Evaluating Contracts Essays Examples
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A contract isapact entered into by two or more competent parties with the objective of creating a legal commitment between the parties. Proof of a contractis written, but they could also be verbal or implied. Some contracts such as for insurance policy, sale of real property, and installment plans have to be on paper in order to be legally binding. The fundamental attributes of a contractual relationship are an offer, consideration, competent parties with the legal capacity to enter a contract, and mutual assent. Each party involved in the contract acquires responsibilities and rights relative to the responsibilities and duties of the other contracting party. Contracts are primarily governed by common law, state law, and private law with the laws varying from jurisdiction to another. In contracting, a project owner awards a contract to a bidding contractor after acceptance of a submitted bid. The paper will study the various types of contracts and their impact on a small business .
A fixed-price contract is an agreement where the amount of payment is not dependent on the resources deployed or the time expended. Adjustable fixed-price contracts have a fixed maximum price but have an allowance for a lesser target price . The price is only adjustable under certain provisions such as defective pricing, economic pricing, or contract change. Fixed-price contracts are negotiated in cases where realistically definite specifications are accessible, and contract costs can be evaluated with realistic accuracy. A business will enter into a fixed-price contract by agreeing to the final price of the product or service as stated in the legal contract that the parties agree to honor . Fixed-price contracts are common contracting officers in instances when they need to control costs. Fixed price contracts place a minimum burden on the contracting party but subject the contractor to maximum risk .
Advantages of Fixed-Price Contracts
Disadvantages of Fixed price Contracts
A small business will suffer huge losses in case the prices of materials escalate during the period of the contract. Fixed-price contracts do not provide room for adjustments in case the calculation of the cost basis is lower than expected. In a fixed-price arrangement, all the risks are imposed on the contractor. Unexpected risks such as price inflations could erode any potential profits for the small business. In case the cost of implementing a contract rises drastically, the small business may not have the means to fulfill the contract thereby leading to legal action against the company. The main risk that small firms face in a fixed-price contract is the unpredictability of market forces .
Cost Reimbursement Contracts
A cost-reimbursement contract is one where the client reimburses reasonable and allowable costs incurred by the contractor in the implementation of a contractin accordance with the terms of the agreement. The final pricing of the contract is determined when the contract is concluded or at some previously established date during the contracting period. A cost-reimbursable contract is used in instances where the nature of the work undertaken cannot be accurately defined from the outset . Cost-reimbursement contracts also apply in cases where the risks associated with the work are high. The costs for which the client can reimburse the contractor areexplicitly stated in the wording of the contract. The client sometimes sets a maximum amount that the contractor can gain from refund. Examples of cost-reimbursement contracts include cost plus percentage of the cost; cost plus fixed fee; cost plus incentive fee, and cost plus award fee .
Advantages of Cost-Reimbursement Contracts
A small business can use high-quality materials in order to improve the quality of their work thus leading to greater customer satisfaction. The company does not face the risk of getting a loss in case the cost of materials escalates. Unless the maximum reimbursement is set, the contractor is sure of making a profit. The small business is cushioned from the effects of a volatile market such as price inflation. The business does not suffer a loss in cases of defective pricing or inaccurate estimation of costs. Most of the risks of carrying out the contract are transferred to the client with the business incurring minimum risks .
Disadvantages of Cost-Reimbursement Contracts
The small business could incur losses in cases where the maximum reimbursable amount has been fixed by the client and cost of implementing the work increases. In situations where cost of materials that are not negotiated for reimbursement goes up, the contractor will have a reduction in potential profit .
Opportunities for Small Businesses
Small businesses have the opportunity to become sub-contractors for large contractors. Subcontracting is an excellent chance for small businesses to get a foothold in government contracting. Subcontracting also offers small businesses the opportunity to prove their capability to deliver quality work and hence have higher chances of attaining a contract. Small businesses are in line to receive funding from the government and support throughout contracting. The federal government has set aside resources to help small businesses compete in the world of contracting. Small businesses can team up with other small businesses in order to team up for joint venturing. Small companies can effect changes in company structure or management quickly. Big companies are hindered by their size, making organizational changes complicated and slow .
