Three Types of Government Contracts and What You Need to Know About Them

If you are new to the DoD contracting space, it is important to understand that not all contracting work is created equally. Every business day, the DoD posts new contracts available for bidding, which to the untrained eye appear chalk full of industry jargon and convoluted language. Depending on the type of work you are bidding on, the government offers different types of contracts to negotiate your compensation for completing said work- each with its different nuances, benefits and varying levels of risk. Before you dive in and grab up a contract of your own, you should know what you are getting yourself and your employees into. Doing this will help you mitigate any risk involved so you can plan ahead and maximize your profitability.

Fixed-Price Contracts

This is the most basic, standard form of contract. Fixed price contracts are exactly what they sound like. In this agreement, contractors are provided with a description of the project and asked to submit a bid for their price to complete it. While fixed-price contracts will sometimes include a clause to renegotiate the price, these clauses are not always present and should be considered an exception to the norm for this contract type. For the most part, it is up to the contractor to provide a competitive bid that will accurately cover the costs to complete the work.

In this contract arrangement, the contractor assumes a healthy amount of risk depending on the integrity of his or her operations. Additional costs incurred but not anticipated during completion of the work are often not compensated. For fixed-price contracts to be a profitable venture, it is essential that both parties are completely clear on project specifications and final deliverables. Accurate forecasting of costs, and highly efficient execution of work are also paramount to success. While fixed-price contracts offer great opportunity, it is the contractor who runs the tightest ship that will fully reap the rewards of this work.

Cost-Reimbursement Contracts

On the other end of the spectrum is the cost-reimbursement contract. While certainly not devoid of risk, this contract type gives the contractor a greater chance to recoup unexpected costs that pop up during completion of the project. The cost-reimbursement contract allows a contractor to submit an upfront quote that establishes a cost maximum. Then, once this cost ceiling has been approved, the contractors proceeds and can file for reimbursement of costs incurred as they complete the work.

While these contract types are often lower risk for contractors than the fixed-price contract, they also usually offer a lower profit margin, thus requiring contractors to be more competitive in their bidding. While the incentive for efficiency might not be as upfront as with a fixed-price contract, it becomes imperative if you wish to turn the biggest profit off a competitive bid.

Incentive Contracts

These contracts types are created to allow the DoD to customize the project work by incentivizing one or more important aspects and focus the contractor on the areas that are important to the government. Incentive contracts will offer some sort of positive or negative incentive for the completion of (or failure to complete) a predetermined objective, whether it’s completion date, reduced cost or some other form of project objective.

Incentive contracts offer good opportunity for contractors who are fully aware and confident in their capabilities, as the objectives are clearly defined. However, care must be taken as these contracts types are often chosen when it’s difficult for the DoD to determine the exact cost or realistic timeline of a project.

The one common characteristic of all DoD contract types is that creating as much efficiency as possible in your operation will always give you a competitive edge and increase your margins. To learn more about how Odyssey can help your business add efficiency to its DoD processes, contact us.