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Types of Contract

Types of contracts

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10 views

Types of Contract

Types of contracts

Uploaded by

devilnish
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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TYPES OF CONTRACT

A S CADERSA MIEAust, MIES


Registered Professional Engineer of Mauritius
What is a Contract?-
• Projects can be of any type ranging from software engineering,
construction, telecommunication to scientific fields.
• Every project is initiated by an organization which should be
supported by suppliers for the various needs of the procurement.
• These two parties are generally termed as 'buyer' and the 'seller.' The
agreement between the two is called the “contract.”
• Contracts are an essential part of procurement management.
• Creates a legal binding between the buyer and the seller.
• Contracts are necessary for project management as they provide
relief on either side by managing the risks involved in procurements.
• A contract is required to share and bear the individual’s
responsibilities in completion of the project.
• Two key components
• Contract Administration- manages contractual relationship between
the buyor and sellor according to specs, scope and performance
requirements
• Contract Compliance- management of all actions after award to
ensure compliance with the contract
Types of Contract
• Most of the contractual relationships are broadly categorized as
either:

• Fixed-Price contract
• Cost reimbursable
• Time & Materials Contract

The third type of contract is seldom used.


• 1. Fixed Price Contracts:
• The contract involves a fixed price for a defined product or service.
• Buyer has less risks
• Sellor has more risks and as such can charge a price to cover these risks- higher contract value
• These types of contracts are recommended when the scope of service is completely defined
and final

• Firm Fixed Price (FFP):


• The prices of the goods and services are set and are never subjected to change unless the
scope is changed and agreed mutually. This type is favorable mostly to the buying
organizations. Because the extent of buying the goods remains unchanged and recurring
buying happens.
• Fixed Price Incentive Fee (FPIF):

• The price ceiling is set, and the seller needs to perform and fulfill the contract requirements
within that price. All the costs above the price ceiling are the responsibility of the seller.
• This type gives both the buyer and the seller some flexibility for performance with technical
incentives. The incentives are tied to achieving agreed upon metrics such as cost, schedule and
technical expertise of the seller.

• Fixed Price with Economic Price Adjustments (FPEPA):


• It is suitable when the contracts are executed in different countries and payments are made in a
different currency. Also, if the seller’s work lasts for a few years (3-5 years generally) this contract
is fitting. This contract gives an option to make adjustments in the predefined final payment as
agreed to in the contract. It can be due to changed conditions such as inflating rates (may
increase or decrease) on specific commodities.
2. Cost reimbursable contracts:
• This type of contract involves cost reimbursement (payments to the work done)
for the costs incurred during completion of the contractual job.
• It is along with a pre-defined fee representing seller profit. It is recommended if
the scope of the work is expected to change during the contract period.
• Cost Plus Fixed Fee (CPFF):
• The seller gets all the allowable costs agreed in the contract. The
seller also receives a fixed fee payment, which is calculated as a
percentage of initial estimated project costs. Unless the project scope
changes, this fee remains unchanged.
• Cost Plus Incentive Fee (CPIF):
• The seller gets the reimbursements for all the costs incurred on performing the
work agreed in the contract. Based on the final costs incurred (greater or lesser
than the initial planned cost), both the buyer and the seller share their expenses.
The sharing is based upon a pre-negotiated cost-sharing formula. Generally, it is an
80/20 split over the target costs based on the actual performance of the seller.

• Cost Plus Award Fee (CPAF):


• In this type, the seller gets his/her legitimate reimbursements. But a majority of
the fee is received upon meeting some technical/subjective performance that is
pre-set in the contract. This solely depends on the buyer’s determination and the
seller’s performance.
3. Time and Material Contracts or Unit Price Contracts
• Unit price contracts are what we usually call hourly rate contracts.
• This type of contract is a hybrid of a cost-reimbursable and fixed-
price contract.
• For example, if the seller spends 1,200 hours on a project at $100 an
hour, the seller will be paid $120,000 by the buyer. This type of
contract is common for freelancers, and the main advantage of this
contract type is that the seller makes money for every hour spent
working on the project.

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