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The price negotiated at the outset of the project by a fixed price arrangement between the service provider and the contracting party does not depend on the amount of time to be expended and the resources to be used for the payment. In other words, as the project starts, there are no planned price changes. Fixed price contracts shall be exercised and concluded according to the conditions and terms of the contract.
In comparison to cost reimbursement, most government agencies have fixed-price contracts and therefore experience the aircraft industry in the handling of fixed-price agreements. The company will benefit from a fixed-price contract as escalating costs are catered for therefore facilitating proper budgeting. The profitability margin is high as compared to cost-reimbursement contract. With a fixed-price contract, the company will predict its profitability due to high and constant prices unlike in cost-reimbursement contracts where cost is not constant, which makes it difficult to forecast profit (Mee, 2012). Besides, time and resources will be utilized sparingly as no cost is reimbursed at the end of the contract. A Healthy relationship will be enhanced between the company and the contracting agencies potential disagreement are eliminated before signing as the value of the contract is communicated. This type of contract guarantees cost certainty making easy for the company to obtain a loan from the financial institution to finance exercise and completion of the contract.
Fixed-price contracts pose a greater risk to the aircraft company due to a high probability of price fluctuation of items to be used in the contract performance, as a result of inflation. Change orders may be issued resulting into disagreements with the contracting agency. In case additional expenses, the financial gains on the part of the Aircraft Company will reduce since contractor bears risks.
Benefits of Cost-reimbursement Contract
This type of contract is a favorable and less costly for the aircraft company due to reduced risks of price fluctuations, as additional costs are paid up by the contracting agency. Also, the government agencies involved in the contracting assumes some proportion of the final risk. There is time management because a simple procurement statement of work is required. The contract may encourage overspending hence distorting the relationship between the entity and the agency. With this type of contract, the company will provide quality services and products as additional costs are catered for by the contracting organization. There is a guarantee that the aircraft company will make a profit considering that all allowed expenses are paid for and an additional payment is made to the entity (Aircraft Company). Specification changes can be made as the contract performance continues, facilitating delivery of the required product or service.
Cost-plus contracts have a greater uncertainty regarding the profit to be made due to final cost variance. The aircraft company will only be working with estimates. The aircraft company has no freedom during exercise of the contract as the agency monitors the contract performance and may terminate the contract in case of any sign of inferior or product or service. The Aircraft entity will bear the compliance risk that poses a threat of risk termination. In the event of contract termination, the company will cater for the damages with no compensation depending on the terms and conditions of the offer.
Opportunities Available to the Company
The government has taken broad step to encourage innovation, entrepreneurship, and employment by promoting enterprises. In awarding of contracts, US government is first considering ability and willingness of small-sized companies to perform the contract. The government has set up a certain proportion of contracts to be awarded to small businesses. The aircraft company has an opportunity to access contracts set out for small businesses before they offered to large enterprises. Also, our Company can utilize the personnel availed by DoD to assist small firms in getting an award of a proportion of government contracts. Small-sized companies have fostered competition of ideas as compared to large entities. These businesses have highly facilitated economic growth in most countries since they are the majority, as they offer a better value for money and better quality service than big corporations. The argument is attributed to the fact that, small companies have low administrative overheads, short management chain, and management costs than large enterprises.
The aircraft company has an opportunity to applying and winning contracts requiring the provision of high-quality products while maintaining the high value of money. Besides, it can utilize the opportunity of using its equipment whether adequate or inadequate and have allowed maximum time to prepare for the contract. Our Aircraft Company has an opportunity to compete with other small aircraft companies for contracts of an amount less than $100,000. The company will have an opportunity to apply for subcontracting incentives set out for small firms to finance them into completing the contract. The company has the opportunity to make use of vendor collaboration central event listing to find and participate in government agencies engagement opportunities. The program is only accessible to small companies as opposed to large firms. Sub-contracting opportunity is also available for the Aircraft Company to facilitate engagement with the government agencies.
Unfavorable Elements of Cost-reimbursement Contracts to the Aircraft Company
Cost-reimbursement Company does not cover disallowable costs, whereas these expenses are difficult to manage especially for a small company that has no established system to handle all types of cost. This element may produce a great trouble to our business in case some additional expenses are not paid for the agency, which may see the company going into losses. This type of contract has a non-clause compliance risk related factors which render the company into losses in case the clauses are misinterpreted. The terms pose the risk of compliance with a possibility of contract termination in case the company fails to comply. This element may produce a great trouble for our business such as damage to company reputation and break of trust and good relationship with the agencies. The company stands to lose as winning contracts may become a significant issue. Cost-reimbursement contracts require the company to have an adequate accounting system for accurate cost computation (Mee, 2012). It may be a challenge for our firm considering the size which may pose a challenge of successful completion of the contract.
The rationale for choosing a management of disallowable cost is that small aircraft has no well-established system for managing all types of expenses involved in agreement as compared to large companies which are well equipped and established with an appropriate system to manage cost. For clause-related compliance risk, our company may fail to comply with the clause requirements which may not be elaborated. The rationale for identifying the challenge of an adequate accounting system as a cost-reimbursement is after considering the company accounting systems that are unreliable hence possibility of fraud in computing contract labor and material related costs. Cost-reimbursements contracts require the company to meet all the contract standards and demonstrate its financial capability to exercise the agreement.
