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The government offers a service in exchange for money through a bidding process. Contractors bid to provide services at the lowest price, and the government selects the best offer. Contracts can be fixed price or cost-plus.
A government offer is an offer to provide a service to the government in exchange for a certain amount of money. The bidding process is similar to an auction, except that different entities compete to provide a service at the lowest price. Government agencies seeking tenders are trying to fulfill their assignments while minimizing costs. A company filing a government bid is seeking to make a profit by entering into a business relationship with the government.
When a government agency is asked to provide a service, it typically first decides whether it can perform the duties in-house or whether it should hire a contractor. Just like in business, the government hires contractors if they offer some special skills or can do the job for a low price. As a general rule, the larger the project, the more likely contractors are involved. This can be seen in many military projects.
If contract work is deemed necessary, a government agency will issue a request for proposal (RFP). An RFP simply states the requirements of the issuing agency that is paying for the service. At this point, interested potential contractors will respond to the RFP with a government offer. Offers can range into more than just a quote. For example, if you are looking for a high-speed rail system, your proposals may involve different train designs, construction schedules or maintenance procedures.
The scale of government-provided services in modern industrialized countries can be vast. Sometimes a third party helps match government bids with contractors. Contractors will often pay other companies to sift through the multitude of RFPs for those that may apply to them.
After a designated bidding period, the responsible government agency evaluates each bid and selects the one that best meets its requirements. This may or may not be the lowest-priced offer: Often higher-priced offers are selected if other benefits of the offer outweigh the price difference. If enough companies do not respond with a government offer, or if none of the offers are suitable, a new RFP can be issued.
Once the government selects a winning bid, it signs a legal contract with the company to provide the needed service at the agreed price. In a fixed price contract, there are no allowances for pay increases if production costs are higher than expected. Conversely, a cost-plus contract has provisions to allow for a variable fee upon completion of the service. This is a common type of contract for large-scale defense projects that are thought to have unpredictable development costs.
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