Fixed Price Contract - Case Study Example

Fixed price contract and cost reimbursement contracts compared Fixed price contracts This is a contract where the sums of payment do not depend solely on the amount of the funds/ resources or time exhausted (Heldman, et al, 2007). Fixed –price contracts are normally used when its predetermined that the price which has been quoted by the contractor is sound to the government and as such when the state needs to procure the merchandise at that particular price without any single opportunity for the contractor to get any such adjustments in the price solely based on the actual spending that has been undertaken during the performance (Schwalbe, K. (2009). Advantages 1. The requirement for this contract is only the delivery of the agreed merchandise, for which the contract was agreed. 2. Can also be used to test unknown contractors 3. It provides for a situation in which there is competitive bidding on the entire scope 4. Management by the owner is least required 5. It provides an incentive for the contractor to equip best resources Disadvantages 1) It bears a heavy risk to the contractor as s/he assumes the cost risk 2) Both the schedule and quality of risk is heightened 3) A very complete and in-depth definition will be needed upfront 4) There will be more costs attached when changes occur than in cost-reimbursement 5) The total schedule of the bidding process is lengthened in this case Cost-reimbursement contract This is that contract whereby a given contractor is compensated for every of its acceptable costs or rather expenses to a given limit, plus an additional imbursement to thrive to some profit (Project Management Institute. (1987). It is a contract with a fixed price contract, whereby the contractor is issued with a negotiated sum f money irrespective of the expenses that may be incurred thereof. There are various contracts namely the time and materials contract, the cost-reimbursement and the fixed price contracts. Each contract comes with its own performance risk and/or cost for the various agencies especially the governments but the different kinds of the cost-reimbursement contracts could be employed be it in form of the award fees, incentives etc that are put in place to motivate the contractor and subsequently dispel waste and inefficiency by the given contactor (Heldman, et al, 2007). Cost-reimbursement contract pay s the said contractor’s acceptable costs that are incurred to such extent set by the contract but may also pay an additional fee related to the performance. Such contracts do include an estimated sum intended to obligate the funds and a ceiling to that said contractor which exceeds at its own risk, unless agreed on and approved by the contracting personnel. This type of contract may be used in situations in which the accounting system used by the contractor for determination of costs is easily applicable to the contract and where appropriate surveillance at the time that the performance is underway (Schwalbe, K. (2009). Advantages 1) It’s also used in a situation where there is a concern in the long term quality is quite high. 2) In this case, final cost might be lower than some fixed price contract due to the fact that the contractors never inflate their prices to cover risk. 3) It has some small incentive to negotiate corners as opposed to the fixed-price contracting (Project Management Institute. (1987). Disadvantages 1. Oversight and administration is also needed in the designation of an award to be offered or any such appropriate incentive. 2. Additional administration and oversight is needed to ensure that it’s only the permissible costs are paid and that adequate general controls to costs are instituted. 3. Certainty is limited to the exact final cost (Project Management Institute. (1987). 4. The incentive provided to be efficient in itself is smaller as compared to the fixed-price contract. Advantage of the small over big companies in contracting There are a number of mechanisms that the government has set aside to help the small businesses in the contracting arena including the Small Business Set-Aside Program a program constituted to help small businesses win state contracts (Heldman, et al, 2007). The plan helps assure that small firms are awarded a reasonable proportion of state contracts by reservation that is setting aside a certain proportion of government purchases solely for contribution by small industry concerns (Schwalbe, K. (2009). There is also the Very Small Business (VSB) program which is to improve right of entry to state pact opportunities for very small business entities by reserving definite acquisitions for rivalry among such entities. SBIR program, employed by the government is a highly aggressive program that motivates small businesses entities to explore their scientific prospective while giving the inducement to proceeds from its resultant commercialization. SBIR finances the vital startup and expansion phases of projects that dole out the needs of government and encompass the likelihood for commercialization in both the private and government sectors. Even though the risk and expenditure of carrying out serious efforts are frequently past the means of many small firms, by reserving a precise percentage of national funds for small firm entities, SBIR guards the small firms and enables them to contend on the matching levels as larger businesses entities (Project Management Institute. (1987). Cost-reimbursement contract and its troubles for small business firms The adequacy of the contractor’s accounting system This type of contracting requires that the above mentioned be adequate and up-to date to permit a timely tracking and reporting thereof of the crucial cost data in such forms as required but the proposed contract type (Project Management Institute. (1987). This factor is so crucial especially when fixed cost contract requires revision in price when the contract is underway or just when the cost-reimbursement type of contract is being reviewed when all the