2 Purchase Planning

2.4 Types of Contracts

2.4.1 General

2.4.1.a Planning. Selecting the most effective contract type for a purchase is an important element of purchase planning and must be considered together with the issues of price, risk, uncertainty, and responsibility for costs.

2.4.1.b Risk and Responsibility. The type of contract used should reflect the cost risk and responsibility assumed by the supplier. Full cost responsibility is assumed under a firm fixed-price contract, while there is minimal cost responsibility under a cost-reimbursement contract. The profit or fee arrangement should also reflect the cost responsibility assumed.

2.4.1.c Flexibility. Any type of contract described in this section may be used, as appropriate to the purchase. The contract types discussed in this section are those used most frequently for Postal Service purchasing. The contracting officer, working with the purchase team, may decide to use a type of contract not described in this section, subject to the approval of a Portfolio manger, or one of the following: the manager, Supply Management Infrastructure; the manager, SM Operations; or the manager, SCM Strategies. This decision must be based on the particular requirements of the purchase or the practices of a particular industry, trade, or profession.

2.4.2 Selecting a Contract Type

2.4.2.a Responsibilities. The contracting officer, working with the purchase team, is responsible for selecting and negotiating the most advantageous contract type appropriate to the purchase.

2.4.2.b Provision and Clause. Although contract type may be a matter for negotiation, the solicitation should specify a particular type of contract in order to provide a basis for comparing proposals (see paragraph f of Provision 4-1). If appropriate, the solicitation may allow suppliers to provide alternate proposals containing a different contract type. Clause B-3, Contract Type, must be included in all contracts awarded without issuing a written solicitation. A cost plus a percentage-of-cost contract may not be used.

2.4.2.c Considerations

1. A firm fixed-price contract makes the supplier fully responsible for cost control and minimizes the need to monitor performance. But if no reasonable basis for firm pricing exists, requiring a firm fixed-price contract may reduce competition and lead to higher prices (suppliers add allowances for contingencies to protect them from risks). Whenever the probable cost of contract performance cannot be realistically estimated, a firm fixed-price contract should not be used.

2. When a firm fixed-price contract cannot be used, costs can still be controlled by using incentives. Efficient performance can be promoted by relating the profit or fee to effective cost management by the supplier.

3. Cost-reimbursement contracts are suitable when uncertainties do not permit costs to be estimated with sufficient accuracy to use any type of fixed-price contract.

4. Factors to be considered in deciding contract type include the:

(a) Realism of the cost estimate.

(b) Extent of competition.

(d) Complexity of the requirement.

(e) Adequacy and firmness of specifications.

(f) Likelihood of changes.

(g) Past experience (pricing and production).

(h) Extent of subcontracting.

(i) Adequacy of the supplier's estimating and accounting system.

(j) Urgency of the requirement.

(k) Volatility of cost factors.

2.4.3 Fixed-Price Contracts

2.4.3.a Firm Fixed-Price Contracts

1. Description. A firm fixed-price contract establishes a price that will not be adjusted based on performance costs. It places full responsibility on the supplier for all costs and the resulting profit and loss, maximizing the incentive to control costs and perform effectively. It is the least burdensome type of contract to administer (if requirements are stable; but if frequent changes are likely, administration will be difficult).

2. Use. A firm fixed-price contract is suitable for purchasing commercially available products, or services with reasonably definitive specifications or statements of work, and whenever fair and reasonable prices can be established at the outset, such as when:

(a) There is adequate price competition (see 5.1.2.b).

(b) Price analysis (see 5.1.2.a) indicates price reasonableness.

(c) In noncompetitive situations, cost or pricing data are adequate to permit realistic estimates of the costs of performance.

(d) The cost impact of performance uncertainties can be estimated closely enough to reach agreement on a reasonable price that represents the risks involved.

