FAR 16.104—Factors in selecting contract types.
Plain-English Summary
FAR 16.104 explains the factors a contracting officer should weigh when choosing and negotiating a contract type. It covers price competition, price analysis, cost analysis, the type and complexity of the requirement, combining contract types, urgency, period of performance or production run length, the contractor’s technical capability and financial responsibility, adequacy of the contractor’s accounting system, concurrent contracts, the extent and nature of subcontracting, and acquisition history. The purpose of the section is to help the Government match the contract type to the level of risk, pricing certainty, and performance uncertainty in the acquisition. In practice, this means the contracting officer should not default to a contract type without analyzing how well the requirement can be priced, how much risk should remain with the Government versus the contractor, and whether the contractor can support the proposed pricing arrangement. The section is especially important because it ties contract type selection to the quality of available pricing information and the realities of performance risk. It also encourages mixed contract structures when a single contract type is not appropriate for the entire requirement.
Key Rules
Use competition when available
Effective price competition normally produces realistic pricing, making fixed-price contracting ordinarily in the Government’s interest. When competition is strong, the contracting officer can usually rely more confidently on market pricing and shift more cost risk to the contractor.
Evaluate price analysis carefully
Price analysis, with or without competition, may support contract type selection, but the contracting officer must judge how reliable that analysis is as a pricing standard. If price analysis does not provide enough confidence, another contract type may be more appropriate.
Rely on cost analysis when needed
If there is no effective price competition and price analysis is not enough, the contracting officer must use the offeror’s and Government’s cost estimates as the basis for pricing arrangements. The uncertainties in performance and their cost impact must be identified and evaluated so the contract places a reasonable degree of cost responsibility on the contractor.
Match type to requirement risk
Complex, unique, or research-and-development requirements often create greater Government risk because costs and performance outcomes are hard to predict. As the requirement becomes repetitive or production quantities increase, risk should shift toward the contractor and fixed-price contracting should be considered.
Consider partial fixed-price structures
If the entire requirement cannot be firm-fixed-price, the contracting officer should consider whether part of the work can still be priced on a firm-fixed-price basis. This allows the contract to reflect different risk levels within the same acquisition.
Account for urgency and schedule pressure
When urgency is a primary factor, the Government may accept more risk or use incentives tied to performance outcomes to encourage timely completion. The contract type should support the schedule need without ignoring the cost and performance risks created by compressed timelines.
Adjust for long performance periods
Long contracts or long production runs may require economic price adjustment or price redetermination clauses, especially during economic uncertainty. These clauses help address inflation, market shifts, or other changes that would make a fixed price unrealistic over time.
Assess contractor capability and finances
The contracting officer should consider the contractor’s technical capability and financial responsibility when selecting the contract type. A contractor that lacks the ability or financial strength to manage the risk of a particular contract type may not be a suitable candidate for that structure.
Verify accounting system adequacy
Before using any contract type other than firm-fixed-price, the contracting officer must ensure the contractor’s accounting system can produce timely cost data in the form required by the contract. This is especially important for price revisions during performance or when moving from fixed-price experience to a cost-reimbursement arrangement.
Review concurrent contract impacts
If the contractor will perform the proposed work alongside other contracts, the contracting officer should consider how those concurrent operations and their pricing arrangements affect risk, cost allocation, and performance. Overlapping work can distort pricing assumptions and complicate administration.
Evaluate subcontracting exposure
Where extensive subcontracting is proposed, the contract type should reflect the actual risk borne by the prime contractor. Heavy reliance on subcontractors can change the prime’s cost exposure, control over performance, and ability to manage uncertainty.
Use acquisition history to refine risk
As the Government repeatedly acquires the same requirement, contractor risk usually decreases because the work becomes better defined and more predictable. Improved product or service descriptions can support movement toward more fixed-price structures over time.
Responsibilities
Contracting Officer
Analyze the acquisition’s pricing information, performance uncertainty, and risk allocation before selecting a contract type. The contracting officer must consider all listed factors, ensure the contractor’s accounting system is adequate before using non-fixed-price arrangements, and choose a structure that reasonably balances Government and contractor risk.
