Benefits and Drawbacks of Fixed Price Contracts and Cost-Reimbursement Contracts - Assignment Example

Evaluating Contracts

Benefits and Drawbacks of Fixed Price Contracts and Cost-Reimbursement Contracts

A fixed price contract is a type of contract whose payments are not determined by either the amount of time or the resources that have been used. As suggested by the name, the cost of the contract is fixed despite the circumstances. On the other hand, cost reimbursement contracts depend on the allocated costs for all the resources as well as the extra charges that cater for the profits by the contractors (Plepys, Heiskanen & Mont, 2015).

Benefits

The fixed price contracts have several advantages for a small business like the business of producing very small remote control aircraft capable of long sustained flights. The first is that can allow the business to set and exact budget before the contract. As a result, even before getting into the contract, the business is aware of all the costs that it will incur. On the other hand, the cost reimbursement contracts have the advantage that they make the calculations related to the contracts easier for the business. The calculations simply require the addition of the profit and the cost of the contract. Similarly, the business is constantly aware of when the resources provided as a result of the contract will be profitable for the business (Pepys et al.,2015).

Fixed contracts are also suitable for business because they reduce the number of possible changes that are likely to occur when the business is implementing the contract. This makes it easier for both contractors and the business owner to have the detailed plan from the beginning. For the cost reimbursement contracts, they have an advantage as they allow the business to increase the prices when other costs increase during the time of the contract. Even though the business can raise the price, the buyer of the contract is in a position where they do not experience shock even with the changing prices. The seller of the contract can simply increase the cost at which the product is sold to the end consumer which is then used to cover the new expenses incurred.

Drawbacks

The contracts discussed above have their drawbacks as well. For instance, fixed contracts carry the risk of setting the price too low on the end of the business. The business is at risk of incurring a loss if it predicts that the cost of the contract will be too low. The risk is higher than in cost reimbursement contracts which change with the situations. Since the market is constantly changing, a decline in the market can cause a loss on the side of the business. Cost reimbursement contracts have the drawback of getting into a dispute with the buyer of the contract over the amount to be charged. This is especially a problem if the dispute occurs after the contract seller has bought the products. Similarly, customers become skeptical about setting up a contract that has an open-ended cost range.

Small Business Opportunities

Small; business have the opportunities of being able to change the tactics of running the business faster than larger businesses. There are very few people involved in the creation and the approval of the small remote control aircraft, capable of long sustained flights. This makes it easier to adapt and change the strategies and the products produced to fit the current market demand. Larger businesses have long chains of commands and boards that first need to approve of any changes in strategies. This makes it a lot harder for them to change and adapt to new demands that may occur in the business world.

Similarly, smaller businesses are closer to the customers. The defense ministry is more easily able to have direct discussions with the owners of the business, rather than dealing with their assistants or secretaries. This way, decisions are made faster, and it becomes easier to create long-term relationships for the sake of future contracts and better profit. Larger businesses have many departments and ranks that often work to prevent close relationships with clients. As a result, smaller businesses have the advantage of being a lot more easily exposed to new contracts with existing clients allowing them to grow (Plepys et al.,2015).

Thirdly, smaller businesses have fewer employees and fewer departments and ranks than larger companies. This provides an opportunity as there are fewer consultations required in times of crisis. Similarly, when times are hard, it is not required that some of the employees get laid off. The business maintains its structure and operation which allows it to operate more easily even in such hard times. Small businesses have the ability to continue growing even when the market does not, in theory, allow it. Additionally, when employees are unhappy about a situation, they can easily express their grievances to the necessary authority without the need for strikes which reduce production in smaller businesses.

Risks in Cost Reimbursable Contracts

The contractor risk in cost reimbursement is always higher than that of the buyer, or in this case, the government. However, cost reimbursement contracts oppose significant risks to contractors and especially small businesses. Firstly, these contracts require that those subcontractors and other vendors should be paid within 30 days after the submission of the request for payment. Failure to this could cost the business in that it may be deemed unfit for reimbursement. A small business such as the aircraft business would suffer greatly because it does not work with large amounts of capital. Additionally, if the buyer of the contract can find proof of the existence of cheaper products that the contractor was not aware of, the buyer may decide not to reimburse the full amount that is indicated. Similarly, documentation of the final costs, especially those that are indirect in nature, can easily expose the contractor fines and penalties if the buyer or the government can prove that unallowable costs have been included as part of the submissions for the incurred costs.

Best forms of contracting for Small Companies

There are numerous numbers of contacting methods that can be used especially when the contract involves the government. The first is fixed price contracting which has been discussed in detail above. It involves fixed prices set before the project begins. The second is the cost reimbursement contract which is discussed above as well. Additionally, we have the incentive contracts, which involve the determination of profits and incentives paid based on the performance of the contractor during the project. Incentive contracts are used when the government wants to use a fixed-price contract while allowing for slight variations in the end costs. Another form of contracting for government contracts is the indefinite delivery contract. This contract is used when the exact timing, quantity of resources or requirements for the completion of a contract cannot be estimated. Similarly, we have the time and materials contracts as well as the sealed bidding contracts among many others. For small businesses, the best bet is to use is the fixed contract because it provides the business with the guidelines on how much to spend (Akalp, 2013).

Best Forms of Contracting for Large Companies

The best form of contract for large companies is the cost-reimbursement contract. The cost reimbursement contracts allow the contractor to have a sort of creative freedom because the funds for the project are not fixed. Cost reimbursement companies are especially good for businesses and governments that are involved in building, construction as well projects that involve immense research. These projects have unpredictable needs, and purchases help in their completion. At the end of a set period, the contractor is then compensated for the costs incurred during the project. Additional funds are given for profit of the contractor as well as to pay for the labor. Similarly, the ability to divide the contract into the segments cost-fixed fee contract, cost-incentive contract, cost-award contracts, and cost percentage of cost contract, makes it suitable for large businesses. Lastly, large businesses have access to resources they can use to work on projects even before they are compensated (Pepys al.,2015).

Company Plan

For the small business to earn a government contract, several steps should be used. The first is to research and plan about the product. This involves the documents needed. This can be done by accessing the central contractor registration database. Once this is done, the second step is to prepare on how to respond when the invitation to bid for the contract is presented. Since the best way to win the government contract is to show experience, the business would be required to show how well it has performed in previous contracts. This should be done on the submission forms. After this, the business is required to have a plan on how the project will be completed this is the next required step which involves making an oral presentation. Finally, the last step will be just before the contract is awarded. The government will ask questions to gauge the competency of the business. Top prepare for this, the business should research and show that it has the most extensive knowledge with regards to the project (Bertolini, Braglia, and Carmignani, 2006).