2.4.3.b Fixed-Price Incentive Contract

1. Description. A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and establishing the final price by applying a formula based on the relationship between the total final negotiated cost and total target cost. The contract specifies a target cost, a target profit, a target price, a price ceiling, and a profit-adjustment formula for each item subject to incentive price revision. The price ceiling is the maximum that may be paid to the supplier, except for adjustments specifically provided for under contract clauses. When performance is completed, the final cost is negotiated and the final price is established by applying the formula. When the final cost is less than the target cost, applying the formula results in a profit greater than the target profit; when the final cost is more than the target cost, applying the formula results in a profit less than the target profit. If the final negotiated cost exceeds the ceiling, the supplier absorbs the difference. Because the profit varies inversely with the cost, this type of contract provides a positive, calculable profit incentive for the supplier to control costs. Billing prices are established as an interim basis for payment. The billing prices may be adjusted if it becomes apparent that the final negotiated cost will be substantially different from the target cost.

2. Use. A fixed-price incentive contract is appropriate when the parties can establish an initial target cost, target profit, and profit-adjustment formula that will provide a fair and reasonable incentive, and a ceiling that provides for the supplier to assume an appropriate share of the risk. When the supplier assumes a considerable or major share of cost responsibility under the adjustment formula, the target profit should reflect that responsibility. For the profit adjustment formula, the supplier's share will usually be in the range of 20-40 percent. The price ceiling is usually established by calculating an amount in the range of 15-30 percent of target cost and adding that result to the target cost.

3. Limitations. Fixed-price incentive contracts should be used when:

(a) The Postal Service wishes to incentivize performance.

(b) A firm fixed-price contract is not suitable.

(d) The supplier's accounting system is adequate for providing data to support negotiation of final cost and incentive price revision.

2.4.3.c Fixed-Price Contract with Economic Price Adjustment

1. Description. A fixed-price contract with economic price adjustment provides for up and down revision of the price when material prices or labor rates that are defined in the contract are subject to fluctuation. This type of contract establishes a basis for measuring fluctuations so that price adjustments are limited to contingencies beyond the supplier's control and reflect actual market fluctuations. Upward adjustments are limited by establishing a reasonable ceiling, and provisions are included for downward adjustments when prices or rates fall below base levels established in the contract. In establishing the base levels, the contracting officer must ensure that the base does not allow for any contingencies that are also included in the adjustment requested by the supplier under the economic price adjustment clause. Contingency allowances for inflation must be eliminated from the base costs when pricing the contract. There are two types of economic price adjustments:

(a) Adjustments Based on Actual Costs of Labor or Materials. These price adjustments are based on actual increases or decreases in the costs of specified labor or materials during performance.

(b) Adjustments Based on Cost Indexes of Labor or Materials. These price adjustments are based on increases or decreases in labor or material cost standards or indexes specifically identified in the contract.

2. Use

(a) General. Fixed-price with economic adjustment contracts are appropriate when there is serious doubt about the stability of market or labor conditions during an extended period of performance, and when contingencies that would otherwise be included in a firm fixed-price contract are identifiable and can be covered separately in the contract. Their usefulness is limited by the difficulties of administering them.

(b) Adjustments Based on Actual Costs of Labor or Material

(1) A contract may provide for adjustments based on actual costs of labor or material when:

(i) The contract is for longer than 6 months;

(ii) There is no major element of design, engineering, or developmental work involved;

(iii) One or more identifiable labor or material costs are subject to change; and

(iv) Adjustments will be limited to contingencies beyond the supplier's control.

(2) The schedule must describe, in detail, the types of labor and material subject to adjustment, the labor rates (including fringe benefits) and unit prices of materials that may be adjusted, and the quantities of labor and specified materials allocated to each unit of supplies to be delivered. The ceiling on upward adjustments should not exceed the original unit price by more than 10 percent annually for the total of increases to each unit-price adjusted. The supplier must notify the contracting officer within a stated number of days after a change in rates of pay or unit prices for specified materials and propose an adjustment. The contracting officer will negotiate the price adjustment and its effective date. In negotiating adjustments under the clause, the contracting officer must consider work in progress and materials-on-hand at the time of changes in labor rates or materials prices, since these may have a significant impact on equitable price adjustments. Negotiated adjustments must not include any indirect costs, except fringe benefits included in the labor rates subject to adjustment.

