Cost reimbursable contract advantages and disadvantages

Learning Activity/Discussion #1: “Contract Dynamics”

As per Module 7, Section 3, discuss the three main types of government and private sector contracts: time and materials, fixed price, and cost reimbursable, when they are applicable, and what are the advantages/disadvantages for each. As per your Business Plan, consider whether there is potential for obtaining such contracts, either on a primary or sub-contractual basis, and incorporate such information into your proposal.

Response 1:

There are 3 types of government and private sector contracts: time and materials, fixed price, and cost reimbursable.

Time and materials contracts is usually given to management of facilities or developing systems, meaning it leans more towards services. It is a combination of two different contract elements: cost reimbursable and fixed price contracts. For time, the contract would be a fixed hourly rate for direct labor cost with an additional fee to the rate for any unanticipated cost plus profit. The material portion is strictly the cost of the material. The advantage is, if the estimation of the project was higher than its cost, the remainder would be profit to the contractor. However, since the indirect cost and profit is in the hourly rate, the contractor needs to make sure that the unanticipated or indirect cost will not exceed the anticipated pricing. The contractor assumes risk of pricing and bidding.

Fixed price contracts are designed to be paid upon delivery and acceptance of the product or service. It includes fixed labor hour prices, fixed monthly billings, fixed unit price (if a product is being delivered), and others. Each represents a different contract based on what product or service is being provided, for instance, lease of an asset, or for a service, or management of a facility. The advantage of such contracts are that it’s a reliable source of income, no surprises, however if not accounting for unexpected expenses, the price would come out of the contractor’s pocket as this is a fixed price contract, no room for changes along the way.

Cost reimbursable contracts are usually contracted work that is paid when products or services are rendered in an acceptable manner. The contractor will incur the expenses, and the government will pay it (as long as it is within acceptable billable cost and not on non-contract related items). There are 3 types of cost reimbursable contracts: cost plus fixed fee – billed based on the total cost incurred to deliver the contract and a specified fixed amount as a fee set prior to the contract. The second if cost plus award which is based on the quality of the work. This is a higher risk contract as what if the quality of the work meets the contractor’s expectation, but not the governments, there would be a risk of losing any reward or profit. Last but not least, there is the cost plus incentive fee which is related to whatever cost savings the contractor can work on.

Response 2:

Three types of government and private sector contracts are time and materials, fixed price and cost reimbursable.

Time and Materials (T&M)

This type of contract includes elements of both cost reimbursable and fixed price (Module 7, Section 3, n.d.). The contractor receives funding associated with the work to produce or develop the agreed product, funds for labor, and funds that cover the material financial costs, covering some G&A overhead costs such as supplies as well (Subpart 16.6 – Time and Material, Labor Hour and Letter Contracts, 2016).

An advantage is that there is more flexibility for adapting as needed to fine tune a product or service to meet the customer needs exceptionally. A disadvantage is that as changes present, it can be difficult to identify accurate timelines and ensure deadlines are consistently met.

Fixed Price

Fixed price contracts are negotiated, rigid pricing strategies agreed by both parties for the completion or delivery of a finished good or service. All costs are identified clearly and the contractor must strictly followed identified projections to meet all fixed prices that were negotiated.

Advantages center on the strict planning associated with fixed pricing. There is a clear understanding of the funding obligation associated with the contract that will remain unchanged and there is it is always easy to identify the status for where a product or service is in the development stages. The disadvantages are that there is no wiggle room from deviation from the identified plan and there can be a delay in production due to the need to plan extensively.

Cost Reimbursable

The three types of cost reimbursable contracts are cost plus fixed fee, cost plus award fee, and cost plus incentive fee. Cost plus fixed fee are contracts for which a fixed fee is a set percentage that the contractor receives at the contract end for the work performed, in addition to the reimbursement of all costs of the contract. Cost plus award fee is where additional money over the reimbursable costs are decided based on contract performance and evaluation. Cost plus incentive fee is additional funds based on total allowable costs and total target costs (Subpart 16.4 – Incentive Contracts, 2016).

Advantages of these forms of contracts are that the contract is guaranteed through the term inclusive of costs identified on the contract. Contractors can evaluated the costs associated with completing the tasks and bid on a contract proposal based on these cost projections. Disadvantages are the dependence that the government will pay timely and accurately. There are potential issues with government funding with federal budget agreements that could cause work stoppage or lack of funding. Another disadvantage is that there could be potential cost overruns for which the contractor must absorb since it is not included in the quoted pricing approved by the contract. Pricing fluctuations can impact costs especially over a five year period.

For my business, The Monk and The Maiden, I would consider fixed price subcontracting for which I would be willing to pay an amount for a particular service, and in turn, I could expect to be paid a certain amount from each practitioner who utilized my space for conducting their development classes, events or readings. It would be relatively simply to establish the relationship that overall benefits all customers of the business as whole, and additionally, should be satisfactory for me and those who join me in creating this center for my community.

Learning Activity #2

As per Module 6, Section 3, please refer to the following NY Times article, "Selling a Business Involves More Than Money" (July 15,2016) and comment as to sale/succession and exit strategy dynamics. You may provide personal experience as examples, as well.

http://www.nytimes.com/2016/07/16/your-money/selling-a-business-involves-more-than-money.html?_r=0

Response 1:

I believe the last company I worked for is a great example to talk about the sale, succession, and exit strategy. I worked there from 2013 until January 2016 and during that time the owner sold and kept just 10%. While I was working there I notice that for awhile the owner was trying to prepare the only of his son that worked in the company to take the control of the company in the future, but he did not seem to succeed, he did not fully trust him and his son was not focus enough to be able to show that he has the capabilities to be in charge. I imagine that is what made the owner to consider selling his company, I personally don't know when the selling process began or the preparations to shape the company to look more appealing but in middle on 2014 I began seeing some changes that did not make many sense to me at the time, they were laying of people that had been there in the company for a long time, pushing to sale more, and cutting back on cost as much as they could. From the point to mid 2015, things were changing all the tie until they finally announced that the company was sold and they presented the new owner. They planned a transition of administration but the main transition at the begging was not of people but and implementation o ideas a change in the way we operated. During the transition time the previous owner stepped down from the CEO position and worked to support the sales team and the transition team. The CFO and president of the company was laid off and the new owner became the CEO and began the transformation of the company. For what I understand the new owner had with him a group of investors and their goal was to improve the companies sales and revenues and then when the company is in a good position sale it which I believe is what is happening now.

Response 2:

The process of selling a business is just as complicated as the process of starting one. In order to sell the business, one must understand business’s value and worth. The integral part of the process is to get business evaluated by professionals, as well keep clean books and records. The business owner should find a reputable valuation company that is specific to the industry. As it was mentioned in the article, one should hire a financial adviser as well to help plan and guide the company through the selling process. The second part of selling the business is preparing oneself emotionally. Business owners naturally are getting attached to their business, because it is their child per say. So it is important for the business owners to plan what they are going to do next.