CON 217 Cost Analysis and Negotiation Techniques

Develop a comprehensive essay comparing the advantages and disadvantages of the cost-based and price-based DoD contracting methods.

Introduction

The DOD (Department of Defense) has the authority of for implementing non-traditional methods of contracting for adapting in a better manner within the competitive market place (Apte, 2016). Such projects focus on non-traditional contracting tools to the disposal of DOD along with their merits with an evaluation regarding the ways on which DOD might efficiently leverage the existing and likely authorities that can prove them as a competitive buyer within advancing technology market (Apte, Rendon & Dixon, 2016). It is also gathered that major contracting methods employed by the government includes micro-purchases and basic acquisition. DOD involves direct purchases through an agency, regulatory processes and ensures supervising contractor performance. Considering the same, the objective of this essay is to analyze the advantages and disadvantages of cost-based contracting methods. It will also explain the advantages and disadvantages of price-based Dod contracting methods. Through analyzing the advantages and disadvantages of such contracting methods, practitioners within the field offered first-hand awareness accounts along with non-traditional contracting experience.

Discussion

Advantages Cost-Based Contracting Methods

Cost based DOD contracts offer for the payment by contracted of the contract’s actual cost along with a stipulated or agreed profit (Bastola, Findley & Woodward, 2015). For this reason, under a cost based contract, the price of DOD contract is determined through adding the real cost of direct material, expenses and labor along with a specified amount for covering the contractor’s overhead costs along with an predetermined profit. Certain advantages are observed in case of cost-based contracting methods those are explained. In this type of contract, for the contractor there is less risk of loss taking place from altering prices, improper anticipations as well as underestimated quotation and all such agreed expenses are recovered (Bastola, Findley & Woodward, 2015). For the contractor there is no issue of bargaining that makes sure work of providing quotation is quite simplified. Advantages of such contract for the contracted consider that contract is settled at a reasonable cost and there is no bargaining problem which saves time. Moreover, the contracted also attains the advantages of the price drops of labor and material.

Cost based DOD contracting methods are entered into, in consideration to several advantages. This contracting method is implemented in case it is not possible to anticipate its cost with great accuracy because of unstable prices while the contract is carried out or when it is spread over longer time and materials prices, labor rates and many other factors those are deemed to fluctuate (Bhatia, 2016). These contracts are deemed to be advantageous in case where it offers an emergency and less time in contract price negotiation and in such situation the work is highly vital than cost. Cost based DOD contracting methods are considered advantageous in case a contract involves a government department (Bastola, Findley & Woodward, 2015). In this case cost based DOD contracts are beneficial both to the contracted along with the contractor as neither of these parties are ready to lose and a fair price is provided by contracted along with that a reasonable profit is attained by the contractor (Dixon, Apte & Rendon, 2015).

One of the major advantages of employing cost based contracts is that it has a tendency to result in superior quality project. Contractors are not needed to cut corners due to the reason that they realize they might be paid for every expenses which they incur cost based profit (Gera & Maddox, 2013). In certain instances, final costs associated with such projects will be less in comparison to a bidding model as the contractor does not have to encompass certain additional protection for safeguarding themselves.

Disadvantages of Cost-Based Contracting Methods

Cost based contracting methods might also present certain disadvantages for the contractor and the contracted those are explained. Benefits on the consideration of favorable market price are deprived. The earned profit is deemed to be low and the records along with books are maintained in a confidential manner (Janjevic & Ndiaye, 2016). Another disadvantage is that profit is generally relied on cost percentage along with an effective working which decreases cost and will not attain any advantage. In addition, price of the final contract remains uncertain and with the budget it is difficult to decide the budget cost. It is also evidenced that contractor might deliberately experience increased prime cost for increasing the profit.