(1) A contract may provide for adjustments based on cost indexes of labor or material when:

(i) The contract involves an extended period of performance and significant costs will be incurred beyond the first year;

(ii) The amount subject to adjustment is substantial; and

(iii) The economic variables for labor and materials are too unstable to permit a reasonable division of risk between the Postal Service and the supplier without providing for adjustments.

(2) The contracting officer must develop a clause tailored to the purchase, with the assistance of counsel.

2.4.3.d Clauses - Supplies and Services Contracts

1. Paragraph I of Clause 4-1, General Terms and Conditions, discusses standard Postal Service payment terms. When necessary, purchase teams may replace paragraph I with Clause 2-26, Payment - Fixed-Price. All fixed-price incentive contracts must also include Clause 2-27, Incentive Price Revision, filled in.

2. Fixed-price contracts providing for economic price adjustments based on actual costs of labor or materials (see 2.4.3.c.2(b)) must include Clause 2-28, Economic Price Adjustment - Labor and Materials.

3. Fixed-price contracts providing for economic price adjustments based on cost indexes of labor or materials (see 2.4.3.c.2(c)) must include Clause 2-29, Economic Price Adjustment (Index Method), and an adjustment formula.

2.4.4 Cost-Reimbursement Contracts

2.4.4.a General. Cost-reimbursement contracts provide for paying allowable, incurred costs. They establish an estimate of total cost so that funds may be committed and establish a ceiling that the supplier may not exceed (except at its own risk) without the approval of the contracting officer. Cost-reimbursement contracts are suitable when uncertainties about contract performance do not permit costs to be estimated with sufficient accuracy to use a fixed-price contract.

2.4.4.b Limitations. A cost-reimbursement contract may be used only when:

1. The supplier's accounting system can determine the costs that apply to the contract; and

2. Postal Service monitoring during performance will assure that efficient methods and effective cost controls are used.

2.4.4.c Cost Contract. A cost contract is a cost-reimbursement contract under which the supplier receives no fee. A cost contract may be appropriate for research and development, particularly with nonprofit educational institutions or other nonprofit organizations.

2.4.4.d Cost-Sharing Contract. A cost-sharing contract is a cost-reimbursement contract under which the supplier receives no fee and is reimbursed only a portion of its allowable costs as stated in the contract. It is suitable when there is a high probability that the supplier will receive substantial commercial benefits as a result of performance.

2.4.4.e Cost Plus Incentive-Fee Contract

1. Description. A cost plus incentive-fee contract is a cost-reimbursement contract that provides for the fee initially negotiated to be adjusted later by a formula based on the relationship of total allowable costs to target cost. This type of contract specifies a target cost, a target fee, minimum and maximum fees, and a fee-adjustment formula. After performance, the fee is determined by the formula. The formula provides, within limits, for increases in the fee above the target when total allowable costs are less than target cost, and decreases in the fee below the target when total allowable costs exceed the target cost. This increase or decrease provides an incentive for the supplier to manage the contract effectively. When total allowable costs are greater than or less than the range of costs in the fee-adjustment formula, the supplier is paid total allowable costs, plus the minimum or maximum fee.

2. Use. A cost plus incentive-fee contract is suitable when a cost-reimbursement contract is appropriate and a target cost and fee-adjustment formula can be negotiated which will motivate the supplier to manage the contract effectively. The fee-adjustment formula should provide an incentive that covers the full range of reasonably foreseeable variations from the target cost. The supplier's share of the difference between target cost and actual cost will usually be in the range of 15-30 percent. If a high maximum fee is negotiated, the contract must provide for a low minimum fee-or even a zero or negative fee. The maximum fee will usually not exceed 10 percent of the contract's target cost, or 15 percent for research and development.

