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TOPIC: Different Types of Coontracts in Procurement

Different Types of Coontracts in Procurement 1 year 10 months ago #5101

  • Mohd Salik
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Dear Cornellius,
Hi !
I find the different types of contractual agreements bit difficult to remember for the exam.

Could u throw some light on it or an easy way to remember that for the exam.

thanks

M.S.Bhaiji

Different Types of Coontracts in Procurement 1 year 10 months ago #5105

  • Steve Sandoval
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Hello Mohd,

There are many different variations, but at the top level there are only three main types: Fixed price, cost plus, and time and materials. It might help if you focused on just those three to start.

These three main types cover the two extremes as well as one that is more mixed.

-At one extreme, you could agree to perform work for a set amount of money. No matter what happens (unless you have contractual escape clauses, but that's a whole different discussion), you are expected to complete the work for that amount. This would be a "fixed price" contract.

-At the other extreme, the buyer could agree to pay the seller whatever it costs to do the work, without specifying a specific amount. This would be a "cost reimburable" or "cost plus" contract. They are commonly called "cost plus" because in almost all cases the seller also gets some sort of additional fee or award, depending on the contract details.

-The mixed case would be "time and materials". In this case, the buyer and seller agree on a set cost rate for time spent on the project, and the seller agrees to pay any material costs. This combines some aspects of a fixed price (in this case, a fixed rate for the labor), and a cost reimburasble (for the materials).

After you fully understand these three, then you can dive into the specific varitaions -- like cost plus a plus incentive fee, or fixed price with economic price adjustment.

I hope this helps to clarify things!
Steve Sandoval, PMP
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Different Types of Coontracts in Procurement 1 year 10 months ago #5108

  • Ahmed Amin
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Hi Mohd,

There are 3 main types of contracts:
1- Fixed Price : also known as lump-sum contract. Best used when there is certainty and clarity in the scope of work. Since the contract is fixed amount, more risk is at the seller side.
2- Cost Reimbursable: in this contract the seller is reimbursed the costs of completed scope plus a fee as a profit. This contract type is used when there is uncertainty about scope of work. And since the buyer pays all costs, more risk is at the buyer side.
3- Time and material: this is hybrid from the 2 types above and risk is distributed on both parties. Most commonly to higher experts . EX: A consultant will be paid 30$ per hour.

There are some variations from each of the above main types as below:

1- Fixed Price contracts.
a. Firm Fixed Price Contract (FFP). Simply a fixed cost and the seller will be responsible for any extra costs.
Ex: the seller has to complete the company's new website for 100k$ within 6 months.
b. Fixed Price plus Incentive Fee (FPIF). Beside the fixed fee, the seller will be given an additional incentive based on performance. The incentive is commonly tied to project performance (Schedule, quality,…). The incentive lowers the risks at the seller side.
Ex: the seller has to complete the company's new website for 100k$ within 6 months.10k$ will be paid if the seller completes the web site before 4 months.
c. Fixed Price with Economic Price Adjustment Contracts (FP-EPA). Commonly used for long contracts to protect the seller from inflation.
Ex: 5% of the price will be added after 2 years if the average inflation rate was above 7%.

2- Cost Reimbursable Contracts.
a. Cost Plus Fixed Fee (CPFF). The seller will be paid all costs plus a fixed fee. This puts more risk on the buyer.
Ex: Total cost plus 10k$ fee.
b. Cost Plus Incentive Fee Contract (CPIF). The seller will be paid all costs plus an incentive fee based on the seller's performance. The formula to calculate the incentive is usually a part of the contract. The risk is still on the buyer but less than the fixed fee.
Ex: Total cost plus 10% of the cost if the new call center system average waiting time is less than 3 minutes.
c. Cost Plus Award Fee (CPAF). The seller will be paid all costs plus an award fee based on performance. The evaluation of performance and the award is subjectively done by the buyer.

Ex: Total cost plus 10% of the cost if the seller meets the quality standards and the end-user satisfaction.


This is all you need to know for the exam and I hope this clarifies the topic for you.
Ahmed Amin Abdullah, PMP
Community Moderator

Different Types of Coontracts in Procurement 1 year 10 months ago #5109

  • Mohd Salik
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My sincere thanks to the duo for explaining the above topic.



Regards

M.S.bhaiji

Different Types of Coontracts in Procurement 1 year 9 months ago #5213

  • onus lawrence
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thank you all.
my company was contacted as a projected manager consultant by inexperience developer for a construction project and a refurbishment. the duration is 12 months for a fixed price.
i was selected to :

Write a formal project delivery brief for your client’s approval on how your organisation would carry
out the project management. The report should include the background of your organisation, project
team integration, project lifecycle, procurement route, risk management, and project planning and control mechanism.
can you please direct me on how to go about this?
i need example of such report.
thanks
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