The major disadvantage of this DOD contract is that there is a potential for certain disputes regarding the items that are costs and the costs those are calculated (Kani, 2014). It is deemed to be vital that there must be a comprehensive contract which takes into account all contingencies and explains in great detail all the costs for calculating indirect costs. Major issue that can be faced by the buyers of a cost based DOD contract is uncertainty associated with fixed cost. The manner in which price that exceeds the budget can be avoided that considers incorporating a clause within the contract which increases total cost based features within the project that safeguards buyer from surprise once the contract ends (Lene & Poppler, 2014).

Another major disadvantage of using a cost based DOD contract is that it is difficult to realize how much the cost of project will be in advance. This results in high uncertainty and if a person is attempting to work based on a budget that can turn out to be dangerous. Such kind of contract also results in a contractor to have fewer causes to be effective within the process. Once they are inefficient, they are supposed to be paid with profit in their work (Makowski, Ricketts & Tidwell, 2016). Certain other disadvantages of this type of contract is that the overall cost of the project is drastically unknown before the start of the project and no incentive for the contractor is deemed to be efficient in the use of materials, labors or equipments and minimum efficiency is observed to maximize the profit. Another disadvantage includes that the owner needs to maintain strict control that can turn out to be costly or difficult.

Advantages of Price-Based Dod Contracting Methods

Any buyer or seller enters within a price based DOD contract through agreeing upon the final cost associated with services and goods that is developed by the contract signed by both parties and are agreed to honor (Shiver & Widell, 2013). Certain advantages associated with a price based DOD contract facilitate a small business in deciding whether to implement an option. A major advantage of the price based DOD contract is that this facilitates small businesses to deal with the cost of hiring out of the company as the business along with the contractor determines overall agreement value before signing. This type of contract offers small business with a clarified picture regarding how much it will cost to hire independent contractor devoid of the surprises that occurs later while working (Shiver & Widell, 2013).

Another advantage of the price-based DOD contracting methods is that at the time both sides realize the details of the contract, there is less stress on working relationships. A price based contract offers extremely good value that leaves no room for argument over an agreement’s duration (Makowski, Ricketts & Tidwell, 2016). Lack of any type of difficult contract escalators facilitates in decreasing the misinterpretation risk that can go against within the civil court in case the contractor takes a decision of suing the contract once he interprets the agreement. This might facilitate a small business in gaining much more in comparison to contract value.

Another advantage of price based DOD contract is that the language of fixed price agreement is effective in controlling the professionalism and effort that must be exercised by a contractor based on the project along with work quality produced by contractor (Makowski, Ricketts & Tidwell, 2016). If it is deemed that contractor did not put enough effort ensuring people are within their legal rights within the agreement terms for terminating any contract and withholding the payment. The contractor must also make sure within civil court in making attempts for recovering owned money within the contract so that people can have detailed records for proving carelessness prior any contract termination.

Another advantage of price based DOD contract is deemed to be a contract that rest on an independent contractor. Being a hiring party, people does not have any obligation to offer further compensation of the contractors cost that includes fuel and equipment purchase costs as the contractor is working within price based contract (Lene & Poppler, 2014). These facilities the contract to be confined within budget of small business along with decreasing the potential of the contractor in submitting high expenses reports for increasing the agreement value.

For the contractor or service provider there are several advantages of price based contracts for they do not require thinking of variable elements that includes weight of paper stock within a printing job along with dealing with consumers over mineral costs. In case the contact is in place with the company’s price based contracts, the consumers can attain bids on contracts which must not include variables like mayoral substitution or hourly labor charge. There are majorly two distinct types of price based DOD contracts in which the consumer pays one single set of amount to a contractor devoid of the fact that there are certain other factors namely materials or time. Another one is renowned as adjustable contract that encompass a fixed maximum price and allows foe decreased target price. This offers certain advantage to the contractor as it provides him certain leeway. The person considers conducting the job being specified for target price and certainly the contract will encompass certain clauses that facilitate him in enhancing the price to the ceiling.

