To begin with, it is important to define a contract. In simple terms, a contract can be referred to as a binding lawful relationship obliging a seller to supply stores or facilities and a purchaser to reimburse for them. A contract involves different commitments that force the government to spend adopted funds. Therefore, a contract sets up provisions that are perfect and definite about the performance and relationship necessities of the participants involved. When it comes to a government contract, and an agency wishes to obtain services and goods, a contract can be a suitable way binding the participants to their agreement. An expression “contract type” is related to many meanings. It may indicate diverse compensation arrangements, whereby they are of many types. Nevertheless, most of the compensation arrangements lie in two groups. The two groups include fixed price and cost reimbursement. On the other hand, a contract type indicates diversity in the structure or form of a contract. For instance, the form of a contract may be a purchase order, letter contract, completion, term contract or a performance-based contract. Lastly, contract type can also be used in identifying a planned end purpose. An instance of this type of contract is a contract like an operating and management one, development and research as well as supply contract. Itoh (1993) argues that there is no contract type that is right for each contracting position. Selection should be carried out on a case-by-case foundation, bearing in mind the performance programmatic and fiscal factors. The objective is to choose the contract type which can end up in the optimum business plan between the involved participants.
Selection of a Contract Type
In-state procurement, the authority sets out a contact type in the conditions and terms of the solicitation. In the field of non-competitive purchasing and a reduced number of bargain purchase business combinations, a supplier can be offered a chance to suggest diverse contract types than envisaged by the Government. The selection of a contract type provides the supplier with the motivation to act in an effective and efficient way. Hence, the selection of a suitable contract type influences the Government’s capacity to achieve reasonable and fair prices.
Responsibility of a Contracting Officer
A Contracting administrator is answerable for choosing a suitable contract type. Nevertheless, in most occurrences, the contracting administrator will be accountable for outlining the work statement and other performance requirements. Requirements persons, conversant with the mechanical degree and requirements of doubts in the work statement, are in a significant position to provide the Contracting administrator with data essential to this contract selection. Therefore, their duties are seen as an essential part of the purchasing process. Holmstrom (1982) states that expenditures for services and goods are viewed not as the trade of contracting persons, but as the necessity of officials to pledge and use the services and goods achieved.
How Work Statement Influences Contract Type
The SOW is a crucial element in determining the choice of a contract type. The degree of clarity, details, and documentation of performance goals and anticipations in the work statement determine all other stipulations of the contract, starting with evaluating arrangement, contractor’s privilege to fee, and the degree of a contract running. According to Gaynor & Pauly, this suggests that, the better the level to which the authority can convey its wants in a clear and accurate way, the better the prospect that the supplier will agree on better execution and expenditure risks linked with a type of contract. There are issues that need to be tackled when the Work Statement is being prepared. These issues are:
- The risk related to contract implementation.
- Whether the job can be done.
- The environmental, technical, schedule, financial and regulatory risks.
- Whether the human hours and labor needed for performance can be assessed with any level of assurance.
- Whether the needed material and equipment can be anticipated with any level of assurance.
- Possibility of unknown conditions.
- Quality of State Furnished Information and Services.
Anytime there is not much or no functioning peril or the level of menace can be forecasted with a satisfactory level of cert, a firm-fixed-price contract is ideal. Nevertheless, when qualms are substantial, more fixed-price or cost-type contracts ought to be taken into account. To honor a fixed price contract while the endeavor has momentous uncertainties could end at an ultimate elevated price, via later fiscal petitions by the contractor.
Categories of Contract Types
Fundamentally, there are only two key compensation types of contracts. The first one is fixed-price while the second one is cost reimbursement. In these types, fixed-fee contracts are on the one side, and cost-plus-fixed-fee contracts are on the other side. There are numerous profit /compensation arrangements affording varying levels of contractor obligation, dangling upon the level of ambiguity implicated in contract execution. An assortment of contract categories is the main method of allotting performance and cost peril between the contractor and the Government. When implementation peril to the free-lancer is least or can be forecasted with a suitable level of inevitability allowing for sensible price estimations, a firm fixed-fee contract is favored. Nevertheless, as qualms rise, other set cost or price type contracts have to be utilized to ease the uncertainties and prevent placing too huge cost peril on the free-lancer. These two main compensation types of fixed fee, as well as cost recompense, with the diverse categories of fixed fee and rate reimbursement contracts covered therein, are depicted below. Moreover, a catalog is also offered of more contracts that do not suit within the types of fixed fee and rate reimbursement contracts, then again fit in the connotation of contract formation or procedure.