Small companies have the capability to introduce innovative products to the market in a short period. On the other side, bigbusinesses have to involve many people and procedures in product development thus giving small companies an advantage. Small businesses are eligible for Small Business Innovation Research and Small Business Technology Transfer programs that offer small businesses the ability to create innovative products and technology to grow their business. Some agencies of the federal government such as US Trade Agency have set aside contracts specifically for small enterprises .
Challenges of Cost-Reimbursement Contracts
Prior to receiving a cost reimbursing contract, a business must be deemed to be financially adequate for determining the costs applicable to the contract. This aspect of cost-reimbursement contracts places small businesses at a disadvantage because they may not have the financial capability to fund the initials costs of the contract. Cost-reimbursement contracts that have a maximum cost limit may prove challenging to small businesses. In cases where the cost is set, the company may incur losses in cases where the material costs fluctuate. The client may also fix some aspects of the contract to exclude some items from allowable reimbursement .
Cost plus fixed fee completion contracts that require a business to complete the terms of the contract before being paid pose a problem for small firms. Small businesses are not able to adequately finance huge projects and, therefore such contracts are unsuitable for small companies. Completion contracts may need small businesses to take loans that increase the costs of fulfilling the project. Cost-sharing contracts are a problem for small businesses because the allowable costs are a portion of the total cost, and the company receives no fee. Cost-sharing contracts do not provide many financial benefits to small enterprises .
Contracting for Small Businesses
The best form of contracting for small businesses is the incentive contract. An incentive contract can be a cost reimbursement or fixed price contract that has a target cost or fee that used as a point of deviation for various monetary incentives. After the conclusion of the contract, the incentive payment is calculated on the basis of contractor’s actual cost for the work and a sliding scale for profits. Incentive contracts are ideal for small businesses because they guarantee a profit after completion of the contract. Clients pay out higher profits for quality work, and this puts small businesses at an advantage if they deliver high-quality work. The small business does not have to inflate costs in order to meet the overall costs of the project. Incentive contracts are also ideal for small businesses in cases where costs cannot be computed with an accuracy .
Contracting for Large Companies
The form of contracting that would benefit large companies is cost-plus-fixed-fee contracts. Cost-plus-fixed-fee contracts provide for payment of allowable costs and a fixed fee. This type of contracting necessitates a contractor to finish and deliver the objectives of the contract within an estimated cost. Cost-plus-fixed-fee contracts are usually applied to contracts that involve high costs and high performance. In cost-plus-fixed-fee contracts, big companies can negotiate the target fee, target cost, and maximum fee from the outset of the contract. All the costs of undertaking the contract are covered by monetary incentives added depending on early completion and quality of the work delivered. Large companies can finance the contract sufficiently, complete it on time, and benefit from the profits and incentives .
Justification for Government Contract Award
First, in order to bag a government contract that favors large companies, the company will play to its strengths by explaining what makes it special as compared to other firms. Doing thorough research on the contract places the business at par with big companies. The next step is by widening the human relationship network within the government . It is crucial to build a solid relationship with decision makers within the government in order to market the company and thereby increase chances of getting the contract. The company can also partner with another firm in order to have the financial muscle to challenge large enterprises for the contract. The business enter into a strategic partnership another company that offers skills, relationships, geographical reach and services that are complementary to our business. Advertising in trade magazines and creating an online will boost the profile of the company and raise its profile among decision makers in the government .
A contract is apact entered into by two or more competent parties with the objective of creating a legal commitment between the parties. A fixed-price contract is a contract where the amount of payment is not dependent on the resources deployed or the time expended. A cost-reimbursement contract is one where reasonable and allowable costs incurred by the contractor in the implementation of a contract are reimbursed by the client in accordance with the terms of an agreement. A cost-reimbursable contract is used in instances where the nature of the work carried out cannot be accurately defined from the outset. The federal government has set aside a percentage of contracts for small businesses . Cost-reimbursement contracts that have a maximum cost limit may prove to be challenging to small businesses. The best form of contracting for small businesses is the incentive contract. The best form of contracting for large companies is cost-plus-fixed-fee contracts. Small companies can get large government contracts by increasing their network, entering strategic partnerships, advertising, and research.
Berrios, Ruben. Government Contracts and Contract Behavior. Journal of Business Ethics, 2006.
Gómez-Ibáñez, José. Regulating Infrastructure: Monopoly, Contracts, and Discretion. Harvard University Press, 2009.
Salanie, Benard. The Economics of Contracts: A Primer. MIT Press, 2005.
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