of an adequate bid or proposal during the estimating/ bidding process.
  • Know what your contractual compliance requirements are when the contract is awarded.
  • Ensure you have identified and have planned for any additional financial or administrative infrastructure that will be required after the award and have included these considerations in analyzing your financial return on investment.

© 2015

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