Contracting Activities and Contract Types

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Introduction

The Department of Defence intends to grant a government contract of $1,000,000 to a firm that operates in drone navigation system technology in this case. In this report, as a public auditor, I am responsible for reviewing the two organizations’ operating data, VectorCal, and Universal Drones (which is my company), to determine which company should win the government contract. Besides, it should also be noted that this document assesses the three actual expenses and the three indirect expenses incurred by the two entities during their navigation system development. After which, I will identify which entity would be the better choice to be awarded the government contract.

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Overview and Background of Both Companies

VectorCal

VectorCal is a manufacturer of drone and surveillance drone aircraft navigation systems and specializes in drone navigating technologies. In conjunction, the company markets its products directly to the government through an arrangement with other various states (Frachtenberg, 2019). Similarly, it provides the government with a wide variety of technology-based goods in an accessible and comprehensive manner. It is also evaluated that it is the largest manufacturer of a drone navigation system for stealth drones in the context of the government’s consensus and specifications.

Furthermore, VentorCal is a specialist in developing drone navigation systems, which is one of the key reasons it has successfully held its position in the industry and the market. However, the firm focuses on research and growth, innovation, and technical inventions to increase performance and reduce the cost of drone production. Similarly, the company’s product development is entirely revolutionary and focused on technology, allowing it to deliver low-cost goods on the market (Frachtenberg, 2019). Besides, with strong sales and profit, it is also the world leader in the industry. Moreover, due to the skills and experience of VectorCal, it is in a position to win the US government contract for the development of drone navigation.

Universal Drones Inc.

Universal Drones Inc. is my organization, which, as a manufacturer of drone native systems, also specializes in drone navigation system innovations. In terms of technology, style, and design, it will deliver various types of drone aircraft to governments and the corporate world. The company’s drone aircraft can also be adapted to meet the demands of business clients and administrations in terms of various technologies, shapes, sizes, and designs. The enterprise aims to provide the global market with modern inventions or design-oriented drone aircraft for corporate customers and governments. Likewise, it gives the latest technology-based goods and services at the lowest cost (Frachtenberg, 2019). However, Universal Drones Inc. is new to the market, but it will use the latest technologies to secure the US government’s contract. In addition, it will also concentrate on directly supplying high-quality, low-cost goods as it also focuses on saving consumers’ costs.

Recent Major Contracts Awarded to Both Companies

VectorCal

VectorCal entered into a contract with one of the largest American airlines to produce about 30 airplanes for airlines over the next two years. In March 2014, the organization and the Airline Company arrived at an agreement which, based on their specifications, VectorCal manufactured aircraft for the carrier. In this arrangement, the manufacturer was mandated to deliver 30 airplanes in two years and within the company’s terms of modern technology, design, fuel efficiency, and seating or passenger capacity.

Universal Drones Inc.

In June 2013, Universal Drones Inc. was awarded a major contract for 50 aircraft by the Australian airline business. In this deal, the company was required to produce and sell 50 planes to the airline corporation for five years. Both parties mutually agreed on this five-year term contract in the agreement. Universal Drones is new to the market, but it depends on the latest technology, which as a matter of fact, won this Australian airline deal. The aircraft manufacturer committed to supplying airplanes to the airline within five years, taking into account all of the airlines’ basic aircraft requirements.

Possibility of Both Companies Winning the Contract

In this segment, the two firms’ validity to win this contract is assessed in their set price analysis, cost recovery, and development of the drone navigation system.

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VectorCal

VectorCal focuses on managing the main costs, which are labor and material costs, in the development of the drone navigation system. The company also pays more attention to the costs incurred in these aircraft’s production process and the company’s budget for material and labor expenses. Thus, it often considers the cost budget and reflects both the industry’s production standard and the consumption rate of material and labor. VectorCal claims that it can lower production costs by budgeting, scheduling, and saving time in the production process (Meng et al., 2018). Besides, the company maintains costs and time by mainly concentrating on costs incurred and time taken in production. This means that VectorCal could be eligible to win the contract in terms of price, cost, and output of the drone navigation system.

Universal Drones Inc.

Universal Drones Inc. also focuses on managing the direct and indirect costs of manufacturing the drone navigation system. It does this by planning the budget for expenses to manage production costs and control the company’s internal expenditure. By designing and executing the budget during the manufacturing process, the organization focuses on reducing internal spending and controlling production costs (Meng et al., 2018). All team members are acquainted with the budget, but they also commit to lowering costs and meeting the corporation’s cost-related objectives. In addition, Universal Drones saves manufacturing costs by concentrating on the indirect and direct cost budget. This means that the company will be eligible to receive the government contract based on the price, cost, and development of the drone navigation system.

