What are the circumstances necessitating the use of a letter contract which is also referred to as an undefinitized contract? The main circumstance is the government’s interests demand that the contractor immediately begin work and negotiating the final contract price (definitized) isn’t possible in order to meet the needs of the buying activity. Letter contracts should only be used when the work needs to immediately begin and there isn’t sufficient time to agree on the final terms and conditions. The government and prime contractors use letter contracts to immediately start work and then set a schedule to work towards negotiating to the finish line.
What are the requirements? FAR 16.603 and DFARS 216.603-3 set out the requirements for the contracting officer. It must also contain a definitization schedule including the required certified cost or pricing data and data other than certified cost or pricing data; and, if required, make-or-buy and subcontracting plans, (2) a date for the start of negotiations, and (3) a target date for definitization, which shall be the earliest practicable date for definitization. The schedule must provide for definitization of the contract within 180 days after the letter contract or before completion of 40% of the work, whichever occurs first. The ceiling is 50% of the estimated cost of the definitive contract unless approved in advance by the official that authorized the letter contract. Prime contractors also issue letter subcontracts in the same format as required by the FAR; however, as a prime you can restrict your time periods and ceilings as necessary to fit your situation with the subcontractor.
There are pros and cons to the government issuing a letter contract, or for a prime issuing one to a subcontractor. As stated, the primary driver or benefit of the letter contract is urgency to start the work; however, this does come at a risk for both parties. For the buyer, there is limited ability to control costs and risk. The initial proposal submitted may not be compliant, which requires additional time to negotiate and finalize per the terms of the definitization schedule. Letter contracts may require more work on the back end to finalize and handle all internal approvals. The contractor has already begun work; thus, the buyer loses the appearance of leverage and the seller is not incentivized to finalize the acquisition.
A Path of Last Resort
As a prime, you want to think carefully about the pros and cons to issuing a letter contract evaluating the risk and timelines. An outstanding procurement action creates risk to your financial program and in general, creates a negative perception as we all want our teammates to play well in the sandbox; however, unfortunately we don’t always get what we want in contracting.
Redstone GCI has a team of consultants with extensive experience with assisting contractors with subcontract administration and the processes and procedures that higher-tier contractors should employ and document associated with their subcontractors. We also have a team of Human Resources experts that assist contractors through EEO compliance and OFCCP audits. Our team would be happy to discuss any potential issues or concerns facing your organization as it relates to these compliance areas.
