Source: http://www.wifcon.com/discussion/index.php?/topic/1069-fixed-rate-vs-fixed-price/
Timestamp: 2019-02-17 20:30:00
Document Index: 700934718

Matched Legal Cases: ['art 16', 'art 11', 'art 41', 'art 16', 'art 11', 'art 17', 'art 16', 'art 31']

Fixed rate vs. fixed price - Contract Award Process - The Wifcon Forums and Blogs
By jodivs, April 1, 2011 in Contract Award Process
What is the difference between fixed rate and fixed price? Can they be one in the same?
Context: I was recently involved in the purchase of satellite services on tracking devices. The devices themselves were bought previously, so this procurement was just for the commerical satellite tracking service. Standard industry practice is to bill monthly (as a subscription) for each "active" device. The end user (customer) knew the number of devices they had, but the actual number of devices needing satellite services at any given time is somewhat variable as it is dependent on mission requirements. For example, the customer had 100 devices, but some months (this timeframe noted only due to standard commerical billing practices of monthly subscription billing), we may only require active service on 95 or 97 of them. The customer, obviously, only wants to pay for those devices needed as the requirement is dynamic (dependent on mission requirements).
The vendors charge a fixed activation/deactivation/re-activation fee each time we change the number of units requiring service. They also bill at a fixed monthly rate per unit needing service--for the sake of clarity, lets say that fixed rate is $50/month for each active device. Further, lets say the fixed rate for activation/deactivation/re-activation is $30 per instance.
The resultant contract action for these has FFP CLINs for these services. The CLIN for the activation/deactivation/re-activation fee have a fixed rate ($30), quantity (10, as historically this is all the customer has every required for the performance period), and a NTE total price. The monthly subscription CLIN has a fixed monthly rate per device ($50), quantity (100, as this is the number of devices we own), and a NTE total price. The vendor (per their standard industry practice) will only bill for the services we actually used--so if only 95 of the devices are active during that billing cycle, that is what they will bill.
I guess I always thought of fixed rate and fixed price as completely different things (which is evident in T&M contracts). That at the end of a fixed price contract, there should be no remaining funds--no need to descope or deobligate. In the case described above however, the chances of descope/deobligating are great, as the total price per CLIN is a NTE amount.
So I ask again, what is the difference between fixed rate and fixed price? Can they be one in the same? I provided the previous example as the argument I have been given that, yes, indeed, they can be one in the same. I am not sure I buy this argument.
When I first saw the subject of your post I was reminded of one of my civilian agency customers who calls its T&M contracts "fixed rate" apparently because it sounds better with "fixed" in there and does not carry the negative connotations that T&M does. "Fixed rate," however, is not a contract type listed in FAR Part 16. But I digress.
I would call this a fixed unit price or fixed unit rate contract, under the general heading of fixed price, because the price is "...not subject to any adjustment on the basis of the contractor's cost experience in performing the contract." FAR 16.202-1. Just my $0.02 worth. Others may have better informed opinions.
It is common to have fixed unit price construction contracts for civil work where the quantity cannot be determined precisely in advance, but can be measured in place. In those contracts there may be funds left at the end, or it may be necessary to provide additional funding. The Variation in Estimated Quantity clause from FAR 50.211-18 would be used, as prescribed in FAR 11.703. Unfortunately, FAR Subpart 11.7 covers VEQ only for supply or construction contracts, not for the type of services you are handling, but some of the principles are similar, i.e. pay a fixed price for each unit actually used.
FAR Part 41, Acquisition of Utility Services, specifically excludes telecommunications services from its applicability, at 41.102( b )(3). Having never handled such a contract for the Government, I don't know where in the FAR to find anything about that.
A fixed rate and fixed price can "be one in the same". Certainly there are contracts with "fixed rates". I would usually refer to those as "unit-priced items", as opposed to "lump sum" priced items. And there is no prohibition in including a not-to-exceed quantity of a unit-priced item. And unit-priced items may be included in or even comprise all the line items in a "fixed-price" contract.