Disadvantages of Price-Based Dod Contracting Methods

Price based contracts are deemed to have several disadvantages. One of such disadvantages is that in case the seller underpriced the work, they might attempt to develop profits through charging more than the necessary amount on change orders. Moreover, another disadvantage is that the seller might make an attempt to complete certain procurement work statement in case they start to lose money (Rendon, Apte & Dixon, 2015). Price based DOD contract needs increased work for buyers in writing procurement work statement. Another disadvantage of this contract is that a price based DOD contract can be expensive in comparison to cost reimbursable contract in case the procurement work statement is incomplete and the seller requires adding for the enhanced risk (Petrucci, 2014).

Price based DOD contracts are considered to be important for the government and at the same time this carries high amount of risks to the contractor. This is due to the reason that within the price based model and the government contracts with such institution for a specific derivable set at a given price. For such reasons, if the expenditures are observed to be more that price based DOD contracts, the institution must deal with cost overruns (Miranda, 2014).

Conclusion

The objective of this essay was to analyze the advantages and disadvantages of cost-based contracting methods. It also explained the advantages and disadvantages of price-based DOD contracting methods. It is gathered from the paper that cost based DOD contracts offer for the payment by contracted of the contract’s actual cost along with a stipulated or agreed profit. For this reason, under a cost based contract, the price of DOD contract is determined through adding the real cost of direct material, expenses and labor along with a specified amount for covering the contractor’s overhead costs along with an predetermined profit. Moreover, a major advantage of the price based DOD contract is that this facilitates small businesses to deal with the cost of hiring out of the company as the business along with the contractor determines overall agreement value before signing. The essay also revealed that the major disadvantage of this DOD contract is that there is a potential for certain disputes regarding the items that are costs and the costs those are calculated.

References

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Apte, U., (2016). Big Data Analysis of Contractor Performance Information for Services Acquisition in DoD: A Proof of Concept. Naval Postgraduate School Monterey United States.

Bastola, J., Findley, K.E. & Woodward, N.T., (2015). Analysis of contract source selection strategy (Doctoral dissertation, Monterey, California: Naval Postgraduate School).

Bhatia, G.V., (2016). A game theory approach to negotiations in defense acquisitions in the context of value-driven design: An aircraft system case study (Doctoral dissertation, Iowa State University).

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Gera, R. & Maddox, J., (2013). Price Analysis on Commercial Item Purchases Within the Department of Defense (No. NPS-CM-13-113). Naval Postgraduate School Monterey Ca Dept Of Applied Mathematics.

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Kani, S.A.P., (2014). Power management and frequency regulation for microgrid and smart grid: A real-time demand response approach. Montana State University.

Lene, C.L. & Poppler, D.M., (2014). Army contracting workforce development building core competencies and skills(Doctoral dissertation, Monterey, California: Naval Postgraduate School).

Makowski, S.E., Ricketts, B.M. & Tidwell, S.M., (2016). Impacts of transitioning from firm fixed price to fixed price incentive firm target contracts in PEO Missiles and Space(Doctoral dissertation, Monterey, California: Naval Postgraduate School).

Miranda, L.D., (2014). NAICS impact on small business set-asides. Naval Postgraduate School Monterey Ca Graduate School Of Business And Public Policy.

Petrucci, D.J., (2014). Improved affordability in DoD acquisitions through strategic management of systemic cost risk (Doctoral dissertation, Massachusetts Institute of Technology).

Rendon, R.G., Apte, U. &  Dixon, M., (2015). Big Data Analysis of Contractor Performance for Services Acquisition in DoD: A Proof of Concept.

Rendon, R.G., Apte, U. & Dixon, M., (2015). Big Data Analysis of Contractor Performance for Services Acquisition in DoD: A Proof of Concept.

Shiver, D. & Widell, C., (2013). Demonstrating the Environmental & Economic Cost-Benefits of Reusing DoD's Pre-World War II Buildings. Bay Area Ecnomics Emeryville Ca.

Shiver, D. & Widell, C., (2013). Demonstrating the Environmental & Economic Cost-Benefits of Reusing DoD's Pre-World War II Buildings. Bay Area Ecnomics Emeryville Ca.