Contract Type

3 Types of Government Contracts You Need to Know

Federal Government contracting is a major step towards prosperity for any small business. The profit margin is kept under control courtesy of rigorously competitive bidding, but that does not change the fact that government contracting can yield great rewards for small businesses over a period of a few years. One of the reasons for that is the fact that the Government keeps handing out projects to small businesses once a contract is rewarded to a worthy candidate.

There are a lot of things that you need to take under consideration when bidding for a government contract. The most important of these is the type of Government contracts that you will be bidding for. Now you may think that just because these contracts are created by one single Government entity, they will have the same impact on your business. This is not true. Different Government contracts influence your company in different ways. This is why familiarizing yourself with Government contracts and knowing the ins and outs of each variant is absolutely essential for you to survive, let alone thrive in the field of Government contracting.

There are various kinds of contracts that are issued by the Federal Acquisitions Regulation. Here, we will be looking at the three that are of the most concern to entrepreneurs owning small businesses.

1) Fixed Price Contracts

The characteristic of a fixed price contract is that the cost is kept as far away from the revenue as possible. The invoices for such contracts are event driven more often than not. This means that invoicing is sent when products and services are delivered. In other words, invoices are not sent out at regular time intervals. With that being said, the terms of the contract do not have to be met completely. Invoices can be sent out when a particular objective stated in the contract is fulfilled by the contractor.

The contractor is usually at the greatest risk when a fixed price contract is signed with the Government body. However, there is very little reason for companies to be intimidated by this contract or ignore it completely. One of the biggest perks of having such a contract is that it allows the company greater room to exercise their control and authority over materials and time management. This notion of a greater share of power appeals to entrepreneurs who would compromise security for heftier rewards.

In simple terms, these contracts always open up the window of opportunity to earn mega profits.

2) Cost Reimbursement Contracts

Cost reimbursement contracts are very much different from fixed price contracts since these do not separate cost and revenue. As a matter of fact, cost and revenue have direct connection in cost reimbursement contracts. There is a periodic time-frame for invoices to be sent out. In other words, the sending of invoices is not dependent on the delivery of goods and services. Monthly based on costs incurred during the period is a typical example of the terms upon which cost reimbursement contracts are created.

When costs are lowered, the revenue stream flows in faster. If there is a loss in revenue, then the terms of the contract can be changed in order to add additional tasking. This contract is extremely suitable for companies that like to play it safe and are afraid of taking leaps of faith and risks that can turn out to be more costly than assumed.

3) Time & Materials Contract

Time & Materials contract, also known as T&M contracts are quite different from any other Government contracts. The biggest difference that can be noted is that the Government directly subscribes to the workforce and labor of the contractor instead of appointing the contractor to produce specific results. In simpler words, the contractor is being hired as a temporary Government workforce. The direct hours are the deliverables in this case. Periodic invoicing exists under the terms of this contract. Since the Government is purchasing specific hours of labor, a contract that details the exact number of hours of particular labor categories is generally issued.

The risk involved in signing up for a T&M contract is relatively low. If the contractor fails to provide the required skills and is unable to show the perseverance required to accomplish the objectives in the field of work, then there is a risk of the Government accusing the company of breaching the contract. In most cases, the small businesses are up to the task that they are appointed for.

Learning more about these contracts can give you a head start in doing your research about Government contracting. The more knowledge you have about these contracts, the better equipped you will be to signing one in the not so distant future.

One thought on “3 Types of Government Contracts You Need to Know”

  1. I guess the phrases “forward-looking” would infree that if a democrat or libertarian were to win the presidency next, the DoD will suffer. Therefore making DoD contractors big losers. Sorry to make this political, but anti-defense and anti-big government parties seem to cause concern for DoD contractors. I work for one so I should know.

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