Management
CO: “Government Contracting”
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Review the Presidential Directive on Government Contracting found in the lessons area.
Why does the President want to reduce Cost-reimbursement contracts?
Why is it preferred to use a Firm Fixed type contract?
Who accepts the greatest risk under each type of contract?
Why is competition favored over sole source?
ANSWER
In a memorandum for heads for the Heads of Executive Departments and Agencies, the Obama administration announced an adjustment on government contracting (Obama Whitehouse Archives). The president intended to reduce cost-reimbursement contracts giving the reason as a compulsion to perform his duty to the taxpayers. The office had observed that from the year 2001, the government spending on contracts had more than doubled which meant more burden on the taxpayer.
Firm Fixed types of contracts are generally preferred by the white house because it protects all parties in a contractual agreement. There are several reasons for this among them, the fact that they shift the risk from the customer to the service provider, prompts a reduction in administrative costs, allows saving of government expenditure for a later date and offers enormous amounts of flexibility.
The greatest risk to the buyers is the time and material contracts (T&M), the greatest risk to the seller is the firm fixed price contract. However, most contracts allow for negotiations to spread the risk between the two parties.
Sole source contracts are mostly used to avoid competition where only favoured bidders are awarded the contracts and not from any form of merit. The government however after realising the amounts of money spent on contracting begun to favour competition over sole-source contracts. The major reason is cost, when competitors race for the same bid, most of them have to reduce the price to compete effectively. Additionally, contracts are awarded in merit-making the best companies to get chosen for government projects, therefore, improving government management of services and taxpayers money.
References
Obama Whitehouse Archives. Memorandum for the Heads of Executive Departments and Agencies – Subject: Government Contracting. Retrieved on 13th August 2020 from https://obamawhitehouse.archives.gov/the-press-office/memorandum-heads-executive-departments-and-agencies-subject-government-contracting
Portugal, P., & Varejao, J. (2009). Why do firms use fixed-term contracts?
