A contract is a legal agreement between 2 individuals, which serves as protection for both parties involved in a business deal. In this article, we will discuss about 3 broad types of contract in project management.
1. FIXED PRICE
This category is the most commonly used contract type. We use this type of contract when all construction-related activities are offered with a total fixed price agreement.
Fixed price (FP) contract is favored in scenarios when a scope or a plan is negotiated and accepted by both seller and buyer in advance. In other words, it helps prevent changes in orders for undefined work and overhead costs during the operation.
For example, when installing some fixtures in your house, you must have never wanted to be surprised by the builders adding random additions that come to their heads. You should prefer making a contract for no surprising increase with you so you don’t need to pay anything extra.
• In FP Contracts, the scope is well-defined and the price is fixed.
• FP Contracts are risky for Sellers if the costs are not well-managed.
2. COST REIMBURSABLE
This type is also known as the Cost Plus Quotation. The Seller is reimbursed for all allowable costs for performing the contract work. It’s straightforward since there’s a fixed fee payment calculated as a percentage of the initial estimated project cost. Furthermore, this is different from an illegal type of contract called Cost Plus Percentage of Costs, which doesn’t have a fixed fee payment.
Before the negotiation, the expense amount must be included, which represents a percentage of the material and labor costs, costs of operation and the contractor’s profit.
This type of contract covers:
• Actual cost
• Specific expenses incurred from the work.
3. TIME AND MATERIAL CONTRACT
This category is a hybrid of both the Cost Reimbursable and the Fixed Price Contract. It is often used for staff augmentation, acquisition of experts and any outside of support when an exact statement of work cannot be prescribed.
The advantage of Time and Material Contract is that you can initiate the contract as well as put a not-to-exceed value at each period to reduce the risk.
In reverse, the drawback of this contract is the Seller can add an unknown expense amount that the Buyer has to pay for.
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