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Financial implications of contracting for acquisition programs.

Professor J. Gerald Land, Professor of Financial Management Defense Acquisition University

Department of Defense (DoD) acquisition program offices must adhere to the Federal Acquisition Regulations (FAR) and DoD Federal Acquisition Regulation Supplement (DFARS) for contracting issues. Contracting requires a comprehensive knowledge of policy and regulations. For example, FAR Contract Clause 52.232-8, "Discounts for Prompt Payment," is required to be included in all fixed-price supply and service contracts; under DFARS 204.7302, a contractor shall be registered in the DoD Central Contractor Registration database prior to award of a contract.

Contracting officers (COs) have broad discretion to determine the best contract type for a requirement. They have the authority to bind the government legally to a contract. COs approve terms, conditions, clauses, and the fair and reasonable price.

Determining a Fair and Reasonable Price

What is a fair and reasonable price in contracting? The fair and reasonable price represents a compromise between the viewpoints of the seller (contractor) and the buyer (government). The contractor may consider one price reasonable and the government, another price. The term fair and reasonable implies a subjective view. As a result, the government must consider all circumstances, including competition and market price of similar goods or services.

A proposed price is justified as fair and reasonable by a detailed evaluation using acceptable procurement methods. Some methods include applying the Producer Price Index and learning curve to a previous price, reviewing catalog lists, analyzing quotes between approved sources, and verifying certified costs and pricing data.

Evaluations of reasonable price may include price analyses or cost analyses. Price analysis is quick and economical to perform. This analysis is used on competitive proposals, sealed bids, and small purchases, as well as purchases estimated to cost up to $500,000, repeat buys of other items, and commercial off-the-shelf items.

Compared to price analysis, cost analysis is more time-consuming and expensive to perform. Research and development efforts, unique sole-source items, and high-dollar procurements (that is, acquisitions over $500,000) are evaluated using cost data.

Types of Contracts

There are two basic types of contracts: fixed price and cost reimbursement. Fixed-price contracts pay a contractor on delivery for a specific product or service performed. Commercial items can be acquired on a fixed-price contract. These items are typically inspected and accepted at destination. When shipping the items free on board (FOB) destination (that is, where the title for goods transfers at destination), the contractor is responsible for shipping costs. This type of contract (with inspection, acceptance, and FOB at destination) usually is locally administered.

With a cost-reimbursement contract, a contractor receives periodic payments for his best effort. These contracts may include an award, fixed, or incentive fee. Cost-reimbursement contracts, which are more complex, are administered by the Defense Contract Management Agency.

Occasionally, contracts must be terminated for convenience or default. The liability costs for the termination must be borne by the program obtaining the goods or services, as terminations cannot increase available funding. Unliquidated obligations must be sufficient to cover the costs for termination of convenience. When a contractor defaults on a contract, the remaining funds cited on that contract may be cited on a replacement contract.

Contracting is a partnership between the government and the contractor to meet the needs of the mission. In addition to the acquisition program offices, managing ongoing contracts involves the services of other organizations. The Defense Finance and Accounting Service processes invoices, the Defense Contract Management Agency administers contracts, and the Defense Contract Audit Agency provides contract audit service. If required, contractors provide fiscal status reports on contracts.


(1.) Department of Defense Financial Management Regulation, Volume 10

(2.) Enhanced Defense Financial Management Course Manual

(3.) Financial Implications of Contracting for Acquisition Programs Slides by Mr. Gerald Land, Defense Acquisition University

Reported by Connie R. Hollins

Connie R. Hollins is a former DoD contract specialist now working in the Accounting Directorate of the DFAS Dayton. A member of ASMC's Aviation Chapter; she is the first DFAS Dayton employee to become a Certified Defense Financial Manager.
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Title Annotation:Workshop Report
Author:Hollins, Connie R.
Publication:Armed Forces Comptroller
Date:Jun 22, 2005
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