The Department of Defense plans to issue a $1,000,000 government contract to a company that specializes in the manufacturing of drone navigation systems. As a result, a government auditor has been contacted to examine the operational data VectorCal and your company in order to decide which company should win the government contract.
Note: You may create and/or make all necessary assumptions needed for the completion of this assignment.
In order to complete this assignment, refer to Assignment 1 where you discussed VectorCal and your company.
You may use the Government Policies Regarding Profit and Preferred Measure and Processing of Equitable Adjustments Case Analysis [DOCX] to assist you with formatting and completing the paper.
Assignment Instructions
Write a 6–8 page paper in which you:
Create a 1-page overview of the history of VectorCal and Universal Drones Inc., the companies competing for the government contract.
The government is deciding on which contact type it will offer. Discuss firm fixed-price and cost reimbursement contracts and what the preferred preference would be for each company when the government decides on a type. Justify the response.
The government decided that it will offer a firm-fixed price contract for this project. Discuss the expenses in detail for each company. The following should be included in these costs:
Direct Costs.
Labor.
Operating.
Indirect Costs.
Labor.
Operating.
Suggest which company should be awarded this government contract based on the data that was presented for each company. Next, provide three to five reasons to support your stance.
Use at least three quality resources in this assignment. Note: Wikipedia and similar websites do not qualify as quality resources.
The Strayer University Library is a good source for quality resources.
Your assignment must follow these formatting requirements:
This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.
The specific course learning outcome associated with this assignment is:
Recommend a company for a government contract award based on history and cost considerations related to production.
Universal Drones Inc was formed to rival VectorCal, the only major firm in the drone industry. Cases of customer exploitation and intentional product delays have rocked the drone industry; thus, Universal Drones Inc. was formed to capitalize on the industry’s issues. Universal Drones Inc develops efficient drones that are accessible without market delay. The organization’s vision statement states, ‘To provide cutting edge navigation and control systems to customers at a reasonable price.’ Universal Drones Inc’s products are fitted with onboard 3-dimension cameras for efficient data relay. The drones also incorporate a GPS tracker integrated with a hopping mechanism to protect the data against possible hacking. The company’s primary market includes; agribusiness firms, defense, military contractors, and the construction industry.
Vector Cal is one of the leading drone companies globally. The pioneers of the firm include an ex-navy pilot who used his vast expertise in military fighter jets technology to develop the unique drone technology at the firm. The business was bankrolled by Cal, who was a financial guru at JPMorgan. VectorCal’s primary product includes drones fitted with stealth technology, a standard that meets the General Aeronautical Systems and the US military parameters. The organization’s mission statement states, ‘To develop stealth drone technology with minimal effect on the drone’s setting.’ Vector Cal’s main market is the US military, while its secondary market is the surveillance drones developed for the public.
Firm fixed-price contracts incorporate a predetermined price that does not change based on the contractor’s cost experience or additional resources allocated. First, the contractor prepares a quotation considering the scope of work and costs to be incurred. Then, the client and the contractor agree on the project cost and sign a binding contract; thus, material and labor cost changes afterward are irrelevant. A firm fixed price (FFP) contract places the maximum risk on the contractors since they incur all costs in product development; thus, there is an incentive to control costs and improve efficiency in fulfilling the contract (Eckerd & Girth, 2017). In addition, the contractor’s risk increases since the profit or loss are subject to the contract price, leading to the minimum administrative burden upon the contracting parties.
A firm-fixed-price contract is appropriate for the acquisition of commercial items or services where there is a detailed specification regarding the cost of developing the product. The determination of fair and reasonable prices is subject to four elements. First, there is sufficient price competition through analyses of competitor quotations. Second, the price comparisons are supported by valid documents such as previous purchases of a similar product. Third, there is a high probability of estimating the project costs correctly. Fourth, the estimation process considers performance uncertainties; thus, the contractor accepts the assumption of risks.
A firm-fixed-price contract can be used in conjunction with an award or fee incentive, provided it is based on quality rather than costs since it remains an FFP contract. The bid price is considered the contract price. An FFP contract is preferred when the project cost risk is minimal or can be predicted. Federal government contracts use FFP contracts when awarding contracts from bidding procedures. The government’s liability is capped at the contract price; thus, there is no government cost increase. The firm’s fixed-price contract also reduces administrative costs; thus, most resources are directed towards monitoring the quality of results. In addition, an FFP contract allows the government to use current exchange rates for deliverables at a later date since it is not restricted by the fiscal year.
