Purdue University Cost based and Price based DOD Contracting Methods Paper

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Assignment Instructions:

Use the resources and the supporting materials located in this course. See all the resources provided and referenced each week. Develop a comprehensive essay comparing the advantages and disadvantages of the cost-based and price-based DoD contracting methods.

You should have peer-reviewed references in addition to the course assigned reading to support this research paper.

•Written communication: Written communication is free of errors that detract from the overall message.

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COST-BASED AND PRICE-BASED METHODS

Cost-based and Price-based DOD Contracting Methods
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COST-BASED AND PRICE-BASED METHODS

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Cost-based and Price-based DOD Contracting Methods
There are two contracting methods used by the DOD. The methods are cost-based and
price-based contracting methods. The cost-based contracting method involves the reimbursement
of expenses incurred and an accumulation of profits (Sabin & Zakner, 2016). The amount of profit
in this contracting method is a certain percentage of the contract's full price. A contractor provides
a set price for the different tasks or services to be performed in the price-based contracting method
(Choi et al., 2021). These methods vary in terms of their applications and requirements. The
advantages and disadvantages of the cost-based and price-based contracting methods indicate the
degree of flexibility or complexity of the two methods.
Cost-based Contracting Method
The DOD uses the cost-based contracting method to ensure the contractor handles a higher
percentage of costs. The DOD assumes a small percentage of the risk, which allows the contractor
to be flexible (Oyer, 2012). In this contracting method, the buyer of the services or products agrees
to pay more so that the contractor can make profits after completing the contract. When there exist
budgetary restrictions, the cost-based contracting method is considered. The reason for the
consideration is the lack of accurate estimation of the work to be completed or the prices of
products to be delivered.
The cost-based contracting method requires the use of supporting documents for the direct
and indirect costs (Choi et al., 2021). The contractor is also allowed to collect an additional amount
above the set reimbursement amount. However, the amount of reimbursement covered does not
include all the expenses incurred by the contractor. The cost-based contracting method has

COST-BASED AND PRICE-BASED METHODS

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different categories that allow cost reimbursement and an additional amount for contractor profits
(Kwon, Lippman & Tang, 2010). With the different categories, the amount of reimbursement
increases with the increase in the costs incurred.
Price-based Contracting Method
The price-based contracting method is different from the cost-based method in terms of its
application and specifications. In this method, the price of goods and services to be provided is
set, and there is no bargaining permitted. The cost of production does not affect the prices set for
products and services (Kwon, Lippman & Tang, 2010). This method is increasingly being adopted
due to the benefits that arise with the early completion of a contract. The time for completion of a
contract is brought out but does not affect the prices of products and services.
Compared to the cost-based contracting method, this method estimates the risks to be
incurred. The risks that the contractor will incur are indicated when using the price-based
contracting method (Sabin & Zakner, 2016). Offsetting the risks is done by providing a price range
compared to the provision of the actual price. Time is a major factor when it comes to incurring
risks in this contracting method. This method is also considered to be more extensive in terms of
its coverage and specifics involved.
Advantages
The advantages of the cost-based and price-based contracting methods indicate the reasons
for their preference by different contractors. One advantage of the price-based contracting method
is the certainty of costs to be incurred. (Sabin & Zakn...


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