The Most Beneficial Form of Contracting for the Small Aircraft Company
Department of Defense (DoD) contracts are the most profitable for small companies despite the high cost of purchases required. The agency mostly issues fixed-cost to obtain purchases of goods and services as opposed to cost-reimbursement contracts which are offered when fixed-cost are difficult to perform. The average dollars allocated for contracting in DoD is $212.5 billion. The department sets out a fair proportion of products to be supplied by small companies. This department issues numerous contracts to Aircraft businesses that are well paying as compared to other forms of contracting. Small enterprises have opportunities to compete with their counterparts hence fostering competition. Maximum time is allowed for small aircraft companies to prepare for the offers unlike other forms of contracting where they end up losing their funds used in bidding as a result of inadequate preparation. The aircraft company benefits more from the set aside-portion contracts as it's priced like a non-set aside portion contract (Budrass, Scherner, & Streb, 2010). Factors such as experience, inadequate resources, and appropriate technical equipment hinder small Aircraft companies from winning contracts offered by DoD.
Contracting with federal agency gives an opportunity for the company to create persistence in which it's listed among the preferred contractors. When offers are ready, the listed entities are first to be considered. Currently, the agency has improved its rate of contracting as well as benefits to Aircraft small companies to prevent marshal of small businesses by large entities in the industry. Large prime contractors are instructed to subcontract with small business to foster maximum benefits both entities. The Aircraft Company will further benefit from the assistance of the personnel in assessing and following procurement procedure to present competitive proposals. Successful completion of DoD contracts helps build trust and confidence with the agency. It fosters a positive trend for the entity for being awarded big contracts in future.
Form of Contracting Supporting Large Companies
The most significant form of contracting in large companies is the Department of Defense contract. It announces contracts valued at $7 million or more each business day and are able to maintain the commercial and government entity. The defense department manages an inventory of installation and facilities to keep Americans safe. It also provides military guidance for the exercise of authority by commanders and other joint force. An inter service support agreement is required when the DOD agency provides support and accepts funds within the defense department. It also provides a lawful purpose, competent contracting parties, an acceptance and offer that comply with the terms of the mutual obligation and consideration. It allows a creation of contract terms by mutual consent of the parties. The department leaders play a major role in setting the tone for the shift towards increased diversity and inclusiveness (Graham, Walsh, Barron, Avery, Burd, Howard, & Bourgeois, 2012). It is a significant milestone for the large companies to gain wider markets for their products. The DOD remains committed to addressing its contract management challenges and in particular has made significant progress in addressing OCS issues since 2015.
The DOD contracting officer does not have the authority to act beyond the scope of the warrant or deviate from the laws and regulations controlling the contract. The party that is contracting is held to know limitations of the DOD officer in charge of contracts' authority. In this form of contract, a specific regulatory authority is required for the defense agency to enter into a contract. The agency bargaining power is controlled by the laws and regulations reflecting national policy choices and prudent limitations on the employees in the department to obligate the contracting funds. However, this form of contract is more regulated subject to volumes of statutes governing it. It makes contracting in the United States a more structured and restricted process than a commercial one.
A Negotiation Plan with the Government
Government contracts are regarded as the best as compared to private contract due to the benefits and profits attached to them. Most of these offers are through bidding process while few are applied by through competitive proposals. Large companies can perform all types of contracts while resources and equipment restrict small entities from performing big contracts. The agencies issues contracts depending on the company ability to perform, consistency, appropriate accounting procedures and availability (Budrass, Scherner, & Streb, 2010). The aircraft company may consider negotiating with the government citing its strengths which include; trust, honesty, ethics, and confidentiality it has demonstrated in the performance of the previous contracts. It may further present its financial records to convince the government it has adequate resources to exercise the contract despite it favoring the large companies. A potential factor that may win government into awarding the offer is the company previously added contract with DoD which amounted to $600,000. The entity may argue that the quoted contract with DoD was a great expansion opportunity and a good exposure to performing contracts favoring large companies. A recommendation from the successful exercise of the contract with DoD may further win the government trust into awarding the contract.
Minimizing the financial gain from the deal by explaining on how the entity with utilize economies of scale to incur the least expenses possible. Besides, the lowest bid in most cases considered for the offer award. Hence this may render the government to consider the small business to big entities. In awarding the contracts, in most cases, the government considers the company ability to deliver quality product by complying to contract specified standards (Mee, 2012). The Aircraft may provide research that associates them with the provision of standard products and promotes entrepreneurship and innovation. The argument may be supported by the need to curb the rate of unemployment which will only be made possible by government supporting small companies that demonstrate ability and willingness to perform the contract. Finally, the entity may get a recommendation from the Small Business Administration (SBA) on its suitability and business expansion plan. Upon viewing the certificate of competence, the government may be convinced that the firm will meet the agreed expectations. The government has been on the forefront to appreciate development and expansion of small companies to enhance economic growth. Hence proper negotiation with the Aircraft Company is likely to result to awarding of the offer.
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