Comparison: fixed-price contracts and cost-reimbursement contracts in remote control aircraft business - Essay Example

? Win the Contract Comparison: fixed-price contracts and cost-reimbursement contracts in remote control aircraft business The fixed price contracts with the Department of Defense in the business of remote control aircrafts business would mean that the payment of the contract for supplying the remote control aircrafts to the defense department of the government would be done on a fixed amount basis irrespective of the cost incurred in manufacturing the remote controlled aircrafts over a period of time. There are benefits and drawbacks for the small aircraft business in entering into fixed-price contracts with the government department. The fixed price-contract is beneficial for the small business of remote control aircraft as this firm of contract would provide a valuation of the entire inventory in order to fix the price of the manufactured aircrafts. The drawback of the fixed price contract is that the risk and cost of the contract is incurred by the business in case of failure to meet with the contracted price and time. The cost-reimbursement contracts for the small remote control aircraft business with the department of defense would mean that the government would make a payment to the aircraft business on the basis of a pre-sanctioned set limit. The payments also include the provision of additional payments in order to account for profit of the supplier. The benefit of the cost reimbursement for of contracting is that the business would not need to compromise on the quality of the products as there would be less constraints on the payment criteria. The drawback of the cost reimbursements form of contracting for the business is that in order to meet the quality specifications of the aircraft, the business has the probability of incurring higher cost which is likely to reduce the profit margin. These are the benefits and drawbacks of the cost reimbursement form of contracting. Analysis: opportunities in the remote control aircraft business as compared to large business The remote control aircraft business has specific opportunities as compared to the large business. The opportunities for the small business of remote control aircraft are given as follows. In bidding for contracts for supplying aircrafts to the government defense department, the small business would have the advantage of highlighting their expertise and efficiency in producing the remote controlled aircrafts as specialized products of the company. The large companies on the other hand would have diversified businesses and thus have reduced efficiency as compared to the small business. The remote controlled aircrafts of the small company could used for specific monitoring and surveillance activities as well as unmanned weapons for the department of defense. The second opportunity lies for the small remote controlled aircraft business in the fact that the company has already managed to attain a contract of over $600000 for supplying products to the defense department. The performance and efficiency of those products would provide an edge to the small business over the other large companies. By looking at the performance of the products supplied by the business to the government department, the department of defense would prefer the small business in comparison to the large companies. Also the company being a small business would look to provide the remote controlled aircrafts at a lesser cost and delivering high efficiency. This would present an opportunity to the small business as they would be able to acquire the bid with these features. Cost reimbursement contracts: biggest troubles for the remote control aircraft business The cost reimbursement contract is like to provide some of the biggest troubles to the small business of remote controlled aircrafts. The cost reimbursement for of contracting would mean that the government would pay the business based on a certain limit of the contracted amount and also accounting for the profits of the business. Since the business is a small business, the business has certain constraints in the availability of the resources like the capital, finance and the technologies required for attaining the efficiency of operations. The cost reimbursement form of contracting would need the business to provide bulk amount of aircrafts at a certain level of desired quality prescribed by the government. The business may face trouble in collecting the resources required for manufacturing the aircrafts and also carry out the expenses over a longer period of time. The business may face trouble to meet the long term expenses as there would be limitations on sources of finances. The business would have constraints on the available limit on finance from the financial institutions due to the size of the company. The small business would not have much inventory to support the short term requirements. The demand for the level of quality of the aircrafts is likely to inflate the cost of the project for which the set limit could be a cause of financial risk to the business. The biggest trouble for the small business of remote controlled aircrafts is the bargaining power of the business in entering into cost re-imbursement form of contracting. The business being small would have to negotiate with the demand of the quality and cost of the aircrafts to be supplied to the Department of Defense. Beneficial form of contracting for small remote control aircraft business The form of contracting that would be beneficial for the small business in supplying the remote controlled aircrafts to the Department of Defense