The federal government receives a lot of criticism for the procurement procedures that it uses in contracting. It has therefore carried out substantive reforms concerning how the procurement processes are being administered. All contracting is guided by the legal and administrative framework set to ensure that public coffers are duly protected.
Fixed price contracts are essential especially in the acquisition, and they are particularly effective. These contracts are legal agreements entered into by the government and the entity to carry out the project. Goods and services are provided at an already set price which cannot change despite the conditions. The contract details are the set time for delivery, and the cost (Chen et al., 2015). There are variations of these type of contracts. In some circumstances, the agreement can be able to predict the cost where the scope of work is not expected to change. The contractor manages the responsibility for the job. In this case, the contract is seemingly fixed because the conditions are not likely to change. Even if there can be any change, it cannot be a substantial one because the terms have already made it clear that it is not changing fundamentally.
A contract can be a fixed total cost type when the contractor has already calculated every bit of it and has included the profit in the price so that all the risks and unexpected occurrences are catered for. For instance, the labor demands may go up unexpectedly, or even the materials may be needed to be increased hence a slightly higher cost. Nonetheless, all these should have been all calculated and should not come in as a surprise.
On the other hand, there may be an incentive fee that can be included on top of the contract. This happens when the project’s baseline is altered so that some extra effort which was not previously mentioned in the deal is added. The incentive is meant to compensate the contractor for the additional milestone. It is known that each contract has a penalty clause if it is not performed as stipulated. For instance, when a software company is given a contract to deliver but it does not do so within the specified time frame, the agreement shall be penalizing the contractor a certain amount for each day the software is late.
Cost reimbursement contracts are quite outstanding. These are the contracts that are mainly for research or construction that must need materials to be purchased. By the time the contract is being written, the cost of the materials or the tools to be used is unknown. Therefore, the procurement department agrees to reimburse the contractor in case the materials cost is above the expected value. The contractor must also collect some fee from the procurement department for the contract. This is profit. However, the cost of the materials is the matter here.
When there is some flexibility needed, the cost reimbursement contracts are the ones preferred. Sometimes the project is high risk, and at other times, the scope of the work may remain unclear. Thus, the contractor may prefer a cost reimbursement contract. This is because the contractor could fathom that they may not be able to complete a specific task using the stipulated resources that have been availed and allocated. In carrying out the project, the contractor may meet with some unexpected situations that force them to used large amounts of additional resources because the work could be more significant than expected. In such a case, the local or federal government office that handles such procurement is obligated to do some reimbursement if the contract has to be completed. Reimbursements are in many circumstances preferred by the federal agencies such as defense. This is because these contracts are expected to produce high-quality work because of the incentives that are available to complete the task. In case the resources are inadequate, the federal procurement offices reimburse them.
More so, the project does not suffer the overbidding problem. This is because contractors are assured that they shall be reimbursed in case the resources fall below the required level. Additionally, there is the probability of additional profits in the fact that the performance of the contractor measures the benefits.
Time and material contracts are mostly preferred by those in the construction or building industry. These type of deals are majorly preferred because of their terms and the freedom given to the contractor by the procuring body. The contractor is paid or the materials used as well as the time that is spent while on the contract. Time is computed in terms of the number of hours spend while carrying out the work. The uncertainty surrounding the cost of the materials as well as the amount of time to be used there makes builders prefer these contracts. By the time of commencement of the contract, the amount of materials to be used is not yet explicitly known and the time to be used is also not yet known.
In other words, the risks involved are too many, and the contractor cannot afford to quote the price of the contract as at the time of signing. If the price is quoted, it means that the contractor shall overbid and the contract shall seem to be so expensive. Therefore, to benefit both the contract and the contractor, the cost and the time spent are to be compensated as the work goes on. The contractor can constantly update the needs and requirements of the work and reshape the project according to the changing circumstances for convenience and better results. The contracting body also can know the pace of the project, and there is a lot of transparency with the project (Callaway et al., 2018). This is because the team must update where it is at any point in time because they will undoubtedly need the intervention of the contracting body for more resources.
Cost plus contracts are aimed to give the contractors more flexibility, and they are highly profitable. More so, the contractors get more incentives when they try to minimize the costs, and they also claim some bonuses for getting through an absolute risk. However, this depends on the specific details of the contractual agreement.
The owner also gets to benefit when using the cost-plus contracts because the better quality is obtained. This is because the contractors do not have to do skimping over materials needed to complete the project. The contractors are given the guarantee that reimbursement is likely to be done when they incur extra expenses and they repay them. The agreement here does not need to be considered for fixed bidding because the contractor may suffer when the budget of the project goes above the expected amount. Going over the budget is not new, and the contractor has to beware of making sure that the decisions made are sound.
The contractor benefits such that they can assume an unfinished design and take it over using the cost-plus contract. This is because there is less risk and the sum that is agreed does not necessarily cover the costs of the project. If the contractor could go ahead and take over the contract with full bidding, they are sure to have the costs and expenses go over the budget that they have set and agreed with the contracting body.
Considerations are therefore necessary such that the contract must contain some clauses that give a guarantee to the maximum cost (Brown et al., 2015). There must also be the savings clause, and the advantages can be altered by such; therefore, there must be strict considerations. This is because there is the maximum cost clause that allows the contractor to set a particular amount as the limit. Any amount spent above this ceiling figure means that the contractor must pay for the money because the maximum amount has already been hit. The savings clause on the other hand only allows the contractor to work as efficiently as possible. This is because when the maximum amount is not hit, there must be some money that has not been used. This money is the difference between the actual cost and the maximum amount. This difference is shared between the owner of the work and the contractor such that each takes a particular percentage as agreed initially in the contract.
Brown, T. L., Potoski, M., & Slyke, D. V. (2015). Managing complex contracts: A theoretical approach. Journal of Public Administration Research and Theory, 26(2), 294-308.
Callaway, M., Hastings, S., & Moeller, A. (2018, March). Applicability of fixed-price contracts for successful cost control. In 2018 IEEE Aerospace Conference (pp. 1-16). IEEE.
Chen, Q., Jin, Z., Xia, B., Wu, P., & Skitmore, M. (2015). Time and cost performance of design-build projects — Journal of Construction Engineering and Management, 142(2), 04015074.