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A legal agreement that binds two or more persons, groups or organizations based on the swapping of promises to carry out a given deed or to convey goods is known as a contract. This agreement is very essential in enhancing trust and collaboration in the society as it presides over a variety of situations. Contracts are mostly enlisted in transactions regarding real property, employment and consumer retail. Further more, contracts have made promises to be less vulnerable to human faults such as misapprehension of the contract or forgetfulness. Being a legal agreement, a contract consists of a proposal, an acceptance and a deliberation.
As a lawful agreement, the involved parties may sort for legal actions incase of any breech of the contract and the state may be needed to compel the other party to compensate the aggrieved party as per the contract agreement. The proposal in the contract is the promise to execute the agreed deed on the basis of fulfillment of the remaining part of the pledge by the other party. Once a proposal is legalized, the proposing party adheres to its bargain only when the associating party keeps to its part of the deal. An acceptance thus is the materialization of the set promises that are clearly stipulated in the contract by both parties. On the other hand, a deliberation serves to guard the promising party from being responsible for yielding or depending on gratuitous proposals. There are a variety of contracts which are grouped into fixed-price contracts and cost-reimbursement contracts. The precise types vary from cost-plus-fixed fee where the cost of performance and the resultant profit is fixed to firm-fixed price where the cost of performance and the profit are the sole responsibility of the contractor (Karras and Wright 2005). The type of contract is determined by the timing and degree of the performance cost by the contractor and also on the nature and value of the contractor’s incentives for an exemplary work done. This paper majorly highlights the two forms of contracts, the fixed-priced contracts and the cost-reimbursement contracts.
1 Analyze the benefits and drawbacks of fixed-price contracts from the perspective of a contractor.
A fixed –price contract entails a price that is constant and can only be adjusted when particular provisions including a change in the contract or a defect in the pricing are in cooperated in the agreement.Thus,the contract specifies the amount offered for the execution of work, goods or services delivery or the labor supply (Cullen 2009). The satisfaction of the involved parties is defined by the contracts scope which explicitly highlights what is required in the contract. Such contracts may be short term or may be over a long period of time. In such a contract, the contractor benefits mainly during negotiations as this is done where distinct specifications are accessible and the estimation of costs can be reasonably accurate.
However, the contractor is at a loss when it comes to administrative issue as he bears the total responsibility for the escalation of costs. Thus, the contract cost is also the cost of the bid without any added fees or incentives. In this case, the contractor takes the entire responsibility to manage the costs in order to execute his duties efficiently and effectively. In addition to the contractor devoting a given intensity of effort to the specified amount, the making of profit is entirely dependent on the ability of the contractor to manage and at the end, the whole contract can be more expensive.
2. Analyze the benefits and drawbacks of cost-reimbursement contracts from the perspective of the federal government.
A cost-reimbursement contract involves the payment of the contractor of all the allowed costs by the client first to place a boundary plus to discover profits through supplementary payments. This type of contract is mostly utilized when there is uncertainty in the definition of the work which do not allow the accurate estimation of the costs involved. The first cash installment to the contractor covers the projects requirements. In such a contract, there is room for further renegotiations incase there arises a need to adjust any part of the contract. Sometime this contract may contain a component of fixed price (Shenson 2000).
The contractor in this accord can be reimbursed all the cost incurred during the performance of his duties with regard to the contracts intended for that project. This contract also aids the government to attain a high quality services that are long lasting at an affordable price since the ultimate cost may be reduced as the contractor needs not to adjust the prices to carter for the risks involved.
The main drawback of this contract to the government is that it needs additional administration and oversight to guarantee that payment is directed to the intended costs incurred and that the contractor is putting into consideration the full control of costs. The final cost estimates are also uncertain and proper fees for incentives or awards require additional administration and oversight. This makes the whole process to be so involving as time and manpower need to be considered in order to attain efficiency (Shenson 2000).
3. Discuss which element(s) of cost-reimbursement contracts tend to produce the biggest troubles for contractors and why
In order to use a cost-reimbursement contract, an accounting system for the contractor is essential for the determination of the contracts applicable costs. Further more; surveillance of the contract performance is needed to ensure appropriate methods and efficient cost controls are brought into play. The attainment of viable items is prohibited by such a contract. The elements involved in this contract include, source selection and competition, analysis and cost determination of the contract and the negotiation testimony. These elements cause trouble to contractors in several ways. In the case of source selection and competition, the contractor’s capability to deliver is the most important consideration and thus the contract is not awarded based on the minimum overall fees and costs put forward. Additionaly, contract awards are based on minimum fees and costs encouraging the giving in of extremely low estimates which may facilitate terms.
This contract is advantageous to the government as it enables the setting up of the financial estimates for the project and the establishments of the full sum for the purpose of reimbursement as the price estimates are done prior to the onset of the work.
In this case, the government regulates its budget as the contractor can only utilize the stipulated amount in the contract. In addition, it facilitates the use of the exact amount
overruns. Thus the contractor is taken through a rigorous exercise as a way of analyzing his proposals and costs for the entire contract (Adoranti, 2009)
The other setback is the analysis and determination of the contracts cost. This is majorly governed by the Public Law Act which stipulates the procedures and requirements for awarding a contract (Adoranti 2009). To be an eligible candidate, a contractor is expected to tender the total cost data prior to contracts awarding time and the proposal should adhere to the stipulated requirements as stated in the Public Law Act. The contractor is also supposed to submit an upto date market prices certificate to certify that the cost data are complete and accurate. Each element of the cost data is evaluated, reviewed and analysed through audit agencies to ensure that the material type, quality, quantity and the enlisted labor meet the envisioned standards.
The negotiation record also pauses difficulties to the contractor as the awarding institution controls the whole process. It is the sole determinant of the type of contractor it awards the tender, the time specification involved, the required services and supplies to be delivered by the contractor, regulates the overall cost of the contract as well as the analysis and highlights the details of the standard elements of the negotiated costs. Considering this type of contract, the contractor is exposed to risks and puts a lot of effort to achieve the contracts promises. The contractor, in most cases, gets no fee and is only reimbursed on the arranged allowable expenses. This agreement only carters for a specific contract at a given period of time since renewal of the contract requires fresh acquisitions that include new fee and cost negotiations.Therefore, there is no guarantee to the contractor that his contract will be renewed (Adoranti, 2009).
4. Select one “other” contract type (neither fixed-price nor cost-reimbursement) and explain its pros and cons from the perspective of the federal government.
The other type of contract is the time and materials contract. This involves an agreement on the rate of performance on the stipulated work which is done on an hourly basis. It accommodates price adjustments as the supplied service mainly determines the monetary quantity. The payments are done upon completion of the work and are directly related to the range and volume of the work.However, the contracted value is subject to modification if the dimensions are exceeded or minimized compared to the prior agreed price and terms. The government has an advantage in such a contract as it can obtain a wide range of services on short notice and expedition of such services is fast. This contract enhances ad hoc conditions of the work as it goes on, without wide-ranging prior arrangements, cost negotiations and specifications, and minus the administrative hindrances and costs connected to the many order alterarions, supplemental accords and source choices. The main setback of this contract is that the government pays the contractor on an hourly basis regardless of the job done .
All the contracts enlisted should meet the State Policies requirements. The contractors should attain full advantage of the prices and extend the discounts and credits to the government. Further more, reimbursement for purchased services and supplies should be done in accordance to the contract agreement. The reimbursement should also consider the transportation cost and other costs incurred by the contractor in order to simplify work.