Types of Contracts

Section 1 Section 1.2055  Types of Contracts a)         Scope This Section contains descriptions of types of contracts and limitations as to when they may be utilized by the State in its procurements. Types of contracts not mentioned in this Section may also be utilized with the approval of the SPO. b)         Prohibition of Cost-Plus-a-Percentage-of-Cost Contracting The cost-plus-a-percentage-of-cost contract is prohibited by Section 20-55 of the Code.  This type of contracting may not be used alone or in conjunction with an authorized type of contract.  A cost-plus-percentage-of-cost contract is one in which the vendor selects the supply or service on which the vendor's percentage is applied. 1)         A percentage mark-up from an agreed price list is not a cost-plus-a-percentage-of-cost contract. 2)         A percentage mark-up from the cost of a supply or service selected by the State or another vendor under contract to the State is not a cost-plus-a-percentage-of-cost contract. 3)         A percentage mark-up from the cost of parts needed in relation to a contract for services does not convert the services contract to a prohibited cost-plus-a-percentage-of-cost contract, provided the parts supplied under the cost-plus-a-percentage-of-cost method do not exceed 20% of the value of the contract. c)         Types of Fixed-Price Contracts 1)         Firm Fixed-Price Contract.  A firm fixed-priced contract provides a price that is not subject to adjustment because of variations in the vendor's cost of performing the work specified in the contract. 2)         Fixed-Price Contract with Price Adjustment A)        A fixed-price contract with price adjustment provides for variation in the contract price under special conditions defined in the contract, other than customary provisions authorizing price adjustments due to modifications to the work.  The formula or other basis by which the adjustment in the vendor's price can be made shall be specified in the solicitation and the resulting contract.  Adjustment allowed may be upward or downward only, or both upward and downward.  Examples of conditions under which adjustments may be provided in fixed-price contracts are: i)          changes in the vendor's labor agreement rates as applied to an industry or area (such as are frequently found in contracts for the purchase of coal); ii)         changes due to rapid and substantial price fluctuations that can be related to an accepted index (such as contracts for gasoline, heating oils and dental gold alloy); and iii)        in requirement contracts in which a vendor is selected to provide all of the State's needs for the items specified in the contract, when a general price change applicable to all customers occurs, or when a general price change alters the base price (such as a change in a manufacturer's published price list or posted price to which a fixed discount is applied pursuant to the contract to determine the contract price). B)        If the contract permits unilateral action by the vendor to bring about the condition under which a price increase may occur, the State shall have the right to reject the price increase and terminate without cost the future performance of the contract. d)         Cost-Reimbursement Contracts 1)         Determination Prior to Use A)        The State agency must submit to the SPO a justification for using any type of cost-reimbursement contract. This justification must be sufficient to show that such a contract is likely to be less costly to the State than any other type or that it is impracticable to obtain the items through any other type of contract. The SPO will consider the justification and any other relevant factors before making a written determination to authorized use of the cost-reimbursement contract. B)        Any reimbursement of travel expenses authorized in the solicitation and the terms of the contract may not exceed the applicable travel control board regulations. 2)         Cost-Reimbursement Contract.  A cost-reimbursement contract provides that the vendor will be reimbursed for allowable costs incurred in performing the contract, but will not receive a fee.  These contracts establish an estimate of total cost and must establish a ceiling that a vendor may not exceed without the written approval of the SPO. 3)         Cost-Plus-Fixed-Fee Contract.  This cost-reimbursement type contract provides for payment to the vendor of an agreed fixed fee in addition to reimbursement of allowable incurred costs.  The fee is established at the time of contract award and does not vary if the actual cost of contract performance is greater or less than the initial estimated cost established for the work.  Thus, the fee is fixed but not the contract amount because the final contract amount will depend on the allowable costs reimbursed.  The fee is subject to adjustment only if the contract is modified to provide for an increase or decrease in the scope of work specified in the contract. 4)         Cost Incentive Contracts A)        General.  A cost-incentive type of contract provides for the reimbursement to the vendor of allowable costs incurred up to the ceiling amount and establishes a formula whereby the vendor is rewarded for performing at less than target cost (that is, the parties' agreed best estimate of the cost of performing the contract will vary inversely with the actual, allowable costs of performance and consequently is dependent on how effectively the vendor controls cost in the performance of the contract). B)        Fixed-Price Cost-Incentive Contract.  In a fixed-price cost-incentive contract, the parties establish at the outset a target cost, a target profit (that is, the profit that will be paid if the actual cost of performance equals the target cost), a formula that provides a percentage increase or decrease of the target profit depending on whether the actual cost of performance is less than or exceeds the target cost, and a ceiling price.  After performance of the contract, the actual cost of performance is arrived at based on the total incurred allowable costs as provided in the contract.  The final contract price is then established in accordance with the formula using the actual cost of performance.  The final contract price may not exceed the ceiling price.  The vendor is obligated to complete performance of the contract and, if actual costs exceed the ceiling price, the vendor suffers a loss. C)        Cost-Reimbursement Contract with Cost-Incentive Fee.  In a cost-reimbursement contract with cost-incentive fee, the parties establish at the outset a target cost; a target fee; a formula for increase or decrease of fee depending on whether actual cost of performance is less than or exceeds the target cost, with maximum and minimum fee limitations; and a cost ceiling that represents the maximum amount that the State is obligated to reimburse the vendor.  The vendor continues performance until the work is complete or costs reach the ceiling specified in the contract, including any modification thereof, whichever first occurs.  