Introduction
In the current context of continuing business failures and mounting uncertainty in the global market environment, the concept of small business can benefit an economy’s efforts to achieve sustained growth. This paper will analyze fixed-price contracts and cost-reimbursement contracts in the light of fast advancement of the small business sector.
1. Fixed-price Contracts Vs Cost-reimbursement Contracts
A fixed-price contract is simply referred to a type of contract where the contract price is fixed and is unaffected by the resources utilized or time expended. In contrast, a cost-reimbursement contract, also known as a cost-plus contract, is a type of contract where the contractor is paid for the actual expenses he/she incurred. Both these contracts have a set of benefits and drawbacks for the business. Fixed price contract is really beneficial for the company to attract more number of clients because it offers them increased predictability. When an organization is concerned about the adverse impacts of fluctuating costs of goods or services on his business plans, the fixed price contract can be advantageous. It can also benefit the contractor to sustain long-term business relations with clients because there is less chances of seller-buyer conflicts when the contract price is fixed. Similarly, budgeting and profit estimation would be easy for the business when it offers fixed price contracts. The major disadvantage associated with this type of contracting is that the firm cannot charge the buyer additionally if the contract exceeds the budgeted cost. In case of cost-reimbursement contract, the contracting firm does not need to compromise the project quality to avoid loss because it will be paid for all the expenses it incurs plus a profit. Therefore, this type of contracting can aid the organization to remain to be a reputed player in the industry in terms of quality. However, the cost-reimbursement contract is more likely to result in vendor-buyer conflicts if the final cost of the project exceeds the estimated costs. As a result, this type of contracting may put the company in great troubles in times of market fluctuations.
2. Identification of Opportunities
As a small business, the aircraft manufacturer can enjoy greater opportunities compared to large businesses in general. In the given scenario, the organization can deliver greater quality aircrafts to the clients compared to large aircraft manufacturers. It is clear that large scale aircraft manufacturers need to focus on many projects at a time and this situation may reduce the quality of products delivered. In contrast, this small business deals with limited number of projects at one time and hence it can focus extensively on product quality, which is a major element determining the sustainability of a business endeavor.
Similarly, the organization may receive increased governmental assistance and trade concessions compared to large businesses. Today, the government has realized the fact the entrepreneurship and small businesses collectively constitute the backbone of the economy and therefore it offers enhanced opportunities for small business ventures. In this context, it is easy for this small aircraft manufacturer to win government contracts and thereby to gain edge over its large competitors. In the current intensely competitive market environment, such an advantage in the marketplace can benefit the company to develop its business fast and to confront with the well-established competitors effectively.
Likewise, the aircraft manufacturer can take better advantages of fast advancing technologies compared to its large competitors. It is easy for a small business to adopt newer technologies and to integrate them into their production processes so as to develop higher quality products at cheaper costs. At the same time, large businesses cannot do this effectively because they have complex production processes and might have entered into long-term contracts with suppliers. It is evident that adoption of newer and improved technologies can assist the business to improve product quality notably and to cut down operating costs dramatically.
3. Challenges of Cost-reimbursement Contracts
Although cost-reimbursement contract would assist the small aircraft manufacturer to avoid financial losses as a result of the market uncertainty, this type of contract tends to produce some troubles for the business too. The most significant challenge is that it prevents the contractor from taking advantages of the favorable market price. To be more precise, the contractor is paid the project cost plus a fixed percent profit under the cost-reimbursement contract method and hence the contractor is denied the chances of making huge profits during favorable market conditions. There is no doubt that this scenario would contribute inadequately to the developmental efforts of small scale aircraft manufacturer. Another demerit of cost-plus contract for the small contracting firm is that it usually earns low profits compared to other forms of contracts. Hence, the profitability of the project is limited when the aircraft manufacturer adopts the cost-reimbursement contract. In many cases, it has been identified that the contractor’s efforts to cut down project costs by enhancing performance efficiency would not benefit him/her anyway. To illustrate, even though the contracting organization attained greater level of working efficiency, it is paid only a fixed percent profit in addition to the actual project costs. Therefore, the firm is not paid appropriately for its extra efforts to enhance the working efficiency. This situation is not good for a small aircraft manufacturer that strives to expand its business spectrum. The firm’s growth opportunities may be limited when its additional efforts go unpaid. In addition, the top management would not make any attempt to enhance the firm’s operational efficiency when its extra efforts to minimize project costs are not appreciated properly. In short, the cost-reimbursement contracts may inhibit the growth of the small business.
