There are several kinds of contracts that are commonly used at the federal level, including fixed-price and cost-reimbursement contracts. In order to understand them more clearly, and in order to compare them with other contracts, it is important to discuss them thoroughly. Fixed-price contracts are exactly what their name implies. They are set up based on a fixed and agreed-upon price, and that price cannot be changed (Barnett, 2003). There are both benefits and drawbacks from the perspective of the contractor when it comes to this type of contract. The most significant benefit is that the contractor knows how much he or she will be paid when the job is completed. The drawback, of course, is that there is the possibility that the job will cost much more than the contractor anticipated. With that being the case, the contractor may find that he or she is not getting paid what the job is really "worth." Even if that becomes the case, though, there is no recourse for the contractor because the price is already something upon which both parties to the contract will have agreed.
Naturally, that can be a serious issue for the contractor who may not think he or she bid the contract properly and is now "stuck" with a contract off of which very little money will be made. Of course, there is more to the issue than just the potential loss of money (Barnett, 2003). If the contractor is able to do the job for much less than was anticipated, he or she will make a hefty profit - and that can lead the other party to the contract into feeling as though there was some deception involved. No one likes to feel cheated, even if it was unintentional on the part of the other party. If one party feels cheated, there may not be any further contracts in the future. Naturally, that is a serious issue that must be faced because there are companies that work with the federal government quite frequently. It is suspected that they would like to continue doing so - but only if the relationship between the government and the contractor is one that both parties consider mutually beneficial (Stanberry, 2008).
Fixed-price contracts are basically easy to address when it comes to the actual price of them. In the beginning, the federal government advertises a job. The contractor (and often more than one contractor) places a bid for the job. The best bid - which is not always the lowest bid, there are other factors to consider - is chosen and the contract is created. When both parties agree to the price and terms, they must abide by them (McKendrick, 2005). If the contractor can do the job for less than anticipated, he or she will make a bigger profit. Conversely, though, even if it costs much more than expected the contractor must complete the contract. That means it could potentially cost the contractor money. No contractor would willingly agree to that, but there are unanticipated issues that can come up and become a problem for the contractor or for the government. In this case, the contract favors the government in that the work will be completed for the price stated, no matter what the actual cost of the total amount of work turns out to be (McKendrick, 2005). A contractor could really lose money.
Each contractor who enters into a contract with the federal government is responsible for making a good and fair estimate of the cost to complete that contract (Stanberry, 2008). Once a price has been agreed upon, there is no option to change it. Not all contractors like to work with fixed-price contracts for that specific reason. Some of them prefer other options, such as choosing a different style or type of contract. One of their other choices is a cost-reimbursement contract, where they get paid based on the true cost of the job as opposed to what they agreed upon in the beginning (Stanberry, 2008). The total price of the contract could fluctuate that way, depending on whether the contractor over-estimated or under-estimated the job, what problems he or she might run into, what changes were requested along the way, and other factors that might not be easily known or determined in the original negotiations.
With a cost-reimbursement contract, the contractor has the advantage and there is more of a risk to the federal government. In these kinds of contracts, the government usually has a maximum amount it has agreed to pay out for the work specified in the contract. However, if the work is not complete but all the money has been paid out to the contractor, the government is left with work that is not done, because there is no more money with which to complete the project (Stanberry, 2008). That, naturally, is not a desirable position for the government. The contractor often fares far better in this scenario, because he does work and is paid for it. If the government runs out of money, the work simply stops. The contractor has still been paid the total amount of the contract, whether all of the work was done or not. The government then has two choices: simply stop work because there are no more funds, or add money to the contract to get the work moving toward completion again (Stanberry, 2008).
Contractors like these kinds of contracts because it is easy for them to be assured that they will get paid the full amount of the contract, even if the job costs more than expected and they cannot complete it for that price. The main drawback of them for the contractor is that they are monitored much more closely. If the contractor tries to overestimate the cost to make a little extra money, he or she will be "found out" relatively easily - and that can stop a person from getting any further federal contracting work. If working with the government is something the contractor enjoys and he or she wants it to continue, it is a good idea for that contractor to focus on handling things appropriately and avoiding any hint of impropriety. Each contract should be estimated as fairly and honestly as possible (Stanberry, 2008). It is understandable that mistakes can happen and that changes might need to be made, but there is little excuse for complete carelessness on the part of either party.
The largest problem for contractors when it comes to a cost-reimbursement contract is that there is such careful monitoring of everything (Stanberry, 2008). Many contractors pad their contracts a little bit to cover unforeseen problems and to make sure they can make a little bit of money even if there are extras or incidentals on which they did not count when they first acquired the contract. With cost-reimbursement contracts, they do not get the opportunity to do this. The government will be carefully monitoring the contract, largely because it understands that there is a significant risk when it comes to these types of contracts. If the work does not get done for the price upon which both parties originally agreed, the contract is still valid and the price still has to be paid (Stanberry, 2008). In other words, the government could be left stuck with a project that is only partially completed, mostly because it failed to realize that it might cost more than what was bid by the contractor originally. It seems as though this might be more problematic for the government, but it is a huge hassle for the contractor to be monitored and followed so closely all the time while the contract is in force.
There are other types of contracts that can be used for federal government contracting, as well. This includes definite quantity contracts (McKendrick, 2005). These can be used for goods, services, or both. They are contracts which require a definite quantity of supplies that are specific to the contract and/or a definite number of services for a particular time period. Performance or deliveries occur when ordered. The services or supplies need to be available on a regular basis, and they also need to be something that is clearly going to be needed throughout the period of the contract (McKendrick, 2005). These other types of contracts work well for the federal government because it knows exactly what it will be getting for the agreed-upon price. Of course, there are also drawbacks. Even if the goods or services should be available, there is always the chance that something will be out of stock or otherwise unavailable at the time it was desired, and that can cause a chain reaction of problems.
For the most part, however, definite quantity contracts are something that work well where the government is concerned. These also usually work well from the view of the contractors, because everyone is clear on what is being provided and how much those things cost. While there is more to a…