Federal Contracting: Benefits and Drawbacks of Cost Reimbursement Contracts
The objective of this study is to examine the pros and cons of cost-reimbursement contracts from the view of the federal contractor and to discuss which elements of cost-reimbursement contracts tend to produce the biggest troubles for contractors and explain why.
Cost-Reimbursement Compared to Fixed-Price Contract
Cost-reimbursement or cost-plus is reported as a contract "where a contractor is paid for all of its allowed expenses to a set limit plus additional payment to allow for a profit." (GovWin, 2010, p.1) Cost-reimbursement contracts can be contrasted with fixed-price contracts, which are reported to be such that the contractors "are paid a negotiated amount regardless of incurred expenses." (GovWin, 2010, p.1) Fixed-price contracts make provision of payment of the allowable costs that are incurred in performance of a contract "to the extent prescribed in the contract." (GovWin, 2010, p.1)
In the fixed-price contracts, "an estimate of the total cost is established so that the government can obligate funds." (GovWin, 2010, p.1) This estimate is used as well in establishment of a ceiling or limit on the amount of costs that may be incurred by the contractor "without the contracting officer approval and that the contractor exceeds (at his own risk)." (GovWin, 2010, p.1) Cost-reimbursement contracts are such that may only be used when "uncertainties involved in contract performance do not permit costs to be estimate with sufficient accuracy to use any type of fixed-price contract." (GovWin, 2010, p.1)
The cost-reimbursement contract involves the contractor agreeing to make provision of its "best effort...
Federal Contracts There are several kinds of contracts that are commonly used at the federal level, including fixed-price and cost-reimbursement contracts. In order to understand them more clearly, and in order to compare them with other contracts, it is important to discuss them thoroughly. Fixed-price contracts are exactly what their name implies. They are set up based on a fixed and agreed-upon price, and that price cannot be changed (Barnett, 2003).
These different elements are important, because they make it difficult for the federal government to adjustment to large scale projects. This is problematic, because it means that inevitable cost overruns and delays will occur (despite using these agreements to deal with these issues). (Carr, 2004) Discuss which element(s) of cost-reimbursement contracts tend to produce the biggest troubles for contractors and why. The biggest elements that are giving contractors the largest challenges
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