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Different Types of Government Contracts

Government Contracts

Different Types of Government Contracts

Government contracts are contracts undertaken by the Government for varied purposes like construction, management, maintenance and repairs, manpower supply, IT related projects etc. The involvement of Central Government or State Government or Government body in a contract makes it a government contract. The party who executes the contract on the behalf of the government is referred to as a contractor, for example Larsen and Turbo may act as a contractor for Tamil Nadu Government for the construction of a flyover etc. Generally in a government contract, opened tenders are floated through sealed biddings and request for proposals may be invited. To participate in a Government contract, the supplier would require a GST registration and must fulfill the eligbility criteria set forth in the contract document. Now, let us look at the different types of government contracts:

Fixed-Price Contracts

A fixed-price contract is a contract where the cost isn’t calculated based on the time and resources used, which implies that such a contract is entered into, if the cost of the project is already known. Certain provisions like contract change, economic pricing, or defective pricing are sometimes included in the agreement. Either of the parties can gain or lose from it. To illustrate, in case of an abrupt increase in prices, the seller gets to lose a chunk of his margin while the buyer is benefited as he got the bargain from the deal, and vice versa.

Cost Reimbursement Contracts

In complete contrast to a fixed-price contract, cost reimbursement contract allows the contractor to claim all of his expenses(subject to conditions), along with additional payments to make for a profit. The Government might be in the receiving end of losses due to escalating costs, or the liability to pay even on occasions when the task isn’t completed, though we may opine that this would be a rare scenario. This kind of a contract is adopted where the costs are difficult to be ascertained. In certain cases, the contractor would present an estimated cost. If the cost exceeds the estimate, the government must approve the same, else the contractor would be in a loss over the exceeded budget.

Incentive Contracts

Incentive contracts was introduced to motivate the contractors in performing their work, by rewarding them with monetary incentives. An incentive contract might be any of the ones mentioned below:

  • Fixed price incentive contracts
  • Cost plus incentive contracts
  • Cost plus award fee contracts
  • Performance incentive
  • Delivery incentive
  • Multiple incentive contracts

Indefinite-Delivery Contracts

An indefinite delivery contract takes place when the duration of the contract is known, but the exact time of delivery is unknown. It is a contract which ensures supply of indefinite quantity of services in a fixed period of time. This is generally undertaken when the government is unsure about the quantity of services required to complete the task. The average duration for completion of a contract of this kind would be four years. There are three types of indefinite delivery contracts:

  • Definite quantity contract
  • Requirements contract
  • Indefinite quantity contract

Time and Materials Contract

A time and materials contract is only carried out in the absence of a thorough knowledge of the duration or the cost to be incurred.  This type of a contract requires government surveillance to adjudge the efficiency of the work process. This contract is only undertaken if there is no scope for implementing any of the other contracts. Similar to fixed-price contracts, time and materials contract includes a sealing price which the contractor exceeds only at his own risk.