Contracts Types and Purpose

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Table of Contents

Introduction
Fixed Price Contracts
Cost-Reimbursement Contracts
Incentive Contracts
Indefinite-Delivery Contracts
Conclusion
Reference

Introduction

A contract is an agreement between two or more parties. Successful performance under a contract depends on the appropriateness of the type of contract chosen. The type of contract chosen also determines the cost and performance risks placed on the contractor. The two broad contract groups are the fixed price and the cost-reimbursement contract. Each of these two broad categories is made up of various types of contracts that can be used individually or in combination. The contracts that will be discussed in this paper entail the acquisition of supplies and services required by agencies. The different types of contracts play have different purposes and are applicable in different situations.

Fixed Price Contracts

The fixed-price contracts have two provisions: a fixed price on part of the contractor or an adjustable price which is applicable in some appropriate cases. There are different categories that have different applications. The fixed-firm-price contract provides for a cost that cannot be adjusted by parties in the contract (Federal Acquisition Regulation, 2000, para.5). Its purpose is to help the contractor control costs and perform effectively. It is mostly applicable when acquiring commercial items or other supplies and services on the basis of detailed specifications. Contractors in fixed-price contracts can adjust the price of the contract if the contract has an economic price adjustment. This type of contract is applicable in cases where contractors have doubts about the stability of the market. Fixed-price contracts with prospective price redetermination are used when there could be a need to redetermine the price of the contract at a specific time after the initial period. It sets a fixed price for an initial period when the contract will be underperforming. It is applicable in the acquisition of products or services where the contractors can negotiate a reasonable fixed price for the initial period but cannot fix the price for other future periods.

A fixed-ceiling-Price contract that has a retroactive price redetermination allows the contractors to provide supplies or services at any price provided that the ceiling price is not exceeded. When the contract is completed, the contractors can engage in a retroactive price redetermination. However, the retroactive price cannot exceed the highest piece set. It is applicable in research and development contracts that have an estimate of about $100,000 or less. In Firm-price-price, the level-of-effort term contract is used when work can only be stated in general terms. The contractor is required to specify the effort that he or she will put in the contract for a given period of time and the government on the other side offers to give a certain dollar amount to the contractor. It is applicable to investigations and research and development in certain areas. The effort expended determines the pay that the contractor will receive.

Cost-Reimbursement Contracts

The cost-reimbursement contract provides a certain amount of allowable incurred cost that can be given to the contractor. The total cost of the contract is estimated and a price ceiling is also set. The contractor is not allowed to go beyond the price ceiling without the approval of the contracting officer (Judge Advocate General’s School, 2002, p.438). Contracts that fall under this category are applied in cases where the performance of the contract contains some uncertainties that cannot allow cost to be estimated using fixed-price contract types. In a cost contract, the contractor does not receive any fee. It is applicable in non-profit organizations, research and development work, and facilities contracts. A contractor in a cost-sharing contract is reimbursed only for an agreed-upon portion of its allowable costs and receives no fee. This type of contract is mostly applicable when the contractor expects high compensation benefits by taking a little price for the contract. cost-plus-fixed-fee contracts allow the contractor to be given an amount of fee that is fixed when the contract is agreed upon. If the work to be performed varies, the fixed amount may be adjusted. It is used when there are uncertainties and an actual amount cannot be estimated.

Incentive Contracts

Incentive contracts are applicable is suitable when a firm fixed-price contract is not efficient and at the same time, the required supplies and services can be acquired at a lower price (Stanberry, 2009, p.268). If the supplies and services can also be acquired in improved delivery or technical performance, incentive contracts are efficient. Examples under this category include structuring multiple-incentive contracts, fixed-price incentive contracts, cost-reimbursement incentive contracts, and others.

Indefinite-Delivery Contracts

This deals with a contract where the amount of supplies to be delivered is not specified. It specifies the procedures that will be used in rewarding a contractor who takes such contracts. It can be used to acquire architect-engineer services and federal information processing resource requirements.

Conclusion

Contracts are used for the acquisition of supplies and services required by agencies. There are different types of contracts that have different purposes and are applicable in different situations. Contractors in a fixed price contract can either receive a fixed price for the contract or a price that can be adjusted as provided by the contract. In cost-reimbursement contracts, the contractors are subject to payment of allowable incurred costs as it could be provided in the contract. If the required supplies and services can be acquired at a lower price and the firm-fixed-price is not efficient, incentive contracts are used.

Reference

Federal Acquisition Regulation, (2000). Type of Contracts.Web.

Judge Advocate General’s School. (2002). Government Contract Law: The Desktop for Procurement Professionals. Oxford: Oxford University Press.

Stanberry, S. A. (2009). Federal Contracting Made Easy. New York: Stanberry.

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