2.4.4.f Cost Plus Fixed-Fee Contract

1. Description. A cost plus fixed-fee contract is a cost-reimbursement contract that provides for paying the supplier a negotiated, fixed fee. The fixed fee does not vary with actual costs, but may be adjusted as a result of changes to the contract. This type of contract type gives the supplier only a minimal incentive to control costs.

2. Use. A cost plus fixed-fee contract is suitable when a cost- reimbursement contract is necessary but the uncertainties and risks for the supplier are too great to permit negotiating a reasonable cost plus incentive-fee arrangement.

3. Completion or Level-of-Effort Form. There are two forms of cost plus fixed-fee contracts:

(a) Types

(1) Completion Form. The completion form describes the scope of work by stating a definite goal or target and specifying an end product. This form generally requires the supplier to complete and deliver the end product within the estimated cost, if possible, as a condition for paying the entire fixed fee. If the work cannot be completed within the estimated cost, the Postal Service may require more effort without increasing the fee, but the estimated cost must be increased.

(2) Level-of-Effort Form. The level-of-effort form describes the scope of work in general terms and requires the supplier to devote a specified level of effort for a stated period. Under this form, if performance is satisfactory, the fixed fee is payable when the period ends and the supplier certifies that the level of effort specified in the contract has been expended. Renewal for further periods of performance requires new cost and fee arrangements, and is treated as a new purchase.

(b) Preference. Because of the greater obligation assumed by the supplier, the completion form is preferred over the level-of-effort form whenever the work can be defined well enough to permit a reasonable cost estimate within which the supplier can complete the work.

2.4.4.g Cost Plus Award-Fee Contract

1. Description. A cost plus award-fee contract is a cost-reimbursement contract that provides for a fee consisting of a base amount fixed at the beginning of the contract and an award amount that the supplier may earn in whole or in part during performance. The award amount must be sufficient to motivate excellence in areas such as quality, timeliness, technical ingenuity, and cost-effective management. The amount of the award fee is determined by the Postal Service's evaluation of the supplier's performance according to criteria stated in the contract. This determination is made unilaterally by the Postal Service and is not subject to the Disputes clause.

2. Use. The cost plus award-fee contract is particularly suitable for buying services. The likelihood of meeting purchasing objectives and achieving exceptional performance is enhanced under this type of contract. It provides the flexibility to evaluate subjectively, at defined intervals, both actual performance and the conditions under which performance was achieved. The additional administrative effort, contract amount, performance period, and cost required to monitor and evaluate performance must be justified by the expected benefits to warrant using this type of contract.

3. Performance Evaluation. Cost plus award-fee contracts provide for evaluation at stated intervals during performance, so that the supplier is periodically informed of the quality of performance and areas for improvement. Evaluation criteria and a rating plan should be prepared for each purchase to motivate the supplier to improve in areas important enough to be rated, but not to the detriment of overall performance. Requirements will vary widely among contracts, so contracting officers must customize the evaluation criteria, rating plan, and even the Award Fee clause, seeking advice from the purchase team and counsel, as needed. The partial payment of the award fee will usually correspond to the evaluation periods to provide incentive. If a high award fee is negotiated, the contract may provide for a low base fee, or even a zero base. The maximum fee, comprising the base fee plus the highest potential award fee, will usually not exceed 10 percent, or 15 percent for research and development.

2.4.4.h Provision

All solicitations for cost-reimbursement contracts-the estimated value of which is $100,000 or more-must contain Provision 2-9, Accounting System Guidelines - Cost Type Contracts. This provision requires pre-award review and approval of the potential supplier's cost accounting system by the Inspector General or a representative, and delineates the elements required in such accounting systems.

2.4.4.i Clauses

1. All cost-reimbursement contracts must include the following clauses:

(a) Clause 2-30, Allowable Cost and Payment.

(b) Either Clause 2-31, Limitation of Cost (if the contract is fully funded), or Clause 2-32, Limitation of Funds (if the contract is funded in increments).

