8). The federal government's recent decision to shift to fixed-price contracts is intended to protect the government from overcharging by contractors and from assuming the potentially enormous losses that are involved when projects, especially high-tech defense initiatives, fail. As Erwin points out, though, "The policy ignores history. This is a shortsighted move that only creates incentives for contractors to bid low and after winning, try to maximize changes in the program as technology or threats evolve" (Erwin, 2010, p. 8).
Another contract type (neither fixed-price nor cost-reimbursement) and an explanation concerning its pros and cons from the perspective of the federal government
Cost-plus pricing contracts can be used to avoid the uncertainty and vagaries that are involved in fixed-price and cost-reimbursement contracts. Cost-plus pricing in a negotiated contract that contains elements of both fixed-price contracts as well as cost-reimbursement contracts (Weber, 2001). In this regard, Weber reports that, "Even most fixed-price defense contracts come with price adjustment mechanisms -- such as change proposals -- that allow principals and agents room to redefine the project specifications and adjust for additional compensation. Because prices are negotiated, not set by the market, there are additional incentives for contractor opportunism. Negotiated contracts give the contractor few reasons to control costs, and they require that both parties devote more resources to monitoring and oversight" (p. 50).
Cost-plus pricing contracts are designed to compel contractors to invest in defense-specific assets to the ultimate benefit of the federal government (Weber 2001). This aspect of cost-plus contracts has serious disadvantages for major defense contractors. For example, according to Weber (2001), "Defense products are built to exacting engineering specifications with specialized equipment, facilities, and labor. Contractors must install expensive equipment and train labor to compete successfully for contracts that they...
50). On a final note, Diltz (1999) reports that, "Cost-plus contracts usually are granted for procurements in which the product is ill-defined, such as a radar system for which the technology currently does not exist to produce the system. The choice of contract type is usually at the discretion of the contracting officer" (p. 4).
Conclusion
The research showed that the 20 or so different types of federal contracts that are commonly used today can be categorized as either fixed-price or cost-reimbursement contracts. The differences in these two types of contracts basically relate to how risk is absorbed and to what extent. In the most common type, fixed-price contracts, costs are mutually agreed upon and are not generally subject to change. With cost-reimbursement contracts, contractors are guaranteed a profit above and beyond the costs of their materials and services. Finally, cost-plus contracts contain elements of both fixed-price and cost-reimbursement contracts that have significant benefits for federal contractors.
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