Summary: The Federal Acquisition Regulation governs every federal contract, but recent changes like the Revolutionary FAR Overhaul and Executive Order 14402’s push toward fixed-price contracts are reshaping how business gets done. Understanding the FAR’s structure, clauses, and contract types is essential for contractors to manage risk, structure proposals effectively, and stay competitive in a shifting federal marketplace.
Introduction
Federal contracting is undergoing meaningful change. The Revolutionary Federal Acquisition Regulation (FAR) Overhaul, led by the General Services Administration (GSA), is well on its way to becoming standard for the entire government as it enters rulemaking. Even as government users are encouraged to consider innovative methods of procurement, the FAR remains as the backbone for contractual relationships.
As part of an article series of frequently asked questions in federal contracting, Aprio’s Government Contracting team has collected some of the most asked questions about the FAR.
What is the FAR?
The Federal Acquisition Regulation (FAR) is the governing set of laws and statutes, plus specific guidance, for entering into a contract with the U.S. Federal Government. The FAR has 53 Parts, all related to different policies and procedures. Contracting Officers (COs or KOs) use the FAR to guide acquisitions as they move through internal approvals, solicitation, award, execution, and closeout. The FAR also includes the solicitation provisions and contract clauses that become binding agreements between the government and contractor. Most agencies have a supplement (or two) to the FAR that can make additional rules, lower or more controlled thresholds, and supplemental clauses to what are included in the FAR. Each contract awarded by the federal government will have both FAR and agency supplement clauses included, as applicable.
What is the Revolutionary FAR Overhaul?
The Revolutionary FAR Overhaul (RFO), also commonly known as the New FAR or FAR 2.0, is an effort led by the General Services Administration (GSA) to streamline the FAR by removing anything other than law and statute, at least for the most part. With its establishment, two other bodies of knowledge were created: Practitioner Albums and the FAR Companion Guide.
- Practitioner Albums are webpages with pointers, examples, and ideas for Contracting Officers to consider.
- The FAR Companion Guide has more details and further explanations on the practical applications of the FAR parts.
It’s important to note that neither the Practitioner Albums nor the Companion Guide are binding. With the RFO, there were some significant changes to the structure of the FAR as well: market research gained flexibility, FAR Parts 12 and 13 were consolidated, and new evaluation techniques were added to FAR Part 15 Contracting by Negotiation. Anyone looking to work with the government or with active contracts should review the changes and potential impacts to their contracts and business thoroughly.
What is the difference between a clause, provision, and instruction?
The FAR includes provisions, clauses, and instructions that indicate how a CO must conduct business, as well as what is expected of the contractor. Instructions provide details on the circumstances in which provisions and clauses apply.
Provisions
Provisions (or solicitation provisions) are the pre-award terms and conditions that are released to industry with the Request for Proposal, Request for Quote, and/or other solicitation. They include the laws that will be applicable, the information that contractors must provide, representations that the contractor must assert, and how proposals are to be submitted.
Clauses
Clauses (or contract clauses) are the terms and conditions incorporated into an award. Typically, clauses are also included in the solicitation; putting the contractor on notice about what will be required during performance. Clauses dictate how the contract will be executed and managed. Clauses are what the CO uses to enforce expectations. All clauses are in Part 52 of the FAR.
Instructions
Instructions (also called prescriptions) are used by the CO to determine which provisions and clauses are applicable, as well as how to conduct business in general. The FAR includes a complex matrix of provisions and clauses that rely on the CO to determine the contract type, dollar thresholds, type of procurement (e.g., commercial or noncommercial), and countless other factors in order to determine what applies in the unique acquisition based on the FAR prescription.
Ultimately, these instructions will result in the list of provisions and clauses that are incorporated into solicitations and awards.
Knowing your contract type is an essential part of understanding how the FAR applies. Moreover, the contract type will drastically change which clauses and provisions apply to your situation.
How does the government determine the type of contract to use?
The FAR allows flexibility in the type of contract used for the goods and services being acquired. During the requirements phase, the Contracting Officer will review the knowns, unknowns, and goals of the program to inform the choice in contracting method and type of contract. The CO will consider risks and how well the requirements are defined to position the acquisition with the best type of contract for the specific situation. Sometimes it is not appropriate to utilize only one contract type for all of the work to be performed, so contract types can be combined into a “hybrid” to allow for better management of risk. This would look like one Contract Line Item Number (CLIN) is Firm-Fixed-Price for labor and another CLIN is Cost Reimbursable for Other Direct Costs (ODCs), all on the same contract. FAR Part 16 lays out the types of contracts that the government can issue.