After performance is complete or costs reach the ceiling, the total incurred allowable costs reimbursed as provided in the contract are applied to the formula to establish the incentive fee payable to the vendor. e)         Performance Incentive Contracts In a performance incentive contract, the parties establish at the outset a pricing basis for the contract, performance goals, and a formula that varies the profit or the fee if the specified performance goals are exceeded or not met.  For example, early completion may entitle the vendor to a bonus, while late completion may entitle the State to a price decrease. f)         Time and Materials Contracts; Labor Hour Contracts Time and materials contracts provide for an agreed basis for labor performed and payment for materials supplied.  Labor hour contracts provide only for the payment of labor performed.  A time and materials contract is typically used when it is not possible at the time of posting the solicitation to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence.  Appropriate contract administration by the State agency is required to give reasonable assurance that efficient methods and effective cost controls are being used. The contracts shall contain a stated ceiling or an estimate that shall not be exceeded without prior SPO approval. If the stated ceiling or estimate is exceeded, a change order shall be executed to memorialize the transaction if required by law. g)         Indefinite Delivery Contracts 1)         Definite Quantity.  A definite quantity contract is a fixed-price contract that provides for delivery of a specified quantity of supplies or services at specified times or when ordered, with deliveries or performance scheduled at designated locations upon order.  A definite quantity contract may be used when it can be determined in advance that a definite quantity of supplies or services will be required during the contract period. 2)         Indefinite Quantity.  An indefinite quantity contract is a contract for an indefinite amount of supplies or services furnished at specified times, or as ordered, that establishes unit prices of a fixed-price type.  Generally, an indefinite quantity contract is based on historical usage or the best information available as to quantity as stated in the solicitation and is not a guarantee of a quantity to be ordered.  The contract may provide a minimum quantity the State is obligated to order and may also provide for a maximum quantity provision that limits the State's ability to order. If an estimated quantity is identified in the contract or the notice of award published in the Bulletin, the State agency may order up to 20% more than the estimate without written SPO approval. Any such authorization shall be documented in writing and published in the Bulletin. 3)         Requirements Contracts.  A requirements contract is an indefinite quantity contract for supplies or services that specifically obligates the State to order all the actual requirements of designated State agencies during a specified period of time, with deliveries or performance scheduled at designated locations upon order. If identified in the solicitation as a requirements contract, all needed quantity, regardless of any stated estimate, must be ordered from that contract.  A requirements contract shall state a realistic estimated total quantity in the solicitation and resulting contract, but this is not a representation that the estimated quantity will be required or ordered, or that conditions affecting requirements will be stable or normal. h)         Leases A lease is a contract for the use of supplies or real property under which title will not pass to the State at any time, except pursuant to an option to purchase. i)          Recovery Contracts Contracts may provide for payment to the vendor of a percentage of the amount the vendor recovers or collects on behalf of the State.  The percentage may be fixed or may vary depending on amount of recovery or other factors, and the percentage may be paired with a fixed price or cost reimbursement method. j)          Renewal, Extension or Purchase Provisions A solicitation or contract may contain provisions for renewal, extension or purchase.  If a solicitation or contract includes these provisions, the requirements for exercising them, the term, and the price or the formula for establishing the price must be stated in the solicitation and contract. Contracts based on a solicitation may include only those renewal, extension or purchase provisions included in the solicitation, and these provisions shall be included as required terms in the contract. Exercise of any renewal, extension, or purchase provision shall be performed in accordance with the contract, the Code, and other provisions of this Part. Failure to include the renewal, extension or purchase provisions in the contract shall render those provisions void. k)         State Produced Supplies and Services Notwithstanding any provision in any contract, supplies or services available in-house or from State programs, such as the Illinois Correctional Industries, may be ordered without violating any contract. l)          Extraordinary Quantities Notwithstanding any provision in any contract, the State reserves the right to take bids separately if a particular quantity requirement arises that exceeds the State's normal needs or ordering requirements. m)        Energy Conservation State agency procurements of energy conservation measures, including guaranteed energy savings contracts, shall be made in accordance with the Code and this Part, except as otherwise authorized by the Code. n)         Sale of Advertising in State Publications 1)         Pursuant to Section 20-110 of the Code and subject to SPO approval, a State agency may sell ads or advertising space in certain State publications.  The sale of advertising or promotional consideration is not exempt from this Part. 2)         These arrangements shall be made pursuant to specifications included in an IFB or, if appropriate, an RFP. 3)         The advertising in, or authorized use of, State publications shall be appropriate to the type of publication and the program operations of the State agency. 4)         This procedure is authorized in conjunction with, for example, publications that promote tourism, conservation, recycling and the State Fairs.  The executive head of the State agency must concur in writing for the State agency to accept advertising from a person the State agency regulates. 5)         Proceeds from the sale of the advertisements shall be paid as stated in the IFB or RFP, including, but not limited to, the following: A)        to the General Revenue Fund; B)        to a special fund authorized to receive the proceeds; C)        as free or additional copies; or D)        directly to the printer by the advertiser. o)         Contracting for Installment Purchase Payments, Including Interest Contracts may provide for installment purchase payments, including interest charges, over a period of time. The interest rate may not exceed that established by law, including the Bond Authorization Act.