Learning for PMP Professionals: Different Types of Contract

Learning for PMP Professionals: Different Types of Contract

A contract is a mutually agreed legal agreement that mandates the seller to provide its goods or services to buyer for a pre-agreed compensation. The compensation can be monetary or in some other form.

There are basically 3 types of contracts. Either its cost based or time and material based or is fixed price based.

Cost based contract can be further classified under various other categories as well. Either it can be cost plus a fixed fee or it can be cost plus a percentage of cost.

For example, suppose you want to construct a new building. You sign up with an architect. The architect charges you a fixed fee of $1000 a month and also 5% of the total building cost as fee for his services.

This is a good example of cost based contractingbecause the architect is charging 5% of the project cost as fee. So, more the cost of the building more will be his fee.

Time and Material contracts are generally used for smaller projects, where in customer pays by per item or per hour or per day basis.

A good example of such contract is call center contracts. If you want 5 people team to answer your customer queries, a call center company in Bangalore can provide you call center executives to you for 2000 dollars a month. So, for 5 people, it will cost you 10,000 dollars a month.

Fixed price contracts are generally signed when the scope of the work is very clear.

For example, a new bridge needs to be constructed on a Junction. The length and required strength of the bridge is well defined. In such case, City Corporation can ask for fixed price proposal from the bidders.

In fixed price contracts, sometimes an incentive fee is also introduced to incentivize the seller to complete the work before time.

For example, City Corporation can ask bidders to complete the bridge in 12 months and add to the contract that if the bridge is completed in less than 12 months, they get $10,000 as incentive per week, if they complete before time. So if they finish the bridge in 11 months, they get $40,000 as incentive for being 4 weeks before time.

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