2. Cost contracts must include Clause 2-33, Cost Contract - No Fee.

3. Cost-sharing contracts must include Clause 2-34, Cost-Sharing Contract - No Fee.

4. Cost plus incentive-fee contracts must include Clause 2-35, Incentive Fee.

5. Cost plus fixed-fee contracts must include Clause 2-36, Fixed Fee.

6. Cost plus award-fee contracts must include Clause 2-37, Award Fee.

2.4.5 Time-and-Materials and Labor-Hour Contracts

2.4.5.a Time-and-Materials Contracts

1. Description. A time-and-materials contract provides for purchasing supplies or services on the basis of:

(a) Direct labor hours at specified, fixed hourly rates (which include wages, overhead, general and administrative expenses, and profit); and

(b) Material at cost and, when appropriate, material-handling costs as a part of material costs. Material-handling costs may include all indirect costs, including general and administrative expense allocated to direct materials according to the supplier's usual accounting practices. The material-handling costs may only include costs clearly excluded from the labor-hour rate.

2. Use. A time-and-materials contract is only used when it is impossible to estimate the extent or duration of the work or anticipate costs with reasonable confidence. Because it does not encourage effective control by the supplier, it may only be used when provision is made for adequate monitoring by postal personnel during performance, to reasonably assure that inefficient or wasteful methods are not being used. Examples of situations where this type of contract might be appropriate are:

(a) Repair, maintenance, and overhaul work;

(b) Work to be done in emergency situations; and

3. Limitation. Time-and-materials contracts may only be used if no other type of contract will do. The contract must establish a ceiling price which the supplier exceeds at its own risk. The contracting officer must document the contract file to show the basis for any change in the ceiling.

4. Optional Method of Pricing Material. When the work to be performed requires the supplier to furnish material that is regularly sold to the general public by the supplier in the normal course of business, the contract may provide for charging material on a basis other than at cost if:

(a) The total estimated contract price does not exceed $50,000 or the estimated price of material does not exceed 20 percent of the estimated contract price;

(b) The material is identified in the contract;

(d) The contract provides that the price to be paid for the material must be the established catalog or list price in effect when material is furnished, less all applicable discounts, and not exceeding the supplier's sales price to its most favored customer for the same item in like quantity or the current market price, whichever is lower.

2.4.5.b Labor-Hour Contracts. A labor-hour contract is a variant of the time-and-materials contract, differing only in that materials are not supplied by the supplier. All the requirements of paragraph a above, except those dealing with materials, apply to labor-hour contracts.

2.4.5.c Clause. Time-and-materials and labor-hour contracts must include Clause 2-38, Payment (Time-and-Materials and Labor-Hour Contracts).

2.4.6 Indefinite-Delivery Contracts

2.4.6.a General

1. Indefinite-delivery contracts are used when the desired period of performance is known, but the exact time of delivery is unknown at the time of award. They establish the supplies or scope of services that can be ordered, terms and conditions, the maximum liability of the Postal Service, and prices. Orders placed against indefinite-delivery contracts are not subject to the noncompetitive procedures discussed in 2.1.6.

2. Indefinite-delivery contracts may provide for delivery of a definite quantity, an indefinite quantity within a minimum and maximum, or the Postal Service's requirements. During the contract term, delivery orders are issued by purchasing organizations or users.

3. The pricing structure of any normal contract type can be used for orders against indefinite-delivery contracts. Fixed-price orders are preferred unless the orders cannot be accurately priced before issuing each order. In that case, time-and-materials or labor-hour orders are preferred. The pricing mechanism may even be left to the judgment of the contracting officer at the time of issuing each order. The contracting officer, in that case, must ensure that the contract clearly provides for each type of pricing. In addition, if so desired by the purchase team, the contract may provide for alternative pricing for each order (for example, an order may be placed at a fixed price, or at a time and materials rate).

2.4.6.b Definite-Quantity Contracts. A definite-quantity contract provides for a definite quantity of specific supplies or services during the contract period, with deliveries to designated locations when ordered.

