What type of contract is most favorable for the government? For business? What factors would you consider to avoid problems with the contract in the future?
Contracts have been divided into two broader categories i.e. fixed price and cost reimbursement.
The fixed price contract the firm that is carrying out the project is fully responsible for the cost effectiveness of the project. It means that even if the firm spends more money than it is awarded for the project by the government, the firm will lose money and government will not be liable for it. This kind of contract is more suitable for the government.
The cost-reimbursement contracts on the other hand are flexible for cost expenditure. If a firm spends more money by making positive addition to the project, there is a high probability that the government will make adjustment for it and pay the extra costs. Usually firms that bid for government projects will opt for this option.
There are multiple factors that I would consider. Some of them are risks involved with the project, profit range, profit percentage and cost estimation. Unless a proper analysis of these factors is not made, there outcomes of the project would be not clear in terms of financial factors and quality of project.