Types of contracts in procurement

National Association of. What are the different types of contracts? What is the federal contract procurement process? In short there are primarily three types of procurement contracts.

Fixed price contracts (FP) 2. Cost-Reimbursable contracts 3. Time and Material contractsThese main types of procurement contracts are further classified as follows. See full list on scholar99. The primary pricing model of the fixed price contract is that the buyer will pay a fixed price for the work the seller is going to deliver.

However there are few types of fixed price contracts that vary a little from this definition based on the nature of the requirement of contract. Eventually the primary model of cost reimbursable contracts are asking the buyer to pay for the cost incurred by the seller in completing the work. The cost reimbursable contracts are of types. Eventually in time and material contracts, the buyer pays for the seller labor cost as well as additional cost for the material required in the project.

This is a combination of fixed price and cost reimbursable contracts. The time says that the buyer pays the seller for the cost of the labor. Meaning the buyer pays for seller for the effort (number of hours) spent on the project. The material part is about the all the non-manpower expenses in the project.

To summarize, we have seen different types of procurement contracts between the buyer and seller. The simple answer could be a project manager could be working with either the buyer side or seller side. It does not matter as long as you understand the type of contract and what goes in the contract clearly and work for it. Also we have seen fixed price contracts are more useful when both the buyer and sell. Procurement contracts are the agreements to use certain products and services on a project.

The types of procurement contracts and are typically either fixed-price, cost-reimbursable, or time and materials. Some agreements can include more than one of these payment structures on a single procurement contract. The seller has to complete the job within an agreed amount of money and time. The seller is responsible for any increase in cost and they are legally bound to complete the task within the agreement.

A contractor agrees to supply a product or service for a fixed price regardless of actual labor, material, and equipment costs. If cost become more than the agreed upon amount the contractor bears the additional costs. A clearly defined scope of work complemented by competitive bidders helps control pricing. Sellers base their bids on the procurement statement of work (SOW). The fixed price contract is the buyer’s preferred contract type.

Unfortunately, it is not always suitable for the project at hand. Implement a cost-reimbursable contract when scope is uncertain, an accurate cost estimates are not possible. This precludes the fixed price contract.

In a cost-reimbursable contract the buyer pays the workers for allowable incurred cost prescribed in the contract. In software projects the buyer often does not know what they really want until the seller demonstrates the deliverable. When the level of effort is uncertain it is best to use a time and material contract. This contract may also be titled Unit Price. So the hourly rate or unit price is known and fixe but the quantity an therefore, level of effort at the time of contract award is unknown.

So the time and material contract is similar to a fixed price contract, as the per-hour or per-item basis is fixed. The buyer pays on a per-hour or per-item basis. It also resembles a cost-reimbursable contract, because materials are reimbursed and the total cost is unknown. The time and material contract does not factor in worker productivity, so workers have little incentive to be efficient.

The seller’s profit is included in the hourly rate, and not the completion of the project. Therefore, time and material contracts are better suited to small dollar amount projects of short duration. Again, the seller has no incentive to work quickly. So the fixed price contract is the buyer’s preferred contract type. In most situations this type of contract provides the buyer the least risk.

It does, however, require a clearly defined scope of work. If the scope is not well-defined or even evolving, then the cost reimbursable contract would be the better route. Cost reimbursable is a common type of contract for software projects where scope is not fixed. In fact, the nature of software project’s to be always changing requirements or scope is such an issue that a whole new project management paradigm resulte known as agile.

The blog at the following link provides A Brief Introduction to Agile Management of Software Projects. In situations where the product is well define but effort to produce that product is unknown or variable, then the time and materials contract is favored. Worker productivity can be an issue in time and materials contracts, so it is better they be short duration and small priced projects.

With a fixed price contract the buyer (that’s you) doesn’t take on much risk. This is great for the project’s risk register, but not so great for the project budget. As the seller adopts all the risk they normally add a bit to the price to allow for any risks.

For example, just because our software consultancy firm thinks it is going to take workshops to define requirements because it has done on the last occasions this doesn’t mean it actually will this time round. They have never worke. With a cost-reimbursable contract you pay the vendor for the actual cost of the work. Indirect costs will be a fixed percentage amount – they won’t send you their electricity bills and ask you to pay a proportion.

So how does the vendor make any money? Obviously they aren’t working for you for nothing, and while you are covering all their. Time and materials contracts see the vendor being reimbursed for materials purchased plus a per day or per hour rate for time spent. The developers building the software in this example will charge on a time and materials basis. In this case, there probably won’t be many materials and they will charge their daily rate for time spent writing and testing the new product.

These types of contracts are best used when an individual knows exactly what the scope of work is. Procurement is the process of finding and agreeing to terms, and acquiring goods, services, or works from an external source, often via a tendering or competitive bidding process. Purchasing consists of the last explicitly transactional steps found at the end of the overall procurement process. Formal contract opportunities are: Competitive, sealed bids with an expected value of $30or more. Advertised in newspapers and available online on PHLContracts.

Opened publicly and electronically. It may include things like scope of procurement , legal jurisdiction, quality requirements, period of contract etc. A fixed-price contract is the best way to make sure that you keep your costs low and get certainty around the scope of work for a fixed tenure. These major contract types can have many variations and can be customized to meet the specific needs of the product or the project. We will break our discussion of the seven contract types into three larger groups of contracts – fixed-price, cost-reimbursable, and time and material.

These contacts first reimburse the seller for all actual costs incurred and then add a fee for the seller’s profit. In this type of contract , the majority of the risk falls on the buyer and is less desirable because of it. When its come to the construction industry acquiring or obtaining strategy is a time-consuming and costly process. Therefor different type of contract processes are there as procurement methods in the construction industry.

So basically, all these types of contracts. Different types of contracts , which are contained within each of these two types of groups, may be used separately or in combination with one another. Types of Conditions Conditions precedent, conditions concurrent, and conditions subsequent are types of conditions that are commonly found in contracts. A condition precedent is an event that must exist as a fact before the promisor incurs any liability pursuant to it. Each have their own pros and cons, as well as unique risk of problems, hence a strong procurement strategy is key.

In the en the type of procurement method you choose to use is highly relative to the conditions of the procurement effort and the type of good or service being acquired. All procurement methods follow tight legal frameworks to ensure all standards are being met and quality in the selection process exists.