Executive Order 14402 Promoting Efficiency, Accountability, and Performance in Federal Contracting reinforced the preference for fixed-price, performance-based contracts, and explicitly called out cost reimbursement, time and material, and labor hour contracts as undesirable. It’s important to understand the difference in contract types so that contractors can structure proposals appropriately, manage risk during performance, and know what the government expects out of the arrangement.
On EO 14402:
The government has always been encouraged to look to fixed-price contracts first. The big difference now is that there is a mandate and waiver process for anything other than fixed-price contracts, adding to the workload and challenge for COs and buying teams. Fixed-price contracts require substantial work upfront; establishing specific tasks with acceptance criteria (e.g., What is considered adequate completion?). The flexibility of an “other than fixed-price” contract has meant that government teams could lean on ambiguity and come up with requirements that are close enough to what they need or leverage the ability to say that they don’t know exactly what they need but still get a contract going. With the push for fixed-price contracts, government teams may take longer during requirements development to put pen to paper and prepare solicitations for release in the first place. Contractors can use this shift to their advantage by shaping procurements into commercial contracts, which lend themselves clearly to firm, fixed-price contract types while reducing the proposal and performance burdens for the company. Remember: in fixed-price situations (whether commercial or noncommercial), the risk sits more heavily with the contractor, so it is essential to understand what you are committing to.
What are the main types of contracts?
Fixed-Price (FP)
When the CO determines that the requirement is well defined and the costs associated with the work are predictable, a fixed-price contract is appropriate. A fixed-price contract or Contract Line Item Number (CLIN) establishes a set price for delivering goods or services and is not changed after negotiations are finalized and the award is fully executed. The only way to adjust the price is through a formal change to the contract that must be proposed and negotiated with further supporting information. If during performance the contractor spends more than expected on previously known work, profit on the project is effectively reduced. As a result, in fixed-price contracts the contractor assumes most of the financial risk and must monitor costs effectively even when it is not required for reporting to the government.
Cost Reimbursement (CR)
Cost reimbursement, which include Cost Plus (CP) contracts, are appropriate when there are known requirements, but the costs cannot be accurately estimated. Instead, the government pays the allowable incurred costs and a negotiated fee. During proposal, the fee is based on a percentage of the estimated costs. At award, the fee becomes a lump sum that doesn’t change even if the incurred costs change. Cost reimbursement contracts shift the risk back toward the government, making these contracts more favorable for contractors in riskier situations such as highly technical development or research programs. Common variations include Cost Plus Fixed Fee (CPFF), Cost Plus Award Fee (CPAF), and Cost Plus Incentive Fee (CPIF).
Time and Materials (T&M)
Time and Material (T&M) contracts are the riskiest for the government and the least risky for contractors. Under a T&M contract, the scope is unknown and the government can’t make an appropriate estimate of the volume of support needed to meet requirements to describe needs to contractors for bid and proposal. Generally, labor categories and rates are negotiated, and the contractor works whatever hours are required with whatever skills mix needed and whatever material purchases are required. The government relies on the contractor to manage the program and control costs but has limited mechanisms to ensure that this is the case. As such, the government and contractor work together on T&M contracts, however they are much riskier for the government and less risky for contractors because every hour will be reimbursed with profit. In the same family, Labor Hour (LH) contracts are for labor only, with no material purchases.
Level of Effort (LOE)
Level-of-Effort can be combined with either FP or CR contracts to indicate a specific number of labor hours over a defined period for a defined scope of work. It’s worth noting that in an LOE situation, contractual requirements are met with the achievement of hours, not results or deliverables, making LOE contracts riskier for the government and more favorable for industry. FFP-LOE contracts are proposed with labor rates defined by category, but at award the CLIN is effectively treated as a lump sum price (the FFP) if the LOE hours are met. In a CPFF-LOE situation, all hours worked are charged at the actual negotiated rate by category.
When contractors know the contract type associated with the work to be performed, contractors can protect themselves and their work by outlining clear Ground Rules and Assumptions (GR&As) for bids that cover scope, key dependencies, and expectations around the applicable situation that may impact their ability to perform. These can be approval timelines, space constraints, onsite vs. offsite performance, or any other underlying factor impacting cost/price or schedules.
Final Thoughts
Navigating the federal government’s rules and regulations at this pivotal moment can be complicated for even the most seasoned of contractors. Aprio helps organizations evaluate and interpret clauses, negotiate terms, and build the compliance infrastructure needed to perform. Contact our team to learn how to interpret government documents and position your company for success in today’s federal marketplace.
