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Perfect Contract
Contracting: A new type of contract
Many standard contracting agreements between the military and other entities have been subject to increased scrutiny and criticism, because of concerns about government over-spending and a lack of fiscal oversight. "Noncompetitive contracting, cost-reimbursement contracts, and time-and-materials and labor-hour (T&M/LH) contracts pose special risks of overspending. Non-competitive contracts present a risk because there is not a direct market mechanism for setting the contract price. Cost-reimbursement contracts and T&M/LH contracts pose a risk because they provide no direct incentive to the contractor for cost control" (Orszag 2009:2). With noncompetitive contracts, when the contract is guaranteed, there is little pressure to consistently offer a product or service at a competitive market price. With cost-reimbursement, all input materials costs are compensated, regardless of the ultimate budget of the project, in contrast to fixed costs projects, where the contractor is paid a fixed amount beforehand, regardless of how much...
With T&M/LH, the least favorable contract type from the point-of-view of the military, time and labor is also compensated if the project goes over budget.
However, these contracts do have their place, under certain circumstances: "Cost reimbursement contracts help agencies obtain critical research, leading edge innovation, and other needs where there is considerable uncertainty about the resources that will be necessary to achieve the government's objective. T&M/LH contracts help agencies accomplish tasks for a reasonable cost where the needed amount of labor effort cannot be specified in advance, such as when an information technology office must diagnose the cause of a system failure" (Orszag 2009:2). Such contracts are often instituted when the contracted entity may be unwilling to enter into an arrangement with the government, because of fears that the outcome may result in such prohibitively high costs that the organization will not be able to enjoy a profit. This is typical of research, particularly exploratory research into a new project.…
References
Orszag, Peter. (2009). Memorandum for the heads of departments and other agencies.
The White House. Retrieved:
http://www.whitehouse.gov/sites/default/files/omb/assets/memoranda_fy2009/m-09-25.pdf
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