The Price of the Contract - Essay Example

Evaluating Contracts Evaluating Contracts Pacts between contractors and their clientele can take more than one form. Firm fixedprice contracts are one category of these pacts or agreements. Fixed price contracts are the type of contracts in which the government agrees to pay a particular amount on condition that the contractor completes his or her performance and it is approved. The price of the contract does not alter in spite of the actual cost incurred by the contractor. This means that the service provider has to sustain the entire cost when signing this agreement. A cost reimbursement contract on the other hand is one whereby the government compensates the contractor for the total admissible costs that are incurred during the implementation of the contract. Such contracts are normally used for purposes of study as well as progression, especially with non-profit corporations. The contractor stands to gain nothing in this kind of contract (Shealey, 1938). Fixed price contracts have both advantages and disadvantages for the supplier. For the service provider, the contract means he or she is able to tell how much they are to be reimbursed for their services. The contractor does not have to be concerned about the changing elements or quibble with the customer about the cost of materials. Elements as well as prices are set prior to the commencement of the job. Another benefit is that, while the contractor risks facing costs that higher than anticipated, it also is not compulsory for it to miscue savings if the costs prove otherwise. Dealing with such contracts enables the purveyor gain a lot of practical experience with the sort of contracts that potential clientele e.g. the government would prefer. A disadvantage with these agreements is that a lot of the financial risk is placed on the service provider than the client. After the pact has been put in place with a steady permanent price, the client is under no obligation to cover or pay higher costs. A cost reimbursement agreement has its perks and pitfalls as well. These contracts are time and again used when long term worth is of greater vitality than cost. As opposed to the fixed price contract, here, the service provider has very little reason to cut edges. The end cost could be less than the fixed price contract since the contractor is not gratified to inflate prices so as to cover hazards. Conversely, the contract does not provide sufficient certainty as to what the final cost will be. There is not as much of incentive as there is in the other type of agreement. Additional management and oversight is necessary to make sure that only approved costs are paid out and that the contractor is exercising enough general expense control. Small businesses have a better chance at signing contracts with the government than large business entities do. To start with, the government is more likely to grant contracts to small enterprises because of the belief that they are the catalysts for growth of the economy. This is in accordance to the procurement policy of the government that buoys up maximum feasible, leading and contracting out prospects for such businesses. Quite a number of initiatives, coupled with programs, have been set aside to back this effort. A few examples include the Small Administration Certificate of Competency program, government-wide contracting goals and small business size canons. Opportunity number two is the Very Small Business Pilot Program. The aim of this initiative is to enable small companies gain better access to contracting opportunities from the government. This is achieved through the reservation of a given number of acquisitions for competition among similar issues. A very small business concern can be described as a business with fifteen employees or less, an average yearly revenue of not more than one million US dollars and most importantly, has its headquarters based in any one of the selected SBA districts (United States, 1999). Last but not least, a small business can also take advantage of the Defence Department SBIR (Small Business Innovation Research) or STTR (Small Business Technical Transfer) Fast Track program. This is a unique plan that provides an ominously higher opportunity of gaining STTR/SBIR awards coupled with continued financing to small companies that are able to attract external investment. Small firms are allowed to hold on to the intellectual property rights to technologies they create while under these systems. Having a strict budget, the cost reimbursement type of contract has a tendency of producing great big troubles for the small business because of the prodigious costs and ambiguity as opposed to fixed price contracts. It is also virtually impossible to determine the terminal price of the scheme. The arrangement also fails to provide the outworker with the incentive to effectively bring their work to completion and over expenditure so as to get the heftiest possible compensation. Another element of these contracts that is challenging is that the use of such arrangements is not allowed in the acquisition of commercial goods. Also, one cannot use the contract unless all factors have been considered. The accounting system of the service provider must also be proved to be sufficient for calculation of all costs to be applied to the order or agreement. A plan in black and white also has to be ratified and indorsed not less than one level above the officer in charge of contracting. These are just a few of the many requirements of getting such a contract making it a long and cumbersome process. A time and materials contract is the best form of contracting that fits a small business. This is because they transfer the burden of risk from the contractor to the contracting agency. T&M contracts can be said to be a hybrid of the two aforementioned types of federal contracts. They present the ultimate jeopardy to the government and the least of it to the service source. This is why the government avoids them at all costs and are a Holy Grail to suppliers. T&M contracts allow the purchasing officials of the governing authority of a country to acquire supplies or amenities on the basis of the real costs of the material as well as the hours of direct labour at indicated permanent rates per hour. These are inclusive of overhead, wages, gains and other costs of administration in general. The most significant form of contracting that would support large companies such as Boeing is the firm fixed price contract. This category of agreements requires that goods or services be delivered at the fore stated price. This refers to the price determined at the time the contract was awarded. The price is not to be altered on the footing of the cost experience of the service provider in performance of the agreement. It is most appropriate in this situation because rational or realistic prices are first established at award time. Large companies need specifications of performance and a distinct description of the design which is protocol in firm fixed price contracts. The reason as to why such a contract is beneficial to large companies is that it is an incentive to the effectiveness of the contractor by holding the firm accountable for all its actions and places all risk for it. When large companies successfully bring such a contract to completion, they gain positive publicity and are awarded more contracts by proving that it is able and trustworthy. In order to justify the government to award small companies, the firm fixed price contract when the form of this contracting buttresses larger companies, one would need to develop a plan. First of all, it is de rigueur to familiarize oneself with the rules and regulations of federal contracting. This is because government contracts differ greatly from their commercial counterparts in that federal agreements have more extended lead times. It is also of great magnitude to truly understand one’s enterprise inside and out before getting into the business of contracting (McVay, 1989). Small business entities may feel disadvantaged when contesting larger firms. This should however not discourage them because they have the advantage of government support. The government has made attempts to set aside opportunities managed by socially or economically destitute groups, women, physically challenged veterans among others. Besides this, it has also made an effort of setting aside at least twenty five per cent of its contracts for little organizations. Registering to conduct business with the government after determining that the federal contract is right for the small company is another step to undertake in a bid to win the government contract. The Central Contractor Registration, is a good place to start provides the necessary guidelines for the whole undertaking. As the old adage goes, if you cannot beat them join them. Subcontracting with the larger corporations is another means of landing the contract. These mammoth contractors normally have a database of prospective partners of contracting out. To have a chance at contracting, one has to register with them aside from registration with the state. A small company also has to be up to date with available contracts. The Fed Biz Opps is a popular website that lists federal contracts that are up for bids. References Top of Form Bottom of Form Top of Form Top of Form McVay, B. L. (1989). Proposals that win federal contracts: How to plan, price, write, and negotiate to get your fair share of government business. Woodbridge, VA: Panoptic Enterprises. Shealey, R. P. (1938). The law of government contracts (federal contracts). Washington, D.C: Federal Pub. Co. United States. (1999). The facts about--: The Very Small Business Set-Aside Program for federal contracts. Washington, D.C.: U.S. Small Business Administration. Bottom of Form Bottom of Form Read More