Selecting the appropriate contract type is crucial to a successful performance of an organization under a contract. It is because the type of contract selected by an organization determines the cost and performance risks that are placed on the contractor. There are several forms of contracts in both private and public entities. The present paper addresses several elements of contracting for my small business that produces small control aircraft capable of long sustained flights. The paper focuses on the forms of contacts that are suitable for the business.
Contrast Fixed-Price Contracts and Cost-Reimbursement Contracts
A cost plus and a fixed price contract are two main forms of construction contracts (Manuel, 2011). The two forms of contracts are frequently applied when organizations enter into an arrangement to construct a home or any other type of structure, for instance, aircraft production. Each for of contract has its benefits and drawbacks for both the contractor and the buyer. In selecting the type of construction contractor, the choice is determined by the existing situation, the requirements of the buyer, and the risk involved in the construction.
In a cost plus contract, the price of construction is the cost plus an added fee, usually labeled as profit. The fixed costs consist of the cost of the construction materials and labor in addition to the indirect costs referred to as overhead. In simple terms, it involves an agreement to pay costs plus profit. On the other hand, a fixed price contract entails an agreement for construction or production at an agreed price. That price comprises all costs and profit.
As a contractor, the cost plus contract provides the benefit of an assured profit. This is because the contractor will get the total compensation for all costs and still make a profit. Nonetheless, a fixed price contract involves a possibility of a risk that the costs can be more than the price, hence resulting in a loss. As for the buyer, the cost plus contract is a better option since the contractor has no reason to cut costs. Furthermore, there are low chances of cost inflation where the contractor overvalues costs to maintain profits. The major drawback of cost plus contract is the likelihood of disputes over the selection and costs of materials involved. The main setback with the cost plus contract is the uncertainty of the ultimate cost. The only way to deter any pricing that exceeds the set budget is the insertion of a section in the contract that will provide a maximum total of the project and ensure effective planning.
Opportunities for Small Business
Small businesses have several opportunities as compared to large organizations. In the aircraft manufacturing industry, for instance, trying to change an aircraft carrier requires a simple process because of a lean structure involved in the operations. In big organizations, their large sizes and structure make such changes difficult and slow. Moreover, the pace of small organizations’ operations is often very fast, making the entities to benefit from getting new products to market.
Furthermore, the size of small businesses enhances the feeling of closeness. In this regard, employees are treated as members of one big family. Because of such feeling and closeness, the organizations’ employees are inspired to work tremendously to the best of their abilities in their projects. Small businesses also have an opportune of developing a close relationship with customers and other stakeholders, for instance, contractors. This close relationship is significant in ensuring the success of businesses. Because of the organizations’ simple structures, issues such as customers or contractors’ complaints are easily addressed, hence making their operations effective.
Challenges of Cost-Reimbursement Contract
One of the challenging elements of the cost reimbursement contract involves the limited inevitability as to what the ultimate budget will be. This promotes some form of anxiety that can affect the efficiency of the project. The reimbursement contract required is costly since it entails extra oversight and administration to guarantee that only acceptable expenses are paid. Also, the contractor tries to exercise tolerable general cost controls. As a way of addressing these challenging elements and the adverse consequences of a contractor sustaining huge expenses, it is logical to set a maximum limit cost to be incurred. Furthermore, the provisions of the contract should indicate the way expenses are to be determined for purposes of compensation. The contractor’s bookkeeping system should be satisfactory to ensure the paying party’s transparency in the payment system and that he/she gets satisfied with what is paid for.
Effective Form of Contracting for the Business
Different types of contracts vary according to the degree and timing of the duty anticipated by the contractor for the prices of performance and the extent and nature of the turnover inducement presented to the contractor for attaining or surpassing quantified standards or objectives. The choice of the contract is also determined by the type and size of the business. In this case, the business involved is a small-scale aircraft construction business. Other elements are considered before selecting the best contracting form, for instance, the price element, price competition, cost analysis, the complexity of the cost requirements, the urgency of the requirements, technical capability, and the procurement history analysis of the buyer. In this regard, I consider firm fixed price appropriate for the organization.
