Institutional Framework of Federal Acquisitions
Federal Acquisition Regulations (FAR) are a set of rules and regulations issued by the Federal Government. These rules and regulations control acquisition process through which the government acquires goods and services. The process comprises of three stages (In McRae, 2003). The first involves the recognition and planning acquisition. The second involves the contract formation while the third is the administration of the already formed contract. However, it does not regulate the activities of private firms except for the parts that the government incorporates in solicitations and contracts of reference (Shealey, 2007).
A fixed-price contract is an agreement set on a final cost of services or goods through the signing of a contract by both parties. They both agree on the length of time that the price extension. One of the advantages of fixed-price contract is predictability, which means that it gives both parties a predictable scenario. The Federal Acquisition Regulation has control over the formation and implementation of contracts on purchases of products, which helps govern how to draft the contract (In McRae, 2003). The guideline and regulations provided by FAR ensure that both parties’ rights are safeguarded, thus guaranteeing a fair deal. This creates efficient, accountable and effective planning by ensuring customer satisfaction in terms of timeliness and cost.
Budgeting and ability to pay are other advantages of fixed-cost contract. If goods or services are necessary to a business, the commercial side and the buyer may experience a negative impact. This happens mostly when the goods or services rise continuously (Keyes, 2007). Small organizations and traders benefit more from this situation as they can budget in advance and have an assured source of the funds before they sign the contract. They should give a description of the design-to-cost objective in the assumptions that they make.
A market change is a case that brings a negative impact on many businesses. Market forces tend to change the value of goods and services. It also includes any materials or supplies required in the production (In McRae, 2003). When these forces occur, the seller experiences losses while the buyer benefits outside the arrangement of their fixed-price contract. To regain this, a contract has to ensure that any market changes will not affect the value and price of the contract. Both parties will define the conditions (Keyes, 2007). These conditions should go in line with the Federal Acquisition Regulation’s guidelines in order to safeguard the contract from external forces. It preserves the integrity of the business operations and the cost set initially.
A fixed-price contract defines the price that the customer will pay to the contractor. It is a requirement of the Federal Acquisition Regulation that eliminates uncertainties, such as the price haggle between a contractor and the customer (Shealey, 2007). It reduces the risk that a contractor would experience if the total cost went higher than the expected cost (Keyes, 2007). This also expounds the experience of the contractor with such types of contracts as government favor. Clients do not have to pay for the extra cost in case this cost goes higher than expected. The client evaluates proposals that the contractors submit and chooses one that favors him in order to be sure of what he should pay in the end (In McRae, 2003). This makes every party accountable for the differences in price which can occur between the ratification and the accomplishment of the contract.
A cost reimbursement contract is a contract according to which the client pays a contractor a negotiated amount regardless of the incurred prices. It is appropriate when there is a need to shift some risk in contract performance to a buyer. The parties use this concept when they cannot explicitly define the items that they purchase. They may also use it in cases when data is not enough or not completely reliable to help in estimating the total cost (Shealey, 2007).
It is mainly applied in cases when long-term quality is higher than the total cost. This is evident as in the case of the space program in the United States.
Time and material contracts are an essential aspect when it comes to making profit. The contractor should know what he is obliged to charge how he will manage the cost in order to avoid losses. The expected profits may raise more if the project management is good and the proposal computation is appropriate (In McRae, 2003). One should determine labor categories either during the negotiation time or the proposal process. This ensures that the customer or client is aware of everything at the signing of the contract. He should also check the description of labor categories so as to provide personnel that will meet requirements’ description while negotiating the cost per hour. It also gives the contractor a chance to announce the requirements to labor category that may have problems (Keyes, 2007). It is important to address these issues during the proposal process. After the fulfillment of this task, the contractor can ensure that labor categories in the proposal requests will meet all the requirements to complete the work. According to FAR guidelines, the contractor should conduct an analysis of pricing which ensures that the whole process he conducts is in the interest of the government.
A cost-plus contract means that a contractor gets paid for all the allowed expenses including an additional payment or an allowance for profit. The American Government first introduced it to encourage production of large American companies. It is a necessary part in the contract as it ensures that the contractor will still get a profit regardless of whether there are market changes that affect the price of purchasing goods and services (In McRae, 2003). It also safeguards the client in that he will not pay abnormal prices to the contractor since they compute total price upon completion of the contract.