Direct Costs and Indirect Costs

Direct Costs

Direct products, direct labor, and overhead incurred by each organization during the navigation system’s development are the most common direct costs. Direct materials for each organization are the materials that could be clearly described by the product of the navigation system (Gerchak, 2016). Direct expenses related to the cost of materials used to produce drones and aircraft are involved in developing this device. Additionally, direct labor costs are attributed to salaries and wages paid to workers, thus directly contributing to the system’s development (Gerchak, 2016). In addition, operating costs for managing the system’s production, such as energy or power bills and inventory service charges, are also direct costs.

Also, actual costs are expenditures that would easily be connected back to a specific object (also referred to as a cost object). They include a product, raw materials used in the production of a commodity, or the labor linked with the item’s manufacturing work. Usually, each company records the expense of the finished product or entity as a direct cost. Three common ways to monitor these actual expenses used by corporations include last in first out (LIFO), first in first out (FIFO), and average cost methods (AVCO). The LIFO method is used by VectorCal, while Universal Drones use the AVCO method.

Indirect Costs

Indirect costs are those which impact the whole organization, not just one item. These include advertisement, insurance, depreciation costs, supervisor’s wages, basic supplies for the company, financial solutions, renting of fixed assets, computers, mobile phones, and so forth (Gerchak, 2016). They are resources and costs for the whole enterprise, not just one product. Thus they are the recurring expenses of running a company and which cannot be connected to any product or service. They can be fixed or variable expenditures; an example of a fixed indirect cost is the rent the company pays for the premises. Electricity and water bills are perfect examples of the variable expenses which indirectly impact the company and are usually adjusted every month. Materials such as equipment, utilities, cleaning products, and office equipment and supplies make it possible to create a navigation system but cannot be delegated to only one product (Gerchak, 2016). These are known as indirect materials or the overhead segment of the material used in the production.

Suggestions

Based on the above analysis, it may be suggested that this $1,000,000 government contract be granted to Universal Drones. In this situation, both companies are experts in drone navigation system technology. Still, it can be advised that Universal Drones is more qualified to obtain the contract based on other aspects rather than expertise alone. For instance, during its pricing process, the company involves comparing previous approximations, received, paid, and comparable products prices, to arrive at a favorable price for the client. In contrast to VectorCal, therefore, the contract should be awarded to Universal Drones because it is more deserving of business aspects. In addition, its AVCO approach, compared to the LIFO method used by VectorCal, would be more suitable for the presentation of direct costs (Meng et al., 2018). Through using the AVCO system, Universal Drones has demonstrated its dedication and efficiency in managing and tracking its expenditure on the output of its goods. The company should again, therefore, be chosen for this contract because of its cost-effectiveness procedures.

In addition, Universal Drones focuses on controlling or reducing indirect and direct expenditures through the budget. In disparity, VectorCal concentrates only on material and labor costs, which also bolsters the selection of Universal Drones as the appropriate winner of the deal. In particular, based on the past contract summary of each entity, it should be recommended that Universal Drones be declared the winner. This is based on the fact that the firm had both the largest sum and the longest contract period earned in comparison with VectorCal (Meng et al., 2018). Therefore, it can be implied that all these are the key effects that have to be considered if one has to be more effective in winning the contract.

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Conclusion

The analysis conducted on the two companies, clearly shows that both companies are more qualified in winning the government contract. However, Universal Drones Inc. emerges as the better option mainly because the enterprise is built on a strong foundation of innovation, cost, and efficiency as its core operating principles. The organization is geared towards the provision of the most advanced technological proficiency by adopting new designs which meet customer needs. Its cost-effectiveness also plays a big role in edging out of VectorCal from this lucrative deal. On the other hand, the main reason why VectorCal lost the contract is because of its pricing method in establishing its product prices. The process only emphasizes the price while overseeing the value of the end product. It is also bound to expose potential clients to risks such as lack of legal protection should anything go wrong during the negotiation period or even upon acquiring the product.

References

Frachtenberg, E. (2019). Practical drone delivery. Computer, 52(12), 53-57. Web.

Gerchak, Y. (2016). Manufacturing newsvendors and inventory pooling with nonlinear production costs. International Journal Of Inventory Research, 3(1), 70. Web.

Meng, L., Hirayama, T., & Oyanagi, S. (2018). Underwater-drone with panoramic camera for automatic fish recognition based on deep learning. Ieee Access, 6, 880-886. Web.

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BusinessEssay. 2022. "Contracting Activities and Contract Types." February 12, 2022. https://business-essay.com/contracting-activities-and-contract-types/.

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