would be the fixed price contracting. In this form of contracting, the business would have the prior information on the contract that a certain fixed amount of payment would be made to the business on supply of a certain number of remote controlled aircrafts. The amount of payment would be fixed irrespective of the cost incurred for the project by the business and irrespective of the time required for completion of the project. Although the risk of the contract is borne by the small business, this form of contracting is beneficial for the business of remote controlled aircrafts. After knowing the payment that would be made on supply of the remote controlled aircrafts, the small business would be in a position to estimate the level of inventory and the availability of the resources required to supply the products of the contract. The additional resources that would be required by the business in order to execute the deal could be estimated. The ways of utilizing the resources and the various types of assets like the fixed assets and the current assets could be managed in an optimal fashion so that the desired profit margin could be attained by the small business. The small business would also be able to limit the project to a certain deadline as the increase in time line of the project work would need the small business to incur additional expenses (Murphy, 2009). The small business would also benefit from the fixed price contract as time to time feedbacks from the government department would not be entertained and adherence to the terms of the contract would be the sole criteria to be met by both the parties. The small business would be able to plan their expenses and mange the cost over a period of time in order to earn profits. Beneficial form of contracting for large businesses The form of contracting that would be beneficial for the large companies like Boeing is the cost reimbursement form of contracting. The large businesses target the bid of government projects of supply of aircrafts on a bulk scale. The large companies have established a brand name for themselves and carry a long term goal of profitability and sustainability in the industry. The bargaining power of the large businesses is also high while they enter into a contract with the government departments. There is no scarcity of resources in terms of capital, manpower and technology and would look to enter into long term contracts. The entry into long term contracts by the large businesses helps them o achieve the economies of scale in the particular project. For this reason, the large businesses would prefer to enter into cost reimbursement form of contracting with the Department of Defense for supply of aircrafts. This would be beneficial as the large businesses would be able to get payments in the contract in accordance with a certain pre-sanctioned limit and also taking into account the profit margin of the large businesses. Thus this form of contracting enables the business to ensure that profits are maximized from the projects that are involved into. There are contingent liabilities that are associated with most of the large business (Garrett, 2008). The long term cash flows from the contract would help the large business to write off the contingent liabilities of the business. For entering into cost reimbursement form of contracting for supplying bulk quantities of aircrafts, the large businesses would also be able to reduce their final cost of the project as the cost of daily supervision and administration of resources are not there in long term production processes. Plan for wining the contract In order to justify the government to award the cost reimbursement form of contract for supplying the remote controlled aircrafts to the Department of Defense, a systematic planning for bidding the project would be required. The plan would include a detailed analysis of the quality of the remote controlled aircrafts and its efficiency over the manned aircrafts supplied by the large businesses. The features of sustainable flights and penetration capabilities of the remote controlled aircrafts designed by the company should be highlighted in the report. Thus unique product features would be first step to convince and justify that the contract should be awarded to the small business. After that the company should look to justify the capabilities of meeting the requirements of the cost reimbursement form of contracting. The company should be able to justify that they would be able to meet the quality of the aircrafts over a long term period as required by the government. The business should undertake a cost analysis of the aircrafts that they would supply the government. The cost assessed by the company should be competitive with respect to the other bids submitted by the competitors. The company should be able to supply the items at a comparatively faster pace as compared to the other companies (CCH, 2007). Thus the company would need to pan and bank on the competitive features of its product quality, cost and timeline for meeting the project in order to acquire the deal. The company should look to accept a comparatively lower payment limit as compared to the competitors. All these planning techniques would help the company to justify the government for acquitting the deal. References Murphy, J. E. (2009). Guide To Contract Pricing: Cost And Price Analysis For Contractors, Subcontractors, And Government Agencies. USA: Management Concepts. Garrett, G. A. (2008). Cost Estimating and Contract Pricing: Tools, Techniques and Best Practices. USA: CCH Incorporated. CCH. (2007). Government Contracts Reference Book. USA: CCH Incorporated. Read More