Fixed price and cost reimbursement contracts: advantages and disadvantages

¶ … Contracts

Different Types of Contracts Analysis

Fixed price contracts advantages and disadvantages for contractors

Fixed price contracts are represented by contracts where the amount of payment does not depend on the amount of resources. This type of contracts usually takes place between contractors and the government. In such cases, the risk is supported by the vendor. The government has the ability to control the costs. Fixed price contracts are preferred in the case of businesses that focus on innovative technologies. This is because the little information on such technologies usually determines increased costs.

There are several advantages determined by fixed price contracts from the perspective of contractors (Symes, 2012). Such contracts allow the contractor to benefit from a higher level of stability in comparison with other types of contracts. Therefore, if the value of the products and services provided by the seller is reduced by certain factors, the fixed price of the contract ensures that the revenues of the contractor are not reduced. This allows companies to make estimations about investments that are required by their activity. This is also allows the contractor to establish a higher price for the products addressed by the contract in order to be in accordance with the risk level associated with the contract in case.

There are also certain disadvantages of fixed price contracts from the perspective of the contractor. The risk of the contract is addressed by the contractor in the case of this type of contracts. In addition to this, certain environmental factors can determine the prices of the materials and supplies required by producing the products addressed by the contract to significantly increase. This leads to increased production costs that affect the contractor.

In case the costs of the products and services addressed by the fixed contract increase, it is possible that the buyer cannot pay the sum of money established by the contract. In such cases, the contractor must pay the production of these products and services, while the revenues are reduced. Therefore, it is important to identify the environmental factors that are likely to affect the costs of these products when establishing the fixed term contract.

Elements of cost reimbursement contracts that can determine important problems of contractors

There are several elements of the cost reimbursement contracts that can determine important disadvantages for contractors. In such cases, contractors are determined to increase their efforts in satisfying the needs of the buyer. The risks associated with this type of contracts are lower in comparison with the risk levels determined by fixed price contracts, but the contractor has reduced control on the contract.

Another element of the cost reimbursement contract that can determine difficulties in the case of the contractor refers to the consideration associated with the contract. This consideration can be represented by currency. The variations of currencies represent important factors that are likely to significantly affect companies' activity. In the case of companies doing business on international level, it is difficult to develop contracts on different currencies that are influenced by environmental factors.

The currency variations can lead to increased profits in the case of these companies, but they can also lead to reduced incomes in accordance with the sum of money established by the contract. In certain situations, the prices of supplies required by the production can reduce, leading to reduced costs of the contract. But the currency modification after establishing the value of the contract can affect the profits of the contractor.

Agreements

There are also other types of contracts, like agreements. These agreements can be basic agreements, or basic ordering agreements. In the case of basic agreements, the contract is negotiated between an agency and the contractor. These agreements refer to contract clauses that must be applied to contracts developed between the agency and the contractor regarding the production of the different products and services required by the buyer. In addition to this, such agreements refer to contracts that the buyer and the contractor are likely to address.

Basic ordering agreements refer to the fact that the contract is negotiated between an agency and the contractor, same as in the case of basic agreements. In addition to the clauses that must be applied to contracts between the parties involved, basic ordering agreements also refer to the description of the products and services that the contractor must provide. This type of agreement also establishes the methods of pricing, issuing, and delivering the required orders.

There are several advantages determined by these agreements that can be addressed. The government can benefit from such agreements because of the stability they determine. This stability refers to relationships with suppliers. The efficiency of the government's activity also relies on the supplies necessary for this activity (Business Dictionary, 2012). Therefore, it is important to develop relationships characterized by stability with contractors that can provide the products and services that are necessary to the government.

This also makes it easier to help contractors understand the needs of the government on long periods of time. Another important benefit of agreements between the government and different contractors is that these agreements refer to several contracts under the same agreements. This means that it is not necessary to negotiate each contract when the need for the products or services in case requires it. The contracts' conditions are negotiated when the agreement is developed between the government and the contractors. Therefore, the problems that can be determined by different conditions of the contracts are addressed in the agreement negotiation.

Basic ordering agreements provide other advantages also. Such advantages refer to the fact that these agreements require the description of the products and services purchased by the government, and the methods of pricing, issuing, and delivering orders. This makes it easier to understand the government's needs by the contractors. In addition to this, customer satisfaction level is increased. The fact that the government and the contractors agree on these issues makes it more difficult for contractors to provide products and services different than those established by the agreement in case. Therefore, these agreements can determine an increased level of quality of the contractors' efforts.

The advantages of the basic ordering agreements also rely on the fact that they allow to agree on prices and quantities of products and services that are not established when the agreement is made. But in such situations it is expected that the government is likely to purchase these products and services and the contractors agree on providing them when they are required by the government.

However, there are also certain disadvantages associated with these agreements. These disadvantages refer to the fact that in certain situations the costs associated with these contracts cannot be anticipated. This makes it difficult for the government to establish the level of resources that can be attributed to these purchases. It is important to establish the costs of the contracts in accordance with the production costs of the providers.

Reference list:

1. Symes, S. (2012). Advantages and Disadvantages of a Fixed Price Contract. Retrieved June 9, 2012 from http://smallbusiness.chron.com/advantages-disadvantages-fixedprice-contract-21066.html.

2. Basic Ordering Agreement (2012). Business Dictionary. Retrieved June 9, 2012 from http://www.businessdictionary.com/definition/basic-ordering-agreement.html.

3. Philpott, D. & Cook, S. (2012). Managing Cost Reimbursable Contracts. Government Training Inc. Retrieved June 9, 2012 from http://governmenttraininginc.com/pdfs/Cost-Reimbursable-TOC-Excerpt.pdf.