2.4.6.c Indefinite-Quantity Contracts

1. An indefinite-quantity contract provides for an indefinite quantity of specific supplies or services, within a stated minimum and maximum, to be delivered during the contract period to designated locations when ordered. It is used when precise requirements for supplies or services ordered over the term of the contract, above known minimums, cannot be determined. The minimum and maximum are provided to limit the pricing risk to the supplier.

2. The contract must require the Postal Service to order, and the supplier to deliver, a minimum quantity of supplies or services over the term of the contract, and requires the supplier to deliver any additional quantities ordered, not to exceed a maximum amount.

3. The minimum quantity must not exceed known requirements, and the maximum quantity must be realistic. The contract may specify minimum or maximum quantities for individual delivery orders, and a maximum that may be ordered during a specified time.

4. Contract maximums may be exceeded upon the mutual agreement of the Postal Service and the supplier.

2.4.6.d Requirements Contracts

1. A requirements contract provides for filling all or specified portions of actual purchase requirements of designated activities for specific supplies and services to be delivered as ordered over the term of the contract. It is used for recurring requirements anticipated during the contract period, where precise quantities cannot be determined. It may also be used to obtain supplies and services in excess of quantities that activities themselves can furnish within their own capabilities. A requirements contract is preferred when the purchase team decides to award a requirements contract to only one source and requirements can be estimated with reasonable accuracy.

2. The solicitation and contract must state an estimated total quantity, and, if feasible, the maximum limit of the supplier's obligation to deliver and the Postal Service's obligation to order. The total-quantity estimate must be as realistic as possible, based on records of previous requirements and current information. The contract may specify minimum or maximum quantities for individual delivery orders, and a maximum that may be ordered during a specified time.

3. When a requirements contract is for repair, modification, or overhaul of Postal Service property, the solicitation must state that failure of the Postal Service to furnish such items in the amounts described as "estimated" or "maximum" will not entitle the supplier to any price adjustment under the Postal Service Property clause.

2.4.6.e Ordering

1. The period for placing orders and the activities authorized to place orders must be identified in the contract.

2. Delivery orders or task orders are used to order against an indefinite delivery contract. A delivery order is used principally for supplies and a task order for services.

3. Ordinarily, orders should be placed:

(a) In writing;

(b) By authorized Postal Service credit card;

(d) By electronic data interchange (EDI); or

(e) Orally.

4. Orders must contain:

(a) The date of the order, contract number, and order number.

(b) Item number and description, quantity, and unit and total price or a ceiling price limiting the Postal Service's liability if the price cannot be negotiated before issuing an order.

(d) Packaging, packing, and shipping instructions, if any.

(e) Accounting and fiscal data.

(f) Any other pertinent information, including a statement of work that describes the services to be performed.

2.4.6.f Multiple Awards

1. The contracting officer may consider making multiple awards of indefinite-quantity contracts under a single solicitation for the same or similar supplies or services to two or more sources. The decision to make multiple awards and to compete individual orders should not be made if:

(a) The supplies or services are unique or highly specialized and only one supplier is capable of performing at the required level of quality.

(b) A single award will result in more favorable terms and conditions, including pricing.

(d) Tasks likely to be ordered are so integrated that only a single supplier can reasonably perform the work.

(e) The order is a logical follow-on to an order already issued under the contract.

(f) It is necessary to place an order to satisfy a minimum guarantee.

(g) The contracting officer determines that multiple contract awards or competition for a particular order are not in the Postal Service's best interest.

2. Competitive delivery and task orders should be awarded based on price and past performance on previous orders and, in some cases, an oral presentation covering how the task will be performed and resumes of key personnel. Participation by suppliers in the competition for orders is optional, so contracting officers must ensure that a sufficient number of suppliers can be expected to compete.2.4.6.g

2.4.6.g Provisions. For contracts where orders will be placed by authorized Postal Service credit card, the solicitation must include Provision 2-6, Credit Card Order Acceptance Requirement.

