Reference no: EM133244317
Please respond to the discussion below:
A contract in business sets out how the relationship between the parties conducting the business with each other will be governed. It provides a clear understanding of how goods and services will be delivered, payment terms, how and when the contract may be terminated if there are unresolvable issues, etc. However, a contract obligates parties to the terms and conditions of the contract.
Guth, S. R. (2009) (2018) explains the relationship between buyer and seller relative to procurement contract as a negotiation conducted to create any necessary agreement(s) between an organization (buyer) and selected seller (vendor). According to Guth, S. R. (2009) (2018), there are different contract templates and types but with two categories; fixed price and cost reimbursable. Each contract type has advantages and disadvantages.
The contract type that presents the greatest risk to the buyer, I believe, is the Cost-Plus Fixed Fee Contract (CPFF). The CPFF provides no financial protection to the buyer as the seller has no incentive to control costs. This contract provides payments to a seller based on allowable costs in performing the contract and it specifies a negotiated fee that is fixed at the inception of the contract and therefore allows the seller to not absorb any cost variance, but the buyer does. Unlike the fixed price contract where the buyer is less at risk since the price the seller agrees to is fixed, the CPFF puts the buyer at a higher risk or at a disadvantage.
Having read the different contract types, I would recommend the Fixed Price Incentive Firm (FPIF). The FPIF is a contract that provides for adjusting profit and establishing the final contract price by a formula based on the relationship of the final negotiated total cost to the total target cost. It sets a ceiling price to be paid to the seller except for any adjustments permitted under other provisions contained in the contract. It is important to note that these decisions are reached at the outset of the contract. In other words, the buyer is reasonably protected by the ceiling price while the seller can realize higher profit by delivering below the ceiling price.
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