Cost-reimbursement contracts refer to a contract where the contractor is compensated for all its allowed and reasonable expenses to a defined limit. In addition, a supplementary fee is added to the contract price to enable the contractor to realize a profit. The assumption is that the contractor will provide quality products at the completion of the contract. The contract terms provide for reimbursement of allowable incurred costs to the ceiling set by the contract. The contractor is prohibited from exceeding the limit without the approval of the contracting parties. Cost reimbursement contracts are primarily used where the project costs cannot be estimated with sufficient accuracy. Furthermore, the allowable costs require documented proof; thus, additional administrative oversight is required.
Cost reimbursement contracts are also utilized where the quality of the product is of greater concern than the project cost (Girth & Lopez, 2019). There is also little incentive to control the project cost, and the level of certainty regarding the final project cost is limited. However, there are instances where the cost is less than an FFP contract since contractors are not required to inflate the price to cover the risks. Cost-reimbursement contracts are divided into four categories; Cost Plus Fixed Fee (CPFF), Cost Plus Incentive Fee (CPIF), Cost Plus Awards Fee (CPAF), and Cost-Plus Percentage of Cost (CPPC). CPFF contracts provide reimbursement for allowable costs plus a fixed fee stated in the contract, which does not change based on project cost. In CPIF contracts, the contract provides for payment for allowable costs plus a fee adjusted based on a predetermined target. In CPAF contracts, the contractor receives compensation and a fee adjustable based on performance. A CPPC contract provides payment on all allowable costs plus a percentage of the total cost.
Contract selection is based on a company’s risk assessment and the project’s scope of uncertainty. VectorCal would prefer a firm-fixed-price contract while Universal Drones Inc a Cost reimbursement contract. VectorCal preference for a firm-fixed-price contract is due to its familiarity with the drone industry. Vector Cal is the only major company in the drone sector thus has sufficient knowledge of the effort required to develop the drones. In addition, the company has historical support for the costs to be incurred thus has leverage over the contract negotiations. Universal Drones Inc.’s preference for a cost-reimbursement contract is due to the uncertainty of the project costs. Universal Drones Inc.’s risk is high since it is penetrating a new market segment. The uncertainty of the company’s research and development of new technology also presents a high risk for the company.
Direct costs refer to costs that can be traced to one specific cost objective, while indirect costs are identifiable with two or more cost objectives.
VectorCal direct labor costs include salaried employees who are paid every month. The company’s direct labor will consist of regular work hours and overtime. The direct operating costs incurred by Vector Cal include repair costs for equipment and property taxes. Vector Cal, an established firm in the industry, is expected to have company premises where the management pays property tax and utilities such as water and electricity.
VectorCal indirect labor consists of security personnel, production, procurement, and quality control supervisors (Kenton, 2020). Indirect labor personnel support the primary manufacturing process. Indirect operating costs consist of fringe benefits and office expenses. Vector Cal has permanent employees thus pays social security, pension plan contributions, and insurance. These statutory deductions are submitted monthly depending on the requirements of respective agencies.
Universal Drones Inc. is a start-up; thus, its direct labor consists of the cost incurred in hiring and retaining employees. The process of talent acquisition is considered part of direct labor since the hired employees work directly to develop the product. Universal Drones Inc. can utilize contractual employees or subcontractors since the team is paid after completing the project. Universal Drones Inc.’s indirect operating costs include rent on the leased property, utilities such as water and electricity.
Universal Drones Inc.’s indirect labor will consist of professional services such as legal and accounting fees since it deals with subcontractors. The legal team is responsible for drafting the contract terms, while the accounting team deals with financial support and finance trail. Universal Drones Inc.’s indirect operating expenses include general administration tools such as computers. The company is required to buy computers necessary for the running of the enterprise that is not directly related to producing a specific product.
The company most suitable for the contract is VectorCal. First, VectorCal has a vast network of qualified staff who can develop quality products, whereas Universal Drone Inc. has to recruit the staff on a contractual basis. Second, VectorCal has an established history dealing with drones thus can provide quality drones within the specified contract price. Third, the company’s vast know-how regarding the suppliers is also a significant factor since it can leverage its position in the market to acquire supplies at a considerable small fee. Finally, VectorCal also has a defined costs structure since it has been in operation; thus, there is certainty in the project’s direct and indirect costs.
Eckerd, A., & Girth, A. M. (2017). Designing the buyer-supplier contract for risk management: Assessing complexity and mission criticality. Journal of Supply Chain Management, 5
Girth, A. M., & Lopez, L. E. (2019). Contract design, complexity, and incentives: Evidence from US federal agencies. The American Review of Public Administration, 49(3), 325-337.
Kenton, W. (2020). Direct Cost. Investopedia. https://www.investopedia.com/terms/d/directcost.asp
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