Contract Type Preference
In general, a firmly fixed fee agreement is the most preferred while rate reimbursement category contracts are less preferred. Nevertheless, choosing a contract depends on sole situations of each distinct incident with the concession of sealed tendering. Sealed tendering has to be firm-fixed valued or fixed valued with monetary price alterations.
Profit/compensation is the basic aim of a commercial enterprise. Nevertheless, there are circumstances in which the revenue motive could be less important. The DOE, as well as contractors, ought to be involved in binding the proper motive to labor for economical and effective contract implementation. Consequently, partakers should pursue to confer and value the contract category suitable to quicken an outstanding implementation. There is the proper appliance of these goals on a contract-by-contract base consequence in a variety of many contract categories.
There are incentive skills to be used to improve contractor functioning for an extensive diversity of job requirements, but those with distinct performance goals. This concedes for performance requirements such as quality, timeliness, quantity to be jointed to performance obligations. In performance–established contracting, all facets of achievement are designed around an objective/ purpose of a job to be done, as divergent to the way in which it is done. It is intended to certify that freelancers are granted freedom to define how to convene the authority’s performance goals, how apt implementation quality degrees are attained, and that compensation is only constituted upon accomplishing these heights. The strategy to victory observing the use of motivations in meeting mechanical, agenda and rate standards is the perceptive selection of suitable goal measures to estimate the contractor’s accomplishment of contract execution purposes. It is hence compulsory, under performance-founded contracts, to launch a Government attribute assurance strategy that defines how freelancer operation will be gauged against the operational standards.
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Categories of Contract Type
In a fixed-fee contract, a freelancer must provide the item for consumption or deliver the amenity for a pre-set strong fixed fee or top limit ascertained in the contract agreement. This contract type consigns the contractor’s top risk, total responsibility for entire costs and consequential profit or loss. It provides top motivation for the freelancer to regulate costs and function effectively and inflicts the lowest administrative load upon the toning parties. There are many categories of fixed charge contracts. The list below has the differences in fixed-price deals that the authority uses.
- Firm-Fixed-Charge Contracts
- Fixed-Charge Contracts with Fiscal Price Alterations
- Fixed-Charge Motivation Contracts
- Fixed-Cost Incentive Contracts
- Fixed-Charge Contracts with Upcoming Cost Redetermination
- Fixed-Charge Contracts with Upcoming Cost Redetermination
Under a cost-compensation contract, a supplier agrees to disburse the best attempts to acquire the specified need, within the assessed amount created in the contract. If the agreement is not performed at the time the supplier spends the funds, the supplier has no duty for further action, unless the agreement is modified to raise funds. Cost compensation contracts are the following:
- Cost Agreements
- Cost-Distribution Contracts
- Cost-Plus-Motivation-Fee Contracts
- Cost-Benefit-Award-Charge Contracts
- Cost-Benefit-Fixed-Charge Contracts
There are some contract categories, which do not plunge into one of the primary types of fixed-charge and cost-compensation contracts. These agreements are:
- Performance-Founded Contracts
- Indefinite-Quantity Contracts
- Definite-Capacity Contracts
- Requirements Contracts
- Time-and- Labor & Materials Contracts
- Letter Contracts
- Fundamental Agreements
- Federal Provision Schedule
Risk Factors Considered In Determining the Appropriate Contract Type
The contract type ought to be equal to the degree of risk in the act of the work statement. The aim of a contact type selection should be to create a pricing plan that gives a reasonable and fair value of a specified work statement`s performance. To achieve this, one should weigh cost and technological risks and hand them over to either the contractor or the Government. If much hazard is assigned to the supplier, there will be extreme pricing possibilities included to cover up the level of risk. On the other hand, if there is no sufficient hazard left for the supplier, there will be little or no motivation for implementing management ability to act upon efficiency and in so doing control expenses. For this reason, it is important for an administrator of the government to understand the hazard factors that ought to be taken into account when determining the contract type. These factors include:
Complexity and Type of Necessity. Requirements that are unique and complex to the authority create the possibility of alteration in performance, doubts and technical direction, placing hazard assumptions on the authority. Hence, great doubts would result in cost compensation contracts as this category of collection shifts risk cost from the supplier to the authority. As requirements happen again, they permit a large degree of assurance related to attaining the aim of the necessity. In this case, risk cost should shift to the supplier, creating an ability to use a fixed cost contract type. An example of a necessity that can be best suitable for a value contract type is a contract for the operation and management of authority facilities. This is where agenda requirements and financial support change year by year. In contrast, such facilities might have requirements/ operations with constant performance accounts that make it appropriate for a fixed price contract type.
