Types:
1. Firm fixed price.
Also known as Lump sum. It is generally utilized in government based project. Here the seller and the purchaser make a deal on a fixed price on a certain project. Furthermore the seller is objected to accept high risk in this form of contract.
Different types of firm fixed price contracts.
- Fixed price incentive fee(FPIF)
Pertains to the extra amount to be paid to the seller once the project is completed earlier. - Fixed price economic price adjustment(FPEPA)
Can be rediscovered basing on the market pricing rate. - Fixed price award fee ( FPAF)
Once the seller‘s performance out passes as planned previously an extra amount will be paid to the seller.
Advantage.
Offers good budget confidence to the purchaser.
Disadvantage.
Augmented cost risk for the seller (increased cost for the seller)
2. Cost plus fixed fee.
The procurement contract refers to a fixed amount for the seller which will be there prior to the beginning of the work. Additionally, they will also obtain the cost obtained in the project.
Advantage.
1. Secures and protects the seller.
Disadvantage.
1. Increased documented cost risk for the purchaser.
3. Cost plus % of cost.
The seller will acquire the total cost they obtained on the projects and they will also acquire a % of fee over cost. Undoubtedly, this is often advantageous for the seller.
Advantage.
1. Secures and protects the seller.
Disadvantage.
1. Augmented cost risk for the purchaser.
4. Cost Plus Incentive Fee.
Known as a performance based additional amount, which will be paid to the seller plus the actual cost they have acquired on the project.
Advantage.
1. Protects and secures the seller and at the same time providing rewards for the purchasers goals.
Disadvantage.
1. Augmented cost risk for the purchaser.
5. Time and Material.
This procurement contract is also referred to as unit price contract which are known as hourly rate. The good thing about this type of contract is that the seller will be given the chance to earn more money every hour they spend on a specific project.
Advantage.
1. Deemed as the quickest type of contract which one may agree upon as it can be disadvantageous for quality problems.
Disadvantage.
1. Risky price to the purchaser.
With certainty choosing one from different types of procurement contracts is a very crucial decision for a project manager. This significantly helps determine your relationship with the seller and alleviates possible risks. Due to this it is imperative to always pick a contract that offers the maximum value for your money and most valued time and secures your project from any probable risk. In the event that scope of work is fixed and definite, it is a must to go for fixed contract but if the scope of the project is exploratory and not fixed you must select the cost reimbursable contract.
If you need only some kinds of consultancy services, expert opinions or outside support you may consider going for time and materials kind of contracts
NB: Obviously the bottom line here is that procuring entity it is fundamental to know which contract you will pick for your seller so that you can better manage them accurately and effectively within your budget.