FAR 16.2 discusses "fixed-price contracts". Actually, the broad term referring to "fixed-price" doesn't mean that "at the end of a fixed price contract, there should be no remaining funds--no need to descope or deobligate." A fixed-price contract may provide for a firm price or an adjustable price, depending upon the specific type and depending upon how the prices are set up. You might be thinking of the firm-fixed-price type contract discussed in 16.202. The FAR at 16.202-1 says that a FFP "contract provides for a price that is not subject to any adjustment on the basis of the contractor's cost experience in performing the contract." It doesn't say anywhere in FAR Part 16 that the final price must match the original price, absent a modification.
Fixed price contracts can include unit-priced items which may vary from the estimated quantity or even an established quantity. See, for example, Subpart 11.7, Variations in Quantity. See 11.701 Supply Contracts. This section discusses where there can be variations in a "fixed-price supply contract" . See 11.703 for clauses for use in fixed-price supply contracts (52.211-16 and -17).
I have had a lot of experience using firm-fixed price construction contracts with estimated quantities of unit-priced items. See 11.701 for construction contracts, which says that construction contracts may authorize a variation in estimated quantities of unit-priced items. The mechanism used in the contract that authorizes the variation will be stated in the contract, in a bid or line item schedule or in the statement of work, specifications, measurement and payment provisions, etc. See 11.703 ?, where it says to use the Variation in Estimated Quantity (VEQ) clause at 52.211-18 when a "fixed-price construction contract is contemplated that authorizes a variation in the estimated quantity of unit-priced items". This clause is NOT the mechanism used to authorize a variation in the estimated quantity. The VEQ clause only provides a mechanism for an adjustment of the unit-price for certain quantities of unit-priced items outside the stated range of variation from the estimated quantity. My point in mentioning the VEQ clause is that 1) it discusses estimated quantities of unit-priced items in a "fixed-price" construction contract and 2) it authorizes a price adjustment based upon the contractor's cost experience.
Since the VEQ clause provides for an adjustment to the "fixed-price" based upon differences in "the contractor's cost", the statement at 16.202-1 that "the price is not subject to any adjustment on the basis of the contractor's cost experience in performing the contract" is technically incorrect.
I didn't research the entire FAR for other discussion of fixed-price contracts, with respect to services or any other variation in "fixed-rate" items. However, I've seen and used service contracts that had unit-priced items with estimated quantities. For example, grass mowing services may have prices per acre or per cutting to allow for variations in growing seasons, weather conditions, adding or subtracting areas, etc.
I know that the FAR isnt very clear and can be confusing at times. As I've said before, it dioesn't have all the answers on to "how to contract." Not all Parts and subparts are coordinated with each other, either. Much of the current language preceded the current organization of the FAR and/or has been moved from other Parts, without editing. For example, the VEQ clause, which preceded FAR, was actually moved years ago from Part 17, I think.
"Fixed" simply means no change except by specific and express agreement on a case-by-case basis.
"Price" is a stipulated amount of payment in exchange for supplies delivered and accepted or services rendered and accepted. See, e.g., FAR 52.232-1.
"Rate," in the context of this discussion, is an amount of dollars per unit.
By unofficial convention, the term "rate" is used in the acquisition of services when the number of units of service to be bought (usually minutes, hours, etc.) cannot be fixed in advance and the parties agree to delivery on demand and payment for units delivered. (In government contracting, the actual number that the contractor is obligated to deliver and that the government is obligated to pay for is usually capped, so as to avoid violations of the anti-deficiency act. Such caps are sometimes referred to as a "ceiling" or "ceiling price.")
While a "unit price" is in fact a "rate," the terms generally are not used synonymously. "Unit price" is most commonly used in supply and construction contracts, while "rate" is generally used in service contracts.
1. If a contract provides for payment of a fixed dollar amount per unit of a fixed quantity of a unit of supply, or a unit of service, or for completion of a construction project, then we ordinarily would say that it is a "fixed-price" contract (i.e., firm-fixed-price), because both the unit price and the number of units are fixed at the outset.
