Types of Contracts

Section 8.2055  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. 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 the price 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. 2)         The application of such things as overhead and profit to the price of a subcontract is not a cost-plus-a-percentage-of-cost 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 authorize 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 Contracts.  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. 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 the maximum agreed upon cost (that is, the parties' agreed best estimate of the cost of performing the contract will vary inversely with the maximum 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 an agreed basis for payment for materials supplied and labor performed.  Labor hour contracts provide only for the payment of labor performed.  The contracts shall contain a stated ceiling or an estimate that shall not be exceeded without prior SPO approval. g)         Definite Quantity and Indefinite Quantity 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. 2)         Indefinite Quantity.  An indefinite quantity contract is a contract for an indefinite amount of supplies or services, within stated limits, to be furnished at specified times, or as ordered, that establishes unit prices of a fixed-price type.  Generally, an estimated quantity is based on historical usage or the best information available as to quantity as stated in the solicitation.  The contract may provide a minimum quantity the State is obligated to order and shall also provide for a maximum quantity provision that limits the State's ability to order.  If the contract identifies an estimated quantity, the State agency may order in the aggregate up to 20% more than the estimate without approval of the CPO or SPO.  For amounts that exceed 20% of the maximum quantity, a new procurement for the additional quantity is required. 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)          Option Provisions.  A solicitation may contain options for renewal, extension or purchase, and, if it does, the solicitation shall also include the requirements for exercising a given option, establish the term, and either establish the price or include the formula for establishing the price.  Contracts based on a solicitation may include only those options included in the solicitation, and other options shall be included as required terms in the contract.  Exercise of options shall be performed in accordance with the contract, the Code and other provisions of this Part.  Failure to include the options in the contract shall render the option provisions void. j)          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. k)         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.