Project Contract Types

Sorted by : APMC PDU Team

Introduction 

In the world of business, contracts are used for establishing business deals and partnerships. The parties involved in the business engagement decide the type of the contract.

Usually, the type of the contract used for the business engagement varies depending on the type of the work and the nature of the industry.

The contract is simply an elaborated agreement between two or more parties. One or more parties may provide products or services in return to something provided by other parties (client).

The contract type is the key relationship between the parties engaged in the business and the contract type determines the project risk.

Let' have a look at most widely used contract types.


Fixed Price (Lump Sum)

This is the simplest type of all contracts. The terms are quite straightforward and easy to understand.

To put in simple, the service provider agrees to provide a defined service for a specific period of time and the client agrees to pay a fixed amount of money for the service.

This contract type may define various milestones for the deliveries as well as KPIs (Key Performance Indicators). In addition, the contractor may have an acceptance criteria defined for the milestones and the final delivery.

The main advantages of this type of contract is that the contractor knows the total project cost before the project commences.


Unit Price

In this model, the project is divided into units and the charge for each unit is defined. This contract type can be introduced as one of the more flexible methods compared to fixed price contract.

Usually, the owner (contractor/client) of the project decides on the estimates and asks the bidders to bid of each element of the project.

After bidding, depending on the bid amounts and the qualifications of bidders, the entire project may be given to the same service provider or different units may be allocated to different service providers.

This is a good approach when different project units require different expertise to complete.


Cost Plus

In this contract model, the services provider is reimbursed for their machinery, lab our and other costs, in addition to contractor paying an agreed fee to the service provider.

In this method, the service provider should offer a detailed schedule and the resource allocation for the project. Apart from that, all the costs should be properly listed and should be reported to the contractor periodically.

The payments may be paid by the contractor at a certain frequency (such as monthly, quarterly) or by the end of milestones.


Incentive

Incentive