United States Department of Agriculture
Food and Nutrition Service
Southeast Region
Policy Memorandum 250.12-03: Types of Procurement Instruments
This memorandum is a restatement of policy previously issued as Food Distribution Policy Memorandum 81-5 on December 12, 1980.
The following information is provided to clearly set out procurement instrument requirements.
Note that the term “formal advertising” means competitive sealed bids. The award of a contract through competitive sealed bids must be to the bidder (with a responsive and responsible proposal) offering the lowest price.
The term “negotiation” means competitive negotiation, and does not refer to sole source procurement. Bidders must submit both a technical proposal and a cost proposal. Competitive negotiation, as opposed to competitive sealed bidding, allows for consideration of price and other factors, and a judgment may be made as to the selection of the proposal which will be most advantageous to State or local authorities. “Noncompetitive negotiation” (sole source procurement) should rarely be utilized by State or local authorities.
The discussions below list types of procurement instruments, describe their significant features, and note whether the particular instruments may be utilized in negotiated and/or formally advertised procurements. Six allowable and two non-allowable types of procurement instruments are discussed.
Allowable procurement instruments:
1) Fixed price contract. Payment to a contractor is made at a fixed rate, either a fixed unit price or a total (“lump sum”) price. The price does not vary with fluctuations in the cost incurred in the provision of goods and services. Fixed price contracts are allowable both for formally advertised and negotiated procurements.
2) Cost reimbursable contract. Payment to a contractor is determined by actual costs incurred, and is typically utilized for procurements from universities and other organizations which are prohibited from earning profit on contracts. Such contracts may be used when the specifications or statement of work cannot be adequately defined. Cost reimbursable contracts may be used only for negotiated procurements.
3) Purchase orders. Purchase orders may be used, on a one-time or recurring basis when the requirement for goods and service is not expected to exceed $10,000. Purchase orders are allowable for both formally advertised and negotiated procurements.
4) Incentive contracts. Payment at a higher per-unit fee may be made if specified goals (for example, the number of children participating in the lunch program increases to, and is sustained at a certain level) are reached. If the goals are not reached, a basic, rather than incentive per-unit fee is paid. Incentive contracts are allowable for both formally advertised and negotiated procurements.
5) Formula contract. Payment to a contractor, generally for goods, may vary based upon a widely used and accepted price document such as the Consumer Price Index or U.S. Department of Agriculture Market News. Formula contracts are allowed only for negotiated procurements.
6) Cost-plus-fixed-fee. Payment to the contractor consists of reimbursement for all costs incurred in providing goods and services, and a fee which is a fixed dollar amount set at the time of contract award. The fee is not adjusted either upward to downward to reflect actual costs incurred during the course of the contract. Cost-plus-fixed-fee contracts are allowable only for negotiated procurements.
Non-allowable procurement instruments:
1) Cost-plus-percentage-of-cost. Payment to a contractor would be comprised of reimbursement of the purchase price of the goods and services and a fee based on a percentage of costs incurred. With such a contract, the higher the costs, the higher the fee received by the contractor. Such a contract would encourage cost overruns. Cost-plus-percentage-of-cost contracts are prohibited.
2) Cost-plus-a-percentage-of-income. In this variation of cost-plus-a-percentage-of-cost, a contractor would receive reimbursement for the purchase price of the goods or services plus a percentage of total program income. Such a contract differs from an incentive contract, and is prohibited.
All contracts, whether at the State or local level, must be carefully examined to determine compliance with procurement standards prior to their approval. These standards apply to procurement of food, supplies, equipment, etc., and of consultative, technical, managerial or other services in the operation of Food and Nutrition Service-administered programs.