4. Recommendations
I would recommend labor-hour contract in this context for the small business that produces remote control aircraft. Labor-hour contract is a type of time and material contract where the contract neither specifies material requirements nor the contractor supplies them. Here, the principal (owner) of the contract is obliged to supply the materials and to pay a predetermined rate of compensation that covers total costs and a certain percent of profit for a negotiated number of labor hours. This form of contract allows fixed rates for each hour of direct work. This type of contract is usually applied in engineering and designing services. Labor-hour contract is good for small businesses, because small business do not take up long term projects. To be specific, it has the potential to maximize profit and has great flexibility in terms of project modifications. Small businesses usually will have to make immediate decisions and project alterations. In emergency situations, labor-hour contact has been proven more effective. The most potential feature of the labor-hour contract is that it offers the business a fixed rate of compensation that covers overheads and a profit. As a result, the business can operate without the fear of operating losses, and hence it can perform different project tasks more efficiently and effectively. In other words, the organization does not need to compromise material/work quality so as to make a profit. Since the contract does not specific the quantity and quality of raw materials, the business is encouraged to choose appropriate raw materials that would add to the value of the work completed.
5. Recommendations for Large Businesses
“A performance based contract is a form of incentive type of contract in which the contractor is not paid based on the method used for performing the work, but is paid based on the results achieved” (Galluzo, 2011). Performance based contracts is the best option for large business, because major focus of long term projects will be the result of the project that the company wants to achieve. In other words, it prefers outcome to short term profit. Large businesses usually have contingency fund to address emergency situations, and therefore, it does not have to depend on external sources of finance so as to meet contingencies. For instance, under performance-based contracts, vendors can easily change their staff or hire new ones without facing any technical or strategic trouble. As Gajurel (2013, p.40) points out, it is important to note that a performance based contract is a long term contract. According to the writer, large corporations are generally equipped with all necessary facilities and resources to achieve intended outcomes over a long-period of time. To illustrate, those companies will have the capacity to undertake long-term management; to estimate and make provisions for cost overruns; and to design and implement necessary programs for the success of the project (Gajurel, 2013, p.40). In addition, large businesses have the ability to hire experienced and quality employees who can contribute significantly to the long-term project outcomes. Needless to say, the accessibility to a broader range of valuable resources such as finance, materials, and labor makes it feasible for large businesses to choose performance based contracts (Gajurel, 2013, p.40). In addition, huge corporations have the ability to spread risks over their relatively broader supply chain so that huge blows in revenues could be avoided.
6. Plan
The following points will show how my company would justify the government to award my company the contract
Small businesses survived to a marked extent during the global financial crisis 2008-2009.
Small scale industry has been driving economic growth in the United States over the last several decades
According to a report from the Council of Economic Advisors (May 2011), small businesses created more than 60 % of new jobs in the country during the previous 15 years (cited in Hill, 2013).
Small businesses can easily and effectively respond to problems
Small businesses have better control over their overhead costs
As a growing concern, this small scale aircraft company would pay particular attention to quality rather than profitability
A growing business is not likely to rely on poor quality materials or unskilled labor
Decision making process will be faster in a small business organization
This type of business has good control over their managerial activities
Conclusion
References
Galluzo, m. d. (2011). Performance based contracting A concept for cost-effective operation and maintenance of wind power plants. Master Thesis. Gotland University. Retrieved from http://uu.diva-portal.org/smash/get/diva2:691622/FULLTEXT01.pdf
Gajurel, A. (2013). Performance-Based Contracts for Road Projects: Comparative Analysis of Different Types. US: Springer Science & Business Media.
Hill, B. (2013). Big Business Vs. Small Business. Retrieved from http://smallbusiness.chron.com/big-business-vs-small-business-59135.html