Contractor
Provide accurate pricing, cost, technical, financial, and accounting information needed to support contract type selection. The contractor must be able to demonstrate technical capability, financial responsibility, and an accounting system that can generate the cost data required by the proposed contract type.
Government/Agency
Support the contracting officer with market research, acquisition history, technical requirements, and pricing analysis so the contract type reflects actual risk and pricing conditions. The agency should also recognize when urgency, long performance periods, or recurring acquisitions justify different contract structures.
Technical and Program Personnel
Help define the requirement clearly, identify performance uncertainties, and explain how complexity, subcontracting, concurrent work, and schedule pressure affect risk. Their input is essential to determining whether fixed-price, cost-reimbursement, or mixed contract structures are appropriate.
Practical Implications
This section is a decision framework, not a checklist to be applied mechanically; the contracting officer must weigh the factors together and document why the chosen contract type fits the acquisition.
A common mistake is using firm-fixed-price by default without checking whether the requirement is too uncertain, too complex, or too dependent on incomplete cost information.
Another pitfall is ignoring the contractor’s accounting system until after award; if the system cannot support the required cost data, a non-fixed-price contract may become difficult or impossible to administer properly.
For long-term or recurring buys, the contract type may evolve over time as the requirement becomes better understood and risk shifts from the Government to the contractor.
Extensive subcontracting, concurrent contracts, and urgency can all change the real risk picture, so the contracting officer should look beyond the prime contract price and examine how the work will actually be performed.
Official Regulatory Text
There are many factors that the contracting officer should consider in selecting and negotiating the contract type. They include the following: (a) Price competition . Normally, effective price competition results in realistic pricing, and a fixed-price contract is ordinarily in the Government’s interest. (b) Price analysis . Price analysis, with or without competition, may provide a basis for selecting the contract type. The degree to which price analysis can provide a realistic pricing standard should be carefully considered. (See 15.404-1 (b).) (c) Cost analysis . In the absence of effective price competition and if price analysis is not sufficient, the cost estimates of the offeror and the Government provide the bases for negotiating contract pricing arrangements. It is essential that the uncertainties involved in performance and their possible impact upon costs be identified and evaluated, so that a contract type that places a reasonable degree of cost responsibility upon the contractor can be negotiated. (d) Type and complexity of the requirement . Complex requirements, particularly those unique to the Government, usually result in greater risk assumption by the Government. This is especially true for complex research and development contracts, when performance uncertainties or the likelihood of changes makes it difficult to estimate performance costs in advance. As a requirement recurs or as quantity production begins, the cost risk should shift to the contractor, and a fixed-price contract should be considered. (e) Combining contract types . If the entire contract cannot be firm-fixed-price, the contracting officer shall consider whether or not a portion of the contract can be established on a firm-fixed-price basis. (f) Urgency of the requirement . If urgency is a primary factor, the Government may choose to assume a greater proportion of risk or it may offer incentives tailored to performance outcomes to ensure timely contract performance. (g) Period of performance or length of production run . In times of economic uncertainty, contracts extending over a relatively long period may require economic price adjustment or price redetermination clauses. (h) Contractor’s technical capability and financial responsibility . (i) Adequacy of the contractor's accounting system . Before agreeing on a contract type other than firm-fixed-price, the contracting officer shall ensure that the contractor’s accounting system will permit timely development of all necessary cost data in the form required by the proposed contract type. This factor may be critical– (1) When the contract type requires price revision while performance is in progress; or (2) When a cost-reimbursement contract is being considered and all current or past experience with the contractor has been on a fixed-price basis. See 42.302 (a)(12). (j) Concurrent contracts . If performance under the proposed contract involves concurrent operations under other contracts, the impact of those contracts, including their pricing arrangements, should be considered. (k) Extent and nature of proposed subcontracting . If the contractor proposes extensive subcontracting, a contract type reflecting the actual risks to the prime contractor should be selected. (l) Acquisition history . Contractor risk usually decreases as the requirement is repetitively acquired. Also, product descriptions or descriptions of services to be performed can be defined more clearly.