2.4.6.h Clauses

1. All delivery order, task order and definite order contracts must include the following clauses:

(a) Clause 2-39, Ordering.

(b) Clause 2-40, Delivery-Order Limitations.

2. All definite-quantity contracts must include Clause 2-41, Definite Quantity.

3. All indefinite-quantity contracts must include Clause 2-42, Indefinite-Quantity.

4. All requirements contracts must include Clause 2-43, Requirements. When purchasing requirements in excess of the quantities that the activities can furnish within their own capabilities or only specified portions of requirements (see paragraph d), use the clause with its alternate paragraph c.

2.4.7 Ordering Agreements

2.4.7.a General

1. An ordering agreement is not itself a contract. It is a written agreement negotiated between a purchasing activity and a supplier that contains terms and conditions applying to future contracts between the parties. The contracts are established when orders are issued and accepted by the parties. Ordering agreements include Basic Pricing Agreements (BPAs) (see 2.4.8). Although there is a price ceiling for individual orders, there is no limit on the aggregate value of orders and no commitment to purchase. This distinguishes ordering agreements from indefinite-delivery contracts.

2. An ordering agreement is useful for expediting contracting for uncertain requirements of supplies or services when specific quantities and prices are not known at the time the agreement is signed, but substantial quantities of the supplies or services are expected to be purchased. Ordering agreements reduce administrative lead time and inventory investment.

2.4.7.b Limitations

1. An ordering agreement may not state or imply any obligation or agreement by the Postal Service to place future contracts or orders with the supplier.

2. An ordering agreement may only be changed by modifying the agreement itself and not by individual orders issued against it. Modifying an ordering agreement does not retroactively affect orders previously issued against it.

3. An ordering agreement extending for more than 1 year must be reviewed periodically to determine whether it should be continued.

2.4.7.c Content of the Agreement. An ordering agreement must:

1. Describe the supplies and services to be provided.

2. Describe the method for determining prices.

3. Include delivery terms and conditions or specify how they will be determined.

4. List the activities authorized to issue orders.

5. Specify the point at which each order becomes a binding contract (for example, issuance of the order, acceptance of the order in a specified manner, or failure to reject the order within a specified number of days).

6. Provide that failure to reach agreement on the price of any one order issued before a price is established (see 2.4.7.e) is a dispute under Clause B-9, Claims and Disputes.

7. Contain the clauses prescribed for the type of contract represented by the orders to be placed. (For clauses prescribed according to contract dollar amount, the aggregate value of orders expected to be placed must be estimated.)

2.4.7.d Ordering. A contracting officer representing any activity listed in an ordering agreement may issue orders for supplies or services covered by that agreement. Except for orders under mandatory ordering agreements, competition must be obtained before placing an order, unless precluded by compelling urgency or other good reason in the Postal Service's interest. Competition may be by oral or written solicitation among firms holding ordering agreements for the same supplies or services, or on the open market. If an order is placed without obtaining competition, the file must be documented to show the reason.

2.4.7.e Pricing. The contracting officer may not authorize the supplier to begin work on an order under an ordering agreement until prices have been established, unless urgency precludes advance pricing and the order establishes a ceiling price limiting the Postal Service's obligation. Pricing must be accomplished as soon as possible after issuance of an unpriced order.

2.4.8 Basic Pricing Agreements (BPAs)

2.4.8.a General. A basic pricing agreement (BPA) is an ordering agreement which permits individuals designated by name or title to place orders by telephone, over-the-counter, or in writing. BPAs permit consolidated invoicing (usually monthly) for all purchases made. Establishing BPAs with suppliers from which frequent, repetitive purchases are made can significantly reduce paperwork and administrative costs. Although there is a ceiling for individual orders (see 2.4.8.d.4), there is no aggregate value of orders under a BPA. When the BPA is limited to specific items on a price list, only those items may be ordered. Suppliers may revise their prices at any time.

