There are multiple benefits to this fixed-price alternative. The high level of flexibility allows you to compensate for unexpected changes or cover unanticipated overages.
Customers and clients like it, too, because it allows them to pay for precisely what they get, and not a penny more. Because time and expenses are tracked in these pricing models, they are easy to audit and offer transparency. Flat fees do not. However, with this flexibility comes certain risks.
A 3-month project can turn into 6-months if the customer keeps adding to the list of expectations. Communication between the service provider and the client is often pretty frequent due to the need to supervise the project from start to finish. Lastly, efficiency can become your enemy. Because these services are charged by time and expenses, a job done efficiently can end up paying you less than if you set a flat fee.
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This type of contract is most of the fixed price contracts. This means the contractor does not have to finance the entire performance of the contract, only getting paid at the end. Time and Materials contract: This type is used when there will be non-labor costs involved in the contract like travel, materials, and usage of equipment.
Typically, travel, materials, and other direct costs ODCs are reimbursed at actual cost. Cost Reimbursable contracts: This type comes in multiple variations, with the two basic types being completion type and level of effort.
When the money runs out, you are supposed to stop. If there is a cost growth after the contract is completed, like rates and direct rates, you can collect that over and above the original estimate. Risk is inherent in all contracts; it just depends on what side of the contract you sit. It is a very important aspect of contracting and it comes in two forms: performance risk and cost risk. A very important yet often overlooked aspect of a contract is obligations.
Fixed price completion contracts performance risk for the contractor is very high. There are obligations to perform: deliver the goods, deliver the services, no matter what it costs. So, both performance risk and cost risks are very high.
They have no obligation to the contractor to pay or do anything else until the goods or services are delivered, inspected, and accepted, then they pay. There is a variant of fixed price contract called a fixed price incentive contract. This is always a completion type. With this type, the government puts into the contract what are called cost shares, so if the contractor underruns the contact, the government shares part of the savings. On the flipside if the contractor overruns the contract, the government pays part of the overrun, not all of it.
If your pricing model is good, then the cost risk is going to be low on the labor portion of a Time and Materials contract. Now the cost risk is relatively low because they know exactly what every hour is going to cost upfront. For the contractor, performance risk is very low across the entire Cost Reimbursable contract spectrum. Because the contractor has no obligation except to do their best. These contracts feature multiple characteristics of various contract types but are labeled as fixed price.
For example:. Sometimes these hybrid contracts will contain the allowable cost and payment clause. If they do, that triggers the requirement for an Incurred Cost Submission.
They then find that the contract was misclassified, reject the submission, and it must be done all over again. It is not determined by contract type. What does the government look for in selecting contract types? Arrangements with similar characteristics are categorized into "types," and so we have the fixed-price, cost-reimbursement, time-and-materials, and other "types. When the time comes for a CO to select the clauses for a prospective contract, he or she categorizes the contract by "type" and "kind", and then complies with FAR "prescriptions" in order to choose the appropriate boilerplate clauses.
Presumably, this "boilerplate" system saves time and money and increases textual consistency and legal predictability. That illustrates clauses applicable to various contract types. Although it doesn't happen frequently now, negotiation of contract types often used to be an issue. It ranges from firm fixed price where essential risk of performance rests with the contractor to cost reimbursement where the government assumes the bulk of risk - essentially the contractor gets reimbursed for all the cost it incurs.
Why are there types of contracts? Share More sharing options Followers 0. Start new topic. Recommended Posts. Swampdonkey Posted October 20, Posted October 20, Thank you in advance for any replies. Link to comment Share on other sites More sharing options Don Mansfield Posted October 20, Guest Vern Edwards Posted October 21,
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