There is not only one kind of contractual agreement the government goes into when it does purchasing. Primarily, there are two factors that determine what type of the contract would be.
The first one looks at the degree and the timing involved in regard to what kind of responsibility the contractor assumes and the second one emphasizes on what could be offered to the contractor in a form of incentives if the contractor meets or exceeds certain standards that would be specified on the outset (Federal Acquisition Regulation 2005). As far as category is concerned there are fixed and flexibly priced contracts.
Fixed price contracts, as the name states are contracts where the establishing of the price takes place on the outset. If there is another variable in fixed price contract, the price could also be adjustable if the case is appropriate. When signing fixed price contacts it is customary to have a ceiling or a target price that could include the cost involved. The Federal Acquisition Regulation of 2005 stipulates that if the adjustment is included in the contract it could be applied by using the contract clause that is used for equitable adjustment for certain circumstances that are covered by the clause.
The government prefers this kind of contract for the obvious reason that it is the contractor that born the responsibility for whatever ensues, in this case profit and loss (Berrios 2006). What this translates into is what the contractor gets is what is in the initial agreement, in spite of the final cost. When there is difficulty to arrive at a cost with acceptable accuracy to sign any kind of fixed-price contract, flexible price agreement will be the type of contract preferred. When the government signs cost-reimbursable contract it is the government that would borne if any unanticipated cost occurs putting the government at a disadvantage.