# COMAR Title 21 — State Procurement Regulations

## Subtitle 06 — Contract Formation and Award

### Chapter 03 — Types of Contracts and Multi-Year Contracts

**Authority:** State Finance and Procurement Article, §§12-101, 13-213—13-215, and 13-217, Annotated Code of Maryland

**Administrative History:** Effective date: July 1, 1981 (8:13 Md. R. II-5)

**Administrative History:** Chapter revised effective January 9, 1989 (15:27 Md. R. 3138)

**Administrative History:** Regulation .06B amended effective March 13, 2006 (33:5 Md. R. 523)

#### Regulation .01 General.

*COMAR 21.06.03.01*

A. Prohibition. Cost-plus-a-percentage-of-cost contracts and subcontracts are prohibited.

B. Policy Regarding Selection of Contract Types.

  (1) Subject to the prohibition in §A, any type of contract which shall promote the best interests of the State may be used. However, preference shall be given in the order indicated to the following types of contracts:

    (a) Fixed-price;

    (b) Fixed-price incentive;

    (c) Cost plus incentive fee; and

    (d) Cost-plus fixed fee or cost-reimbursement.

  (2) The objective when selecting a contract type is to obtain the best value in the time required and at the lowest cost or price or greatest revenue to the State. In order to achieve this objective, the procurement officer, before choosing a contract type, should review those elements of the procurement which directly affect the cost, time, risk, and profit incentives bearing on the performance.

  (3) Among the factors to be considered in selecting any type of contract are:

    (a) The type and complexity of the procurement;

    (b) The difficulty of estimating performance costs such as the inability of the State to develop definitive specifications, to identify the risks to the contractor inherent in the nature of the work to be performed, or otherwise to establish clearly the requirements of the contract;

    (c) The administrative costs to both parties;

    (d) The degree to which the State shall provide technical coordination during the performance of the contract;

    (e) The effect of the choice of the type of contract on the amount of competition to be expected;

    (f) The stability of material or commodity market prices or wage levels;

    (g) The urgency of the requirement; and

    (h) The length of contract performance.

  (4) Except for a firm fixed-price contract, no contract type may be used unless the procurement officer determines that the contractor's accounting system will permit timely development of all necessary cost data in the form required by the specific type of contract contemplated and that the contractor's accounting system is adequate to allocate costs in accordance with generally accepted accounting principles and that determination is approved by the appropriate Department.

#### Regulation .02 Types of Fixed-Price Contracts.

*COMAR 21.06.03.02*

A. Definitions.

  (1) “Firm fixed-price contract” means a fixed price contract that provides a price that is not subject to adjustment because of variations in the contractor's cost.

  (2) “Fixed-price contract” means a contract which places responsibility on the contractor for the delivery of the product or the complete performance of the services or construction in accordance with the contract terms at a price that may be firm or may be subject to contractually specified adjustments.

  (3) “Fixed-price contract with price adjustment” means a fixed price contract that provides for variation in the contract price under special conditions defined in the contract, other than customary provisions authorizing price adjustments due to modifications.

B. Application.

  (1) Fixed-Price Contract Generally. A fixed-price contract is appropriate for use when the extent and type of work necessary to meet State requirements can be reasonably specified and the cost can be reasonably estimated, as is generally the case for construction or standard commercial products. A fixed-price type of contract is the only type of contract that can be used in competitive sealed bidding.

  (2) Firm Fixed-Price Contract. A firm fixed-price contract should be used whenever prices which are fair and reasonable to the State can be established at the outset. Bases upon which firm fixed prices may be established include:

    (a) Adequate price competition for the contract;

    (b) Comparison of prices in similar prior procurements in which prices were fair and reasonable;

    (c) Establishment of realistic costs of performance by utilizing available cost or pricing data and identifying uncertainties in contract performance; or

    (d) Use of other adequate means to establish a firm price.

  (3) Fixed-Price Contract with Price Adjustment. When a fixed-price contract with price adjustment is used, the formula or other basis by which the adjustment in contract 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:

    (a) Changes in the contractor's labor agreement rates as applied to the industry or areawide;

    (b) Changes due to rapid and substantial price fluctuations, which can be related to an accepted index;

    (c) In requirements contracts, when a manufacturer's 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) and that change affects the contractor.

#### Regulation .03 Types of Cost-Reimbursement Contracts.

*COMAR 21.06.03.03*

A. Definitions.

  (1) “Cost contract” means a contract which provides for reimbursement for allowable costs but no fee.

  (2) “Cost-plus fixed fee contract” means a contract which provides for reimbursement for allowable costs and in addition a fixed fee.

