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Evaluating Contracts - Assignment Example

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A fixed-price contract is one, where the business will enter into an agreement to complete the work contracted by the government agencies, at a fee agreed upon during the beginning of the contract (during the start of the contractual work). The budget requested from the agency…
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Evaluating Contracts
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Download file to see previous pages Apart from the costs of the materials, the business will then have its markup, and the arrangement accommodates changes in the prices of materials (Gido & Clements, 2014, p. 87).
The advantages of entering into a fixed-price contract for the business include that it will allow the business to secure and plan the execution of the contract fully, right from the beginning of the contract. The case for a cost-reimbursement contractual agreement is different, because the agreement limits the profits that the business could make from the execution, irrespective of the duration taken and the efficiency of executing the work. Secondly, this type of contracting will simplify the process of sales forecasting, because the profits to be drawn from the contract can be determined before starting the project, and that allows for more sales prospecting. The case is different in the case of entering into a cost-reimbursement contract, because disputes over the costs of materials and labor can affect the process of reimbursement and the profitability of the business – as a result (Gido & Clements, 2014, p. 87). The major risk arising from entering into this type of contract is that, it is likely that the business will agree on a price which is too low, to the extent that it may not meet the costs of labor and materials adequately. Further, there is the risk that the increment of the prices (costs) of the materials needed for the execution of the contract may limit the business’ ability to make a profit from the contract, especially in the event that prices increase. The case is different in the case the business enters into a cost-reimbursement contractual arrangement, because it will allow the business the advantage of determining the profits to be made before starting the contract. This advantage is highly significant, where there is a risk of change (increment) in the costs of labor and materials. Arising ...Download file to see next pagesRead More
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