2. If a contract provides for payment of a fixed dollar amount per unit of a variable quantity of a unit of supply or unit construction work (e.g., cubic yards of excavation), we ordinarily would say it is a "fixed unit price" contract.
3. If a contract provides for payment of a fixed dollar amount per unit of a variable quantity of a service, we might call it a "fixed rate" or "fixed hourly rate" (or a "time-and-materials" or "labor hour") contract.
All three arrangements are loosely called "fixed price, but only No. 1 is really so.
I learn something every day, here.
Most of the other types of fixed price contractd listed in part 16 require application of the cost principles from Part 31 and are subject to audit under 52.215-2. Both of these results are to be avoided when contracting for commercial items. That is why indirect costs under T&M contracts for commercial items are expressed as a fixed amount instead of using billing rates an final indirect cost rates.
I love this topic. I hope FAR will be revised someday to add another fixed price contract type that is described in the second example of Vern?s post #4. Maybe it could be 16.208 Fixed-unit-price contracts with adjustable quantity. I use this type of contract for both supplies and services (for service whose payment is paid not for hours worked but for quantity of output, e.g., insurance verification service that is set
up with a unit price per insurance policy, translation service with unit price per completed page, etc. Although I can write those contracts as fixed-price in a way to allow adjustment of the quantity, I have a problem with some reporting that requires us to select the exact type of contract from fixed price contracts. For example, when completing FPDS-NG, we need to select one from FFP; Fixed price award fee; Fixed price incentive; Fixed price level of effort; Fixed price redetermination; Fixed price with economic price adjustment. Therefore, I need to report the contract as FFP, while it is not exactly FFP.
1. Note: FAR 11.703 © refers to fixed-price construction contracts with variable quantities. Such contracts long pre-date the FAR and the automated contracting software.
2. Retreadfed addressed your question concerning commercial item contracts other than FFP or FFP with price redetermination.
Notwithstanding what Vern said above, see FAR 36.207, Pricing fixed-price construction contracts.
Subparagraph (a) says that generally FFP contracts shall be used for construction and says that they may be priced on lump sum basis, unit-price basis or a combination thereof.
Because of the DoD contracting software system and reporting requirements, we must adjust the final contract price to reconcile final quantities of unit-price items with the adjusted contract price (100% complete reflects actual quantities).
Due to limitations in SPS, we can't use an admin mod to make the total price adjustment, even though the rights of the parties are not affected by the adjustment, because the software won't accept price adjustments using an admin mod, so I've been told. The term FFP refers to the unit priced and lump sum CLINS, not the total contract price.
There it is: IT rules! Or, IT overrules (common sense)!
That's what happens when those bits and bytes control the acquisition process.
I agree to a certain extent. A mod is necessary to adjust the price and add or reduce funding in order to properly make payments but the work hasn't changed. It is a contract management function. Years ago, we sent in reconciliation forms to track variations and to alert the Finance and payment offices that pay quantities were different than the official contract price. Now, it is done by modification, which is better but the administrative mechanisms don't seem to be there yet.
We were told to cite the VEQ clause as the authority for the mod to adjust estimated quantities to actuals. However, the VEQ clause is not the contract mechanism that allows us to pay for actual quantities. The contract will include measurement and payment provisions for the purpose, which are self acting.
The VEQ clause only addresses the right to a unit-price adjustment under certain circumstances, if the actual quantity of an item falls outside a range of 85-115% of the estimated quantity. The clause also allows a time extension, if warranted, due to the additional work. However, it doesn't mention paying for actual quantities or adjusting the contract price.
We certainly wouldn't want to use the changes clause, because routine variations in quantity, absent a change in the work, is not a "Change" or a "Change Order".
I feel that either the VEQ clause ought to be broadened to cover the administrative aspect of paying for actual quantities, adjusting funding and quantities, etc. or admin mods should be used.
At any rate, a construction contract with estimated quantities of unit-priced items is still called a FFP contract (of sorts) in accordance with FAR 36.207. So you can check the FFP block in your contracting software when using such a contract.