  (3) “Cost-reimbursement contract” means a cost contract or a cost-plus fixed fee contract.

B. Application.

  (1) Generally, a cost-reimbursement contract is appropriate when the uncertainties involved in contract performance are of such magnitude that the cost of contract performance cannot be estimated with sufficient certainty to realize economy by use of any type of fixed-price contract. A cost-reimbursement contract necessitates appropriate monitoring by State personnel during performance to give reasonable assurance that objectives are being met.

  (2) Determinations. A cost-reimbursement contract may be used only when the procurement officer determines in writing that:

    (a) This contract is likely to be less costly to the State than any other type or that it is impracticable to otherwise obtain the items of the kind or quality required except under such a contract;

    (b) The proposed contractor's accounting system shall permit timely development of all necessary cost data in the form required by the specific contract type contemplated; and

    (c) The proposed contractor's accounting system is adequate to allocate costs in accordance with generally accepted accounting principles.

  (3) Cost-reimbursement contracts shall provide that costs shall be reimbursed only if they are costs recognized as allowable and allocable under the cost principle regulations in Subtitle 09, or in the contract.

C. Each contractor under a cost-reimbursement type contract shall give notice and secure approval, as required by the contract, before entering into:

  (1) A cost-reimbursement subcontract; or

  (2) Any other subcontract involving more than $25,000, or 5 percent of the estimated cost of the prime contract. However, the cost-plus-a-percentage-of-cost system of contracting may not be used between contractors and subcontractors.

#### Regulation .04 Types of Cost Incentive Contracts.

*COMAR 21.06.03.04*

A. Definitions.

  (1) “Cost-plus incentive fee” means a contract which provides for the reimbursement to the contractor of allowable costs incurred up to a ceiling amount and establishes a formula by which the contractor is rewarded for performing at less than target cost or is penalized if it exceeds target cost.

  (2) “Fixed-price incentive contract” means a fixed-price contract in which the parties establish at the outset a target for performance and a formula by which the contractor is rewarded for exceeding performance and penalized if performance is not met.

  (3) “Target” means the parties agreed best estimate.

B. Determinations.

  (1) Before entering into any incentive contract, the procurement officer shall make a determination that the proposed contractor's accounting system shall permit timely development of all necessary cost data in the form required by the specific type of contract contemplated and that the contractor's accounting system is adequate to allocate costs in accordance with generally accepted accounting principles.

  (2) Before entering any cost-plus incentive fee contract, the procurement officer shall make the additional determinations required under Regulation .03B(2)(a).

#### Regulation .05 Time and Material Contracts Labor Hour Contracts.

*COMAR 21.06.03.05*

A. Definitions.

  (1) “Labor hour contract” means a contract which only provides for the payment of labor performed.

  (2) “Time and material contract” means a contract which provides an agreed basis for payment for materials supplied and labor performed.

B. Ceiling. Labor hour and time and material contracts shall state a dollar ceiling that may not be exceeded without the prior determination and approval of the procurement officer.

C. Determinations. Labor hour and time and material contracts shall be entered into only after the procurement officer or designee determines that:

  (1) State personnel have been assigned to closely monitor the performance of the work; and

  (2) In the circumstances, it would not be practicable to use any other type of contract to obtain the needed items in the time required and at the lowest cost or price to the State.

#### Regulation .06 Quantity Contracts Requirements Contracts.

*COMAR 21.06.03.06*

A. Definitions.

  (1) “Definite quantity contract” means a fixed-price contract that provides for delivery of a specified amount of goods or labor either at specified times or when ordered.

  (2) “Indefinite quantity contract” means a contract for an indefinite amount of goods or labor to be furnished at specified times, or as ordered, that establishes unit prices of a fixed-price type.

  (3) “Requirements contract” means an indefinite quantity contract for goods or labor that obligates the State to order all the actual requirements of designated using agencies during a specified period of time.

B. Application.

  (1) Indefinite Quantity Contract. An approximate quantity or the best information available as to quantity shall be stated in the solicitation and the contract. The contract may provide a minimum quantity the State is obligated to order and may provide a maximum quantity that limits the State's obligation to order.

  (2) Requirements Contracts. Requirements contracts shall include the following:

    (a) A provision that requires the State to order its actual requirements of the goods or labor covered, provided, however, that the State may reserve in the solicitation and in the resulting contract the right to take bids separately if a particular quantity requirement arises that exceeds the State's normal requirements or an amount specified in the contract; and

    (b) Two exemptions from ordering under the contract:

      (i) When the procurement officer approves a finding that the goods or labor available under the contract may not meet a nonrecurring, special need of the State, or

      (ii) Goods are produced or labor is performed incidental to the State's own programs, such as Maryland Correctional Enterprises, that can satisfy the need.