The urgency of Requirements. If urgent, the authority may assume a great proportion of hazard, or offer motivation to ensure well-timed contract performance. An example of this urgent want that might be suitable for a cost contract type can be the continuation of the act of a facility unspecified by a defaulting supplier.
Period of Performance. When the contract time lengthens over a long period it is hard for the supplier to set up accurate agreement value and cover-up all incidents in performance. The long time of the act, the threat of budget and performance levels increase. Consideration ought to be given to the utilization of fiscal price alteration terms or extra re-pricing mechanism.
Technical Capability. Consideration ought to be offered to whether the attempt was once done, whether a technological need ever existed or whether the need is new. This will control the degree of supplier`s technological ability necessary to carry out contract needs. For instance, meeting mechanical requirements that need a high level of technical ability might have a great risk to attain in an efficient and effective manner, and this is a matter to consider when determining a contract.
Financial Capability. Concern should be offered to a supplier’s financial risk. For instance, small organizations with partial expertise might not have the financial backing to carry out the requirement in a well-timed and efficient way.
Performance/Fee Incentives. Incentives may be put into consideration when measurable and realistic targets are set out in the work statement and profitable project action is identified. In order for measurable and realistic targets to be created, good technological, schedule and price baselines are important. Authority technical persons should be capable to monitor supplier’s actions and make well-timed decisions on mechanical matters. A mixture of performance and price inducement should be utilized as applicable. Performance motivation should be put into consideration when the authority desires development in performance. Price incentives ought to be utilized to motivate the supplier in order for him/her to manage costs in an effective way.
Adequacy of the Supplier’s Accounting Scheme: Before making a decision about a contract type other than firm-set-price, an officer shall make sure that the supplier’s accounting scheme will provide well-timed tracking and exposure of necessary information in the structure needed by the planned contract type. This reason may be critical when a set price type contract needs price review while the action is in evolution, or when a charge reimbursement contract is well-thought-out, and all existing, or past encounters with the supplier have been going on a fixed-charge basis.
Concurrent Contracts. If an action under the planned contract includes concurrent action under additional contracts, the effect on these contracts, including their fee arrangements, should be put into consideration. For instance, a contractor with security contracts at many sites should contain good control and knowledge of the technological and charge aspects needed, hence leading to a cost-benefit incentive and fixed cost contract types. However, two matters require to be considered under these conditions:
- Whether the supplier has mutual concurrent and fixed cost types of contracts, and how the supplier ensures no intersect charging of overheads?
- What type of contract does the supplier hold for similar or the same services?
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In economics, compensation arrangements can be termed as significant tools for the ineffective management of financial institutions. These are arrangements that serve important goals, such as retaining and attracting a skilled workforce, encouraging improved individual and organizational employee functioning, and delivering retirement security to workers. Researchers claim that a poor planed compensation arrangement is in a position to provide employees and executives with enticements to take unwise risks, which are not even with the abiding wellbeing of the firm. Organizations suppose that faulty motivation compensation exercises in the commercial industry are one of several aspects that contribute to a financial crisis. This paper discusses the general types of contract compensation arrangements and various affairs concerning special Contract Compensation.
