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Contract Basics: Fixed Price versus Costs Plus

By Edited Nov 13, 2013 0 0

Today, I’d like to go into a little more detail about these two types of contracts.  Sorry this post isn’t something more high-speed, like tactical assault rifles or something, but this is some basic business language that you’ll need to know.  For the most part, there are two basic ways that a government can award contracts:  Costs Plus, and Fixed Price.

                Costs plus contracts usually favor the company who wins the bid.  Very simply, the government agrees to reimburse the company for any costs that it incurs while doing the work, and also agrees to pay a set amount on top of that for the company’s profit.  These types of contracts are most commonly used when the government needs certain services to be put in place very quickly.  Costs plus contracts are usually simple to execute, but are generally more expensive to the taxpayer.  In addition, costs plus contracting has gotten a lot of bad press in recent years, like when KBR was discovered to be leasing luxury SUVs and 5-star Dubai hotels to fulfill their basic transportation and office needs.

                On the other hand, fixed price contracts are exactly what they sound like.  Companies submit a set dollar amount during their bids, and the government does their best to hold them to that figure.  Fixed price contracts require a lot more work up front on the part of the contractor, since they have to predict as closely as possible how many employees they’ll need to hire to perform the services, what logistical costs will be involved, etc.  Predicting an exact amount of expenses for a span of several years is nearly impossible, so sometimes the government has no choice but to be flexible when unplanned costs pop up.  Often, fixed-price contracting involves a lot of negotiation back and forth between the company and the government, which can stretch for years into the contract.  Fixed-price contracting is a much slower process, but it gives the government’s contracting officers a lot more oversight into how their money is being spent.  

                Are you still awake?  Great!  Now that we’ve covered the basics, I suppose you’ll want to know exactly what all this garbage means to you!

                Basically, it’s about money.  (Yeah, now you’re awake!)  Since the government is shifting towards awarding most of their contracts on a fixed price basis, companies will have to submit lower bids in order to stay competitive.  They’re looking for any overhead costs that they can cut, to include money spent on salaries and equipment.  This means that you’ll need to have more realistic expectations for your starting salary, and can pretty much forget about pulling in $500/day unless you’re ex-Special Forces.  Once you’ve landed that first entry-level job, you’ll probably have to focus on career development in order to be able to earn more.  Sure, there’s still a lot of top-dollar jobs out there, but they’re being filled by people who have specialized skills and the most experience.     

                Apart from your base pay, the type of contract you’re on is also going to have a huge effect on your working environment.  In a costs plus world, the government pretty much gets whatever they want.  Bills for working overtime hours are no problem, and special equipment is ordered just as quickly as the need arrives.  On fixed-price contracts you might regularly find yourself overstretched in your duties, or even covering another person’s position for an extended time.  More importantly, you’ll have to constantly be playing politician to keep your customer happy when you decline their requests to cover extra shifts, or to have a subcontracted job completed as quickly as they’d like.  You’ll feel the pressure from your management as well, when they try to cut costs on your expenses like travel and training.

                I can’t stress enough how important it is to do your research when you apply for a position.  Besides the company’s job description, try to locate the actual contract award on the Fed Biz Ops website.  This’ll tell you not only the pricing system for the contract award, but the names of all the other companies bidding, how long the initial award will last, and the exact range of duties you might find yourself performing.

                Remember, even with all the cool high-speed action stuff, security contracting is first and foremost a BUSINESS.  The more you know about the way contracts work, the more likely you’ll be able to turn an initial overseas contract into a successful career. 




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