2-18 Select Contract Type and Period of Performance

Selecting the most effective contract type for a purchase is an important element of purchase planning and must be considered along with price, risk, uncertainty, and responsibility for costs. The nature of a purchase will determine the appropriate contract type. The type of contract selected should reflect the appropriate risk and responsibility that will be assumed by the supplier. For example, full cost responsibility is assumed under a firm fixed-price contract, while there is minimal cost responsibility under a cost-reimbursement contract. The selected contract type determines how the supplier will be paid; it drives the supplier’s fee or profit amount. Purchase/SCM teams may decide to use a type of contract not described in this process step subject to the approval of a portfolio manager. Cost plus a percentage of cost contracts may not be used.

The contract is also a driver of supplier performance. An inappropriate contract type (e.g., supplier’s risk is too high) can lead to the supplier delivering sub par work, renegotiations, or a unsuccessful relationship with a supplier. A wide selection of contract types is necessary to provide the flexibility needed for the purchase of a large variety of products and services.

Selecting the optimum contract length for any given requirement is also an important element of purchase planning and must be considered along with price, risk, market conditions, and industry norms in finalizing a period of performance for solicitation. The length of a contract and whether to consider the inclusion of option periods and their individual term will depend on several factors.

For a non-recurring requirement for supplies or services, the contract length should generally conform to the specific delivery date or performance period associated with the requirement.

For a recurring requirement for supplies or services, optimum contract length will depend on consideration of the following:

• Competition: If there are many suppliers capable of providing the supplies or services, then the total contract length should allow for reasonable re-competition opportunities.
• Evolution in methods for performing the requirement: Some commodities and industries undergo relatively rapid advances in methods for manufacturing supplies or performing services. In such cases, solicited contract lengths and incorporated option periods should consider the frequency of allowing for re-competition in order to take advantage of improvements in these methods.
• Maintain infrastructure stability: In certain commodities and industries, long term contracts may provide the opportunity for additional value when the Postal Service’s corporate direction is to maintain stability within its infrastructure to minimize risk and transition costs, maintain service levels, and have the ability to leverage supplier relations to include technology advances and supplier innovation.
• Best value: Contract length will often impact pricing, delivery, and performance perimeters. The optimum contract length in terms of obtaining best value may also require conforming to standard or preferred practices within a given commodity or industry.

Portfolio manager approval is required where the contract’s period of performance, including options, will exceed or be extended beyond a total of eight years. (See Section 2-41.3.2, Reviews and Approvals of Contract Awards, Modifications, and Ordering Agreements.)