A fixed-price form of contracts provides for an organization’s price, or, in correct cases, a modifiable price. Fixed-price contracts offer an amendable price, for instance, the maximum price, the target price, or both. Except if otherwise stated in the contract, the price offered in this form of contract is subject to the contract clauses for reasonable adjustment of the contract price.
In this contract, the small business will be required to deliver the final products, which are the aircraft at a definite price that was fixed at the time the contract was being awarded and not subject to any adjustment based on the contractor’s cost experience in performing the contract. Contracting using fixed price contracts is effective since it is being applied by nearly all federal agencies. Therefore, there are several and widespread opportunities for small businesses. In most of the state and local procurements, the fixed price contracts are applied because of their rationality. In March 2009, the former President of the United States, Barrack Obama officially recommended a preference for fixed-price contracts to heads of managerial departments and assistances. The contract form is also significant to an organization because the fixed pricing encourages transparency in knowing what is set. Furthermore, fixed fee pricing is also significant for the small businesses since the entity can evaluate sales forecasting methods.
Effective Form of Contracting for Large Business
The best form of contracting for large businesses is the cost-reimbursement contracts. This form of the contract provides for payment of acceptable incurred costs to the amount approved in the contract. Such contracts establish an approximation of total price for the purpose of obliging resources and ascertaining an upper limit that the contractor may not surpass except with the authorization of the contracting officer (Chen & Gunny, 2014). This form of contracting is effective for larger organizations since they are in a position to know the total costs that will be applicable to a project irrespective of the time and material costs. Since large organizations are established in terms of resources, this element is significant in minimizing the risks. The organizations are also likely to make profits from the contracts using the total costs set. Furthermore, since large organizations have an accounting system, the contracting form is sufficient for ascertaining the costs applicable to the contract.
Obtaining Large Organizations Contracts
Despite the fact that the federal government classifies different contracts to be awarded to large and small businesses, the contracts remains a lucrative opportunity for small businesses. The federal government typically spends several billion on contracts annually, and a good number of the contracts are awarded to small businesses both in public and private entities (Tadelis, 2012). Nonetheless, getting these contracts with many bidders is not easy. The following tips are significant in ensuring that small businesses get the contracts meant for large organizations.
The first stage is for organizations to familiarize themselves with the contracting rules. Small businesses need to familiarize with federal rules concerning contracting before an opportunity comes along, which in simple words means being prepared. In most cases, government bids are different from private sector bids and have longer lead times and stringent bidding as well as product requirements (Tadelis, 2012).
The small entities also need to acknowledge what the government is buying. Despite the fact that each agency and department has distinctive objectives, identifying these goals can be significant. Nonetheless, most of the government contracts are not new, something that helps in ensuring effective knowledge on the needs of the contract. Small businesses need to identify the opportunities of what the government is offering and focus on their contracting sales and marketing strategy.
Small organizations also need to research on the upcoming opportunities. This involves identifying organizations’ offer and tracking contract opportunities and solicitations that are parallel with their capability. Research information can be collected in sites like the USAspending.gov and FedBizOpps.gov among other market intelligence entities.
The organizations also need to put their foot on the ground through taking part in the industry’s specific government occasions. Despite the fact that most of these activities are hosted by the private sector, they attract the procurement community, influencers, and industry professionals. These persons are important in providing contracting expertise.
Many organizations thrive on contracts. Nonetheless, there are different types of contracts that businesses engage in, which have their advantages and disadvantages. Several factors determine the choice of a given contract, and m small businesses have started competing for government contracts. Nonetheless, the bidding and awarding of such contracts depend on the effectiveness of the firms in receiving the tenders.
Chen, H., & Gunny, K. (2014). Profitability and cost shifting in government procurement contracts.
Manuel, K. M. (2011). Contract types: An overview of the legal requirements and issues. DIANE Publishing.
Tadelis, S. (2012). Public procurement design: Lessons from the private sector. International Journal of Industrial Organization, 30(3), 297-302.