2.4.8.b Use. BPAs are used when:

1. A wide variety of items in a broad class of supplies (hardware, electrical supplies, etc.) may be available from suppliers but quantities and delivery requirements are not known and may vary considerably. BPAs may also be used for services.

2. The preparation of numerous written orders and processing of invoices can be avoided.

3. There is a need to provide supply sources for offices that do not have purchasing authority.

4. A purchase or series of purchases from a particular supplier may not be made using local buying procedures.

2.4.8.c Sources. BPAs should be established with suppliers from which numerous individual purchases will likely be made in a given period. For example, if experience shows that a supplier is dependable and consistently lower in price than other suppliers, and if numerous small purchases are made from it, it would be advantageous to establish a BPA with the supplier.

2.4.8.d Restrictions. The following restrictions apply to BPAs:

1. BPAs may not be made for supplies or services which must be purchased from mandatory sources (see 3.3).

2. BPAs may not be made for construction on Postal Service premises.

3. The term of a BPA may not exceed 5 years.

4. Individual orders may not exceed $10,000 (except for fuel, where the ordering limit is tank capacity).

2.4.8.e Ordering. When orders are placed under a BPA established for specific items on a price list, only the items on the list may be ordered.

2.4.9 Letter Contracts

2.4.9.a Description. A letter contract is a written preliminary contractual instrument that authorizes the supplier to begin work immediately, before a definitive contract is negotiated.

2.4.9.b Use

1. A letter contract is used when:

(a) The requirement demands that the supplier be given a binding commitment so that work can begin immediately.

(b) Negotiating a definitive contract in time to satisfy the requirement is impossible.

2. Each letter contract must be as complete and definitive as possible under the circumstances.

3. Each letter contract must contain a negotiated definitization schedule including:

(a) A date for submission of the supplier's price proposal.

(b) A date for the start of negotiation.

4. Each letter contract must state the maximum liability of the Postal Service. This is the amount estimated to be needed to cover performance before definitization. It may not exceed 50 percent of the total estimated cost of the contract.

5. The definitization schedule must provide for definitizing the contract within 180 days after the date of the letter contract or before completion of 40 percent of the work, whichever occurs first. However, the contracting officer may, in extreme cases, authorize an additional period. Because an undefinitized letter contract is, in effect, a cost-reimbursement contract, it is not in the Postal Service's interest to allow it to continue longer than necessary. Therefore, if after exhausting all reasonable efforts, the contracting officer and the supplier fail to reach an agreement on price or fee, Clause 2-44, Contract Definitization (see 2.4.9.d), requires the supplier to proceed with the work and provides that the contracting officer may determine a reasonable price or fee, subject to appeal as provided in Clause B-9, Claims and Disputes.

2.4.9.c Limitations

1. A letter contract may only be used if no other type of contract is suitable. Its use must be approved by a Portfolio manager, or the manager of SM Operations, the manager of Supply Chain Management Strategies, or the manager of Supply Management Infrastructure.

2. A letter contract may not commit the Postal Service to a definitive contract in excess of the funds available at the time the letter contract is executed.

3. A letter contract may not be modified to add work unless the added work is inseparable from the work being performed under the letter contract.

2.4.9.d Clauses

1. A letter contract must include clauses required for the type of definitive contract contemplated, and any additional clauses known to be appropriate.

2. All letter contracts must include the following clauses:

(a) Clause 2-45, Execution and Commencement of Work.

(b) Clause 2-46, Limitation of Postal Service Liability. Insert as the maximum liability, the amount necessary to cover the supplier's performance before definitization. The maximum liability may not exceed 50 percent of the estimated cost of the definitive contract unless approved by a Portfolio manager, or one of the following: the manager, Supply Management Infrastructure; the manager, SM Operations; or the manager, SCM Strategies.

(c) Clause 2-44, Contract Definitization, with the definitization schedule established in accordance with subparagraphs 2.4.9.b.3 and 2.4.9.b.

(d) Clause 2-47, Payment of Allowable Costs Before Definitization, if a cost-reimbursement definitive contract is contemplated.

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