There are two main contract types widely used in the projectmanagement – contracts with fixed cost and cost-reimbursable ones. There isalso a hybrid model called time and materials contract, which combines traitsof both. Here below I will describe characteristics of each, their advantagesand disadvantages.Fixed-price contracts.
This category of contracts includes setting a settled add up to cost for acharacterized product, service, or result to be given. Fixed-price contractsmay too consolidate money related incentives for achieving or surpassing chosenventure destinations, such as plan conveyance dates, fetched and technicalperformance, or anything that can be measured and along these lines measured.Venders beneath fixed-price contracts are legitimately committed to total suchcontracts, with conceivable budgetary harms in case they do not. Buyers requireto absolutely indicate the item or services being procured.
Changes in scopemay be suited, but for the most part with an increment in contract cost.Firm fixed-price contract (FFP). Themost commonly utilized contract sort is the FFP. It is favored by most buyingorganizations since the cost for merchandise is set at the beginning and notsubject to alter unless the scope of work changes. Any taken a fee incrementdue to adverse performance is the duty of the vender, who is committed to fulfillhis obligations. Under the FFP contract, the buyer ought to absolutely indicatethe item or administrations to be procured, and any changes to the acquirementdetermination can increment the costs to the buyer. Both – seller and buyer mayexperience risks, depending on the microeconomic environment, inflation,however in most cases this type of contract benefits buyer most rather thanseller.
Fixed-price incentive feecontract (FPIF). This fixed-price course of action gives the buyer and seller adaptabilityin that it permits for deviation from execution, with budgetary incentives tiedto accomplishing concurred upon measurements. Regularly such budgetarymotivations are related to cost, schedule, or specialized execution of thedealer. Execution targets are set up at the outset, and the last contract costis decided after completion of all work based on the seller’s execution. UnderFPIF contracts, a cost ceiling is set, and all costs over the price ceiling arethe obligation of the dealer, who is committed to complete the work. Overall thiscontract benefits both parties, however provides certain risks to the sellerdue to its strict contractual obligations enforcements.
Fixed Price with Economic PriceAdjustment Contracts (FP-EPA).