current and past experience with the contractor has always been on fixed-cost basis (Schwalbe, K. (2009). Financial and technical capability Cost reimbursement contract is preferable to the big firms as they have the resources in form of the financial capability to and the expertise therefore to accomplish all the requirements in a timely manner as compared to the smaller firms with very little financial backing. The large firms also have the technical capability to handle this type of contract (Heldman, et al, 2007). Period of performance If the contract period is to cover or go over a long period of time, especially beyond five (5) years, it is necessary that the cost reimbursement contract be considered as it would be difficult for both the contractor and the contracting companies to establish exact contract value and cover all the contingencies in the performance (Schwalbe, K. (2009).This would be most suitable for large companies. Most beneficial contract In the case of this small business that is seeking to expand, I would use the fixed cost contracting method because of the following reasons: Eliminating likely disagreements The working relationship is under less stress if both the sides do understand the details of the contract they are going into. This kind of contract leaves very little room for argument over the contracting period as the values are very clear. It also dispels any misinterpretation in the likely event that there is a court battle in case the contractor sues to enforce the contract in his or her own understanding (Project Management Institute. (1987). Level of effort control The language of this contract issues control, to both, the effort and professionalism. This must be exercised by a contractor while he/she is working under the contract (Heldman, et al, 2007). In this case it allows small business owners to have a control on how dedicated the contractor would be to both the project as well as the quality of work he/she produces therefore me may terminate the contract if me feel that it’s of low quality and withhold payment too, and provide for a case in which me would have detailed records to present to the court. Managing the cost of the contract This type of contract allows small business to control or rather do manage the cost of hiring form outside the company as both the contractor as well as the business determine the cost/value of the agreement before penning down any agreement thereof. The value of the contract in money terms is not usually subject to any king of increments. This provides the firm with a very good picture on the cost to hire an independent/sole contractor without any hiccups later on in their relationship (Schwalbe, K. (2009). Eliminating the costs of business It is the contractor who determines the cost of fulfilling the cost of such a contract. The small business as a hiring party has no obligation to issue additional compensation for the costs of the contractor including the cost of fuel plus the purchase of the equipment while under contract. It therefore allows the contract to remain within the budget of the small enterprise and eliminate the possibility of the contractor inflating the costs in ant attempts to increase the value of the contract (Heldman, et al, 2007). Most significant contracting for large companies The most significant method for large companies is the cost-reimbursement contracts because most large firms such as the Boeing to tender for such contracts that go over long periods of time and that do involve a lot of resources, financial or otherwise which even the small companies are not in a position to avail and as such would not be in a position to avail resources that would guarantee the quality of the contract being as high as possible (Heldman, et al, 2007). The large companies also have the capacity to gauge that the final cost would in most cases be lower that the fixed price contract due to the fact that the contractors would not be in a position to increase their prices at any particular time during the project to cover their costs (Schwalbe, K. (2009). A small incentive is also available to negotiate corners as opposed to the other contracting method and with multinational companies like Boeing, such small incentives may sum up to some hefty package that may result into some positive net outcome in financial terms that may be employed elsewhere (Project Management Institute. (1987). A plan to get government awards by small companies The most important justification to win the government in a case when a small business need to win a contract, is the possibility to show in precise terms that it has a good cash flow (Project Management Institute. (1987). This cash flow shows that the small business is in such financial capacity to sponsor the contracts that would be awarded to it (Heldman, et al, 2007). This would entrench the belief that the contract would be honored to the letter and the quality of performance raised thereof. In such instances, there is the possibility of even subcontracting by the small businesses to ensure that the contract is delivered on a timely manner and to the specifications agreed on before entering the contract (Schwalbe, K. (2009). With the good timing, and adequate resources to tender, it is most likely that the company would win the government contracts even though they are small in size. Research is important; the small companies need to research well in order to get the requirements that would lead to them qualifying to be awarded the tenders. The small business also need to follow the current market conditions to assure the government that it would carry out the contracts in alignment with up to date methods (Heldman, et al, 2007). REFERENCES Heldman, K., Baca, C., & Jansen, P. (2007). PMP: Project management professional study guide. Hoboken, N.J: Wiley Pub. Project Management Institute. (1987). The PM net work. Drexel Hill, PA: The Institute. Schwalbe, K. (2009). Introduction to project management. Boston, Mass: Course Technology. Read More