When searching for government contracts to bid on, small businesses must keep in mind what types of contracts are available within the government-contracting sphere. The two main types of contracts that small businesses will come across are fixed-price and cost-reimbursement contracts. No matter what kind of product or service a business is offering to the government, it’s helpful for small businesses to learn about the various contract types that exist before bidding on any local, state, or federal RFPs.
Fixed-price contracts are the most common type of contract that small businesses will bid on. In this type of contract, the final contract price is normally determined before work on the contract is started. There are many types of fixed-price agreements, and they are outlined below in detail:
The first type of fixed-price contract is the firm fixed-price contract. In this agreement, the agreed-upon price determined by the buying agency and the supplier is not subject to any changes. The supplier must perform the contract at the awarded price and in turn accepts all of the profits or losses that result from completing the contract at that price.
The second type is the fixed-price with economic price adjustment contract. In this type of contract, the price of the contract may be adjusted based on fluctuations in economic circumstances that are beyond the supplier’s control.
The third type is the fixed-price incentive contract whereby profits are adjusted and the closing price is determined based on the relationship between the final, agreed upon cost and the original target cost of the contract.
The fourth type, the fixed-price, level-of-effort contract, involves an agreement whereby a fixed price is set as compensation for a specified level of effort by a contractor over a predetermined length of time. If the level of effort on the part of the contractor goes beyond specified thresholds, the price of the contract may be adjusted by either inflating or deflating the price accordingly.
Another, less-common type of contract is the cost-reimbursement contract, in which the final price is decided late in the process, either when the work is finished or at some point during fulfillment of the contract. Cost-reimbursement contracts are very beneficial for start-up companies because there is little to no risk on their part, since they can legally stop work on the contract once the funds allocated for the contract have been spent. Suppliers have less risk of losing money in this type of contract, even if they run into difficulties while completing the work. Below are the different types of cost-reimbursement contracts:
The first are cost contracts, where a contractor is compensated with a predetermined amount of money that has been designated for the work.
The second are cost-sharing contracts, which pay contractors based on a particular portion of the contract that is being reimbursed.
The third are cost-plus-fixed-fee contracts, where reimbursement is based on the agreed cost of the contract, plus a fixed fee.
The fourth type of cost-reimbursement contract is the cost-plus-incentive-fee agreement, whereby a contractor is reimbursed for costs incurred during the fulfillment of the contract and an additional fee is added based on the relationship of the final cost to the target cost.
The last type of cost reimbursement contract is called a cost-plus-award fee, which is when a contractor is paid based on costs incurred and an additional fee is provided, the amount of which is calculated using a formula determined by the governing agency.
Knowing details about the various types of contracts available to businesses before bidding on government RFPs will ensure that you understand when payment for your services will be issued and what form it will take. With this knowledge, contractors can make the best possible decisions to ensure the success of their businesses.