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The Government assumes the risks inherent in the contract -benefiting if the actual cost is lower than the expected cost-losing if the work cannot be completed within the expected cost of performance.

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In sealed bidding, you cannot negotiate the terms of an EPA clause.

When you prepare the invitation for bids (IFB), the contract clause must be established in a way that is compatible with the requirements of the sealed bidding process.. Where: I1 = Index for Base Period I2 = Index for Adjustment Period S = Percentage of Price Subject to Adjustment P = Base Unit Contract Price Example of an Economic Price Adjustment.

Most of those arrangements fit into two general categories fixed-price and cost-reimbursement, but labor-hour and time-and-materials contracts have characteristics of both: The market prices at risk are severable and significant.

The risk stems from industry-wide contingencies beyond the contractor's control.

In developing an FPEPA contract, you can choose from the FAR EPA clauses, use an agency-prescribed clause, or develop your own unique clause following agency guidelines.

For commercial items, consider market research and commercial practice in clause development.).

As a minimum, your appraisal of cost risk should consider two areas of particular concern, contract performance risk and market risk.).

Before agreeing on a contract type other than firm fixed-price, you must ensure that the contractor's accounting system will permit timely development of all necessary cost data in the form required for the proposed contract type.

However, requiring contractors to accept unknown or uncontrollable cost risk can endanger contract performance, substantially reduce competition, and/or substantially increase contract price.

To realistically choose the proper contract type to meet a specific contract situation, you must consider the proper allocation of cost risk.

In this chapter, you will learn about the development and application of common compensation arrangements:).

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