Types of Contract

Learning objectives
• By the end of this session, you should be able to
• Understand and describe the types of fixed cost contracts
• Understand and describe the types of cost reimbursable contracts.
• Understand and describe Time and Material contract.
• Understand the advantages and disadvantages of each contract.
• Compare and contrast the generic types of contracts from the standpoints of
a balance of seller and buyer risks
• Identify factors that determine which type of contract to select.
 Contracts
• A contract is a mutually binding agreement that
obligates the seller to provide the specified products or
services and obligates the buyer to pay for them.
• Contracts can clarify responsibilities and sharpen focus
on key deliverables of a project.

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3 types of contracts
• Fixed-price (FP)
• Cost-reimbursable (CR)
• Time and Material (T&M)
 Types of Contracts➀
• Fixed-Price Contract
• Used for acquiring goods, products, or services with well-defined
specifications or requirements.
1. Purchase Order (PO)
2. Firm Fixed-Price Contract (FFP)
3. Fixed Price Incentive Fee Contract (FPIF). For example,
• Contract = $110,000. For every month early the project is finished, an
additional $1,000 is paid to the seller.
4. Fixed Price Award Fee Contract (FPAF). For example,
• Contract = $1,100,000. For every month that performance exceeds the
planned level by more than 15 per cent, an additional $5,000 is awarded to
the seller, with a maximum award of $50,000.
5. Fixed Price with Economic Price Adjustment Contracts (FP-EPA). For example,
• Contract = $1,100,000, but a price increase will be allowed in year two based
on the Canadian CPI for year one, or
• Contract = $1,100,000, but a price increase will be allowed in year two to
account for increases in specific material costs.
• Fixed Price/Cost Plus Award • Fixed Price/Cost Plus Incentive
Fee contract Fee contract

• The determination of fee is • The seller is reimbursed for all

based solely on the subjective allowable costs for performing
determination of seller the contract work and receives a
performance by the buyer, and is predetermined incentive fee
generally not subject to appeals   based upon achieving certain
performance objectives as set
forth in the contract

PMBOK guide 6th Edition

Fixed-price Contract
from the buyers’ perspective
advantages
• This type of contract requires less
work for the buyer to manage.
• The seller has a strong incentive to
control costs.
• The buyer knows the total price
before the work begins.
disadvantages
• The seller may try not to complete some of
SOW if they begin to lose money.
• The contract type requires more work for
the buyer to write the SOW.
• A fixed-price contract can be more
expensive than a cost-reimbursable contract
if the SOW is incomplete. If the seller
underprices the work, they may try to make
up profits by charging more than is
necessary on change orders.
• In addition, the seller needs to add to the
price of a fixed-price contract to account for
the increase risk.
 Types of Contracts➁
• Cost Reimbursable Contract (With a cost-reimbursable contract you pay the
vendor for the actual cost of the work. This could be materials, equipment,
whatever and will normally include direct and indirect costs)
• Used when the exact scope of work is uncertain, and, therefore, costs
cannot be estimated accurately enough.

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1. Cost Plus Fixed Fee Contract (CPFF). For example,
• Contract = cost plus a fee of $100,000
2. Cost Plus Incentive Fee Contract (CPIF). For example,
• Contract = $500,000 target cost plus $50,000 target fee. The buyer and seller
share any cost savings or overruns at 80% to the buyer and 20% to the seller.
3. Cost Plus Award Fee (CPAF). For example,
• Contract = Cost plus a base fee plus award for meeting buyer-specified
performance criteria. Maximum award available is $50,000.
4. Cost Plus Percentage of Cost (CPPC). For example,
• Contract = Cost plus 10 per cent of costs as fee
Cost-reimbursable Contract
from the buyers’ perspective
advantages
• This contract type allows for a
simpler SOW.
• It usually requires less work to
define the scope.
• A cost-reimbursable contract is
generally less costly than a fixed-
price contract because the seller
does not have to add as much for
risk.
disadvantages
• This contract requires auditing
the seller’s invoices.
• This contract type requires more
work for the buyer to manage.
• The seller has only a moderate
incentive to control costs.
• The total price is unknown.
 Types of Contracts➂
• Time and Materials Contract (Time and materials contracts see the vendor
being reimbursed for materials purchased plus a per day or per hour rate for
time spent.)
• Used for service efforts in which the level of effort cannot be defined when
the contract is awarded.
• Best used for work valued at small dollar amounts and lasting a short amount
of time.
• For Example:
• Contract = $100 per hour plus expenses or materials at cost
or
• Contract = $100 per hour plus materials at $5 per linear meter of wood

Information Technology Project Management, Eighth Edition 12

Time and Material Contract
from the buyers’ perspective
advantages
• This type of contract can be
created quickly, because the SOW
may be less detailed.
• The contract duration is brief.
• Flexibility--allow businesses to
modify the volume of work, revise
materials or designs, shift the
focus or change features following
the project implementation.
disadvantages
• Low budgeting control
• The seller has no incentive to
control costs.
• This contract type is appropriate
only for work involving a small level
of effort.
• Deep involvement--This contract
type requires a great deal of day-to-
day oversight from the buyer.
Risk to buyer and seller according to contract type

Buyer
100%

Risk

Seller

0
CPPC CPIF T&M FPIF
CPFF CPAF FPEPA FFP