#### Regulation .07 Personal Property Leases.

*COMAR 21.06.03.07*

A. Definition. “Lease” means a contract for the use of supplies that are not owned by the State.

B. Application. A lease may be entered into if:

  (1) It is in the best interest of the State;

  (2) All conditions for renewal and costs of termination are set forth in the lease; and

  (3) The lease is not used to circumvent normal procurement procedures.

#### Regulation .08 Lease with Purchase Option.

*COMAR 21.06.03.08*

A. A purchase option in a lease may be exercised only if the lease containing the purchase option was awarded under competitive sealed bidding, competitive sealed proposals, or competitive small procurement procedures, or the leased supply or facility is the only supply or facility that can meet the State's requirements, as determined in writing by the agency head.

B. Before exercising the option, the procurement officer shall:

  (1) Investigate alternative means of procuring comparable supplies;

  (2) Compare estimated costs and benefits associated with the alternative means and the exercise of the option; and

  (3) Obtain review and approval of the appropriate Department.

#### Regulation .09 Multi-Year Contracts.

*COMAR 21.06.03.09*

A. Application. A multi-year contract is appropriate when it is in the best interest of the State to obtain uninterrupted services extending over more than one fiscal period, when the performance of the services involves high start-up costs, or when a changeover of services contractors involves high phase-in/phase-out costs during a transition period. The multi-year method of contracting is also appropriate when special production of definite quantities of supplies for more than one fiscal period is necessary to best meet the State needs but funds are available only for the initial fiscal period.

B. Objective. The objective of the multi-year contract is to promote economy and efficiency in procurement by obtaining the benefits of sustained volume production and consequent low prices, and by increasing competitive participation in procurements which involve special production or high phase-in/phase-out costs during changeover of service contractors.

C. Conditions for Use of Multi-year Contracts. A multi-year contract may be used when it is determined by the procurement officer that:

  (1) Special production of definite quantities or the furnishing of long-term services are required to meet State needs;

  (2) Estimated requirements cover the period of the contract and are reasonably firm and continuing; and

  (3) A multi-year contract shall serve the best interests of the State by encouraging effective competition or otherwise promoting economies in State procurement. The following factors are among those relevant to this determination:

    (a) Firms which are not willing or able to compete because of high start-up costs or capital investment in facility expansion shall be encouraged to participate in the competition when they are assured of recouping these costs during the period of contract performance;

    (b) Lower production costs because of larger quantity or service requirements, and substantial continuity of production or performance over a longer period of time, can be expected to result in lower unit prices;

    (c) Stabilization of the contractor's work force over a longer period of time may promote economy and consistent quality; or

    (d) The cost and burden of contract solicitation, award, and administration of the procurement may be reduced.

D. Multi-year Contract Procedure.

  (1) Solicitation. The solicitation shall state:

    (a) The amount of supplies or services required for the proposed contract period;

    (b) That a unit price shall be given for each supply or service, and that these unit prices shall be the same throughout the contract (except to the extent price adjustments may be provided in the solicitation and resulting contract);

    (c) That the multi-year contract shall be cancelled automatically if funds are not appropriated or otherwise made available to support continuation of performance in any fiscal period succeeding the first; however, this does not affect either the State's rights or the contractor's rights under any termination clause in the contract;

    (d) That the procurement officer shall notify the contractor on a timely basis that the funds are, or are not, available for the continuation of the contract for each succeeding fiscal period;

    (e) Whether bidders or offerors may submit prices for:

      (i) The first fiscal period only,

      (ii) The entire time of performance only, or

      (iii) Both the first fiscal period and the entire time of performance;

    (f) That a multi-year contract may be awarded and how prices shall be determined, if prices for the first fiscal period and entire time of performance are submitted;

    (g) That the effect of termination is to discharge both parties from future performance of the contract, but not from their existing obligations. The contractor shall be reimbursed for the reasonable value of any nonrecurring costs incurred but not amortized in the price of the supplies or services delivered under the contract.

  (2) Award. Award shall be made as stated in the solicitation and permitted under the procurement method utilized.

#### Regulation .10 Multiple Awards.

*COMAR 21.06.03.10*

When a multiple award is made, all State agencies shall order all of their actual normal requirements for the specified supplies or services from contractors awarded the contract. A multiple award may be in the State's best interest when an award to two or more bidders or offerors for similar products is needed for adequate delivery, service, availability, or for product compatibility. In making a multiple award, care shall be exercised to protect and promote the principles of competitive solicitation. Multiple awards may not be made when a single award will meet the State's needs without sacrifice of economy or service.