Shareholders, investors, and associates of a protected economic institute for an esteem union have a concern in affiliating the comforts of directors and the staffs of the organization with its abiding strength. Alliance of the welfares of members or shareholders, and employees, however, has not always been sufficient to secure the soundness and safety of an institution, daunt extreme compensation, or prevent conduct that can lead the establishment to significant pecuniary loss. Employees and managers of a covered fiscal organization may be inclined to endure the extent of risk which is erratic with wide public dogma goals. In addition, at larger organizations, members or shareholders could have inconvenience effectively watching and adjusting the motivation-grounded compensation arrangements all over the organization that may affect the firm’s risk profile, just as with enlarged disclosure provisions. As an outcome, regulation and supervision of compensation for enticement, like with other features of fiscal oversight, can perform an essential role in assisting to confirm that motivation compensation exercises at covered fiscal institutions do not intimidate their soundness and safety. Organizations have designated to suggest rules, instead of procedures, to be able to inaugurate general necessities pertinent to the established compensation provisions of all included fiscal institutions. The anticipated rule would add on present regulations and progressing supervisory endeavors of the organization. The anticipated rule outlines compensation to signify all indirect and direct expenses. It also outlines benefits or fees, both non-cash and cash, granted to, awarded to, or merited by or for the advantage of every covered individual in substitute for services delivered to the embraced financial firms. Comprising, but not reduced to, benefits or payments are pursuant to an engagement contract, benefit or compensation agreement, cost arrangement, benefit, stock preference plan, post-employment advantage, or compensatory plan.
Special Contract Compensation Arrangement
To discuss this topic, this paper will evaluate how the management of an organization can make a special compensation arrangement for the organization`s workers. This is aimed at motivating the workers and hence upraises the production as well as services rendered. The basic goal of each director is to facilitate team and individual performance. There are many challenges to management. One of the main challenging elements is choosing which ways of compensating workers would promote individual action without delaying group performance. Group reimbursement can be a method to raise productivity while trying to improve and monitor individual acts at a similar time. There are important differences between individual and team compensation.
Team compensation is utilized when a joint effort is crucial. In mechanical fields like software growth, there might be an interdependent group creating an ultimate deliverable. These groups are authorized as to accuracy and speed, assuming every individual in the team is needed to finish the job within budget and on time. The reimbursement of the team is scaled in proportion to the utmost pay size depending on what time or how to fit the group completes the job.
Individual reimbursement is the custom in a lot of industries, where salaries are paid based on personal performance. It can contain hourly pay, sales fee, and subjective regular reviews. While jobs may be tangled between the members of a group, each employee is considered and compensated in regard to his/her involvement in the group, and not the group’s final deliverable. Among those who obtain this kind of reimbursement are commission traders, employees of non-technological labor sites and assembly and many others.
Team Compensation Advantages
In team reimbursement, employees might perform well and not bring the group down. This is in particular so in plan-based tasks, which need every group member to finish a job before other members of the group can move on to another stage of the task. Data are mutual when groups are assessed and compensated as a team because the motivation to withhold data for personal benefit is reduced.
Individual Compensation Advantages
Individual reimbursement is based on personal performance in spite of group performance. This offers higher payment to high-achieving workers and lower payments to low-achieving workers. It creates competition between workers for kudos and payment; as a result, employees are more motivated to perform. It also stays away from punishing workers based on the reduced performance of team members, ensuring better morale of the employees. This reimbursement may also appear personal, more than ever to high-performing workers.
Disadvantages of Team Compensation
This type of compensation can be applied to discrete workers accepting too much responsibility while others are compensated for deprived performance. Quarrels among the workers, in this case, may reduce their morale and damage the end product. Power battles for repute when a chore goes satisfactory can result in a group benefits model.
Disadvantages of Individual Compensation
Individual reimbursement can bring up immoral rivalry as in commission deals when team members conflict over a client or a transaction. Workers’ bravado for advanced positions or levels at the elimination of coordination can originate from this system. Data and work procedures might pool with inspired workers to the barring of persons who require to be trained.