What Are the Differences Between Government and Commercial Contracts?

Last Updated March 16, 2020

Working as a contract manager generally involves specialization in one of two areas: commercial contracts or government contracts. While the two areas of contract management do share many features, there are some important distinctions to consider. This article highlights the differences between each contract type.

Commercial Contracts

When two businesses agree to work together, whether the deal is to include procurement of goods or services, the deal is finalized through a contract. Commercial contracts form the basis of most interactions between two private-sector organizations. The skill with which these contracts are drawn up is important. While successful contracts can greatly increase business revenue, poorly structured contracts can have a negative financial effect.

Commercial contracts are drawn up in a largely standardized system of stages. While the following list can vary, it gives a sense of the structure typically used in commercial contract management.

1. Initial requests – Contract opportunities are identified and relevant support information is collected.
2. Preliminary drafting – The contract is written up either manually or though automated contract management software.
3. Negotiation – Both parties in the contract sit down with the first contract draft and negotiate terms and conditions. The contract may need to be amended at this stage if parties hold significant reservations on a certain clause.
4. Contract approval – The final vision of the contract is approved both by the negotiating team and upper management.
5. Implementation – Terms of the contract begin to be implemented, or executed, as per contract specifications.
6. Obligation management – Each party to the contract specifies who is responsible for each key contract deliverable, ensuring that obligations are met on time and within budget.
7. Amendment provisions – It is possible that new information may become available as the contract is underway. If this is the case, room needs to be made for the possibility of contract amendment.
8. Audits – To ensure that contract terms are being met throughout the duration of the contract, regular audits are typically used. Audits also have the added benefit of giving forewarning of problems that may arise.
9. Contract renewal – Once the terms of the contract are met and both parties are satisfied, there may be a chance to renew the contract for further business dealings. Commercial contract managers should always be aware of this possibility and seek to keep profitable contracts in play for as long as possible.

Government Contracts

Government contracts are used when an organization seeks to do business with the federal government. Unlike commercial contracts, which are often governed by state law and a locally adapted version of the Uniform Commercial Code (UCC), government contracts operate under an entirely different system of regulations. While much of the contract drafting and execution process above remains intact, three of these legal differences are worth noting.

To start, all government contracts operate under the Federal Acquisitions Regulations (FAR) system, federal regulations codes that give the government distinct powers in the contract management process. Notably, one key provision is that the government can terminate the contract at any point without penalty. This “termination for convenience” clause permits the government, for example, to pull out after half of the deliverables have been met. It is up to the business contractor to decide what to do with the remaining half to maintain profitability.

Related to the termination clause is the “changes” clause. In essence, where commercial contracts must meet and unanimously approve any contract changes, the federal government has the power to call for changes without business approval. While changes may lead to increased compensation for business contractors, the contractors nonetheless have little to no choice but to accept these changes.

Federal contractors also have the ability to press criminal charges on any private employee who lies or falsifies contract information. Commercial contractors are often exempt from such charges, as it generally falls to the organization to police its employees and decide how best to deal with negligence.

Key Difference

These examples are but a few of the differences between commercial and government contracts. While many processes remain the same between the two contract types, the primary difference is in the legal powers of the federal government. This authority gives the government unique flexibility in changing contracts to suit its needs.