subject: Learning For Pmp Professionals: Types Of Contract [print this page] When as a buyer you want to buy some items from the seller, you need to sign a contract. Contract is a document that has terms and conditions for purchasing, for example, contract will have details like what item seller will provide and how much money the buyer will pay for that item, when the buyer will pay, what is the warranty on the supplied items etc.
We all sign contract, even your employment agreement with your Employer is also a kind of contract, which mentions how long you need to work and how much you will get paid for that work, how many paid holidays you will have etc.
A contract always has minimum 2 parties. The party that provides the goods or service is called the Seller and the party that buys the goods or service is called the Buyer.
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.
Its important to note that a contract must be written and it must have legal remedies. So if either party fails to honour their commitment, the other party can go to the court and appeal against the misdeeds.
Either all the contracts of a organization can be managed by creating a central contracting or purchasing department, in that case its called Centralized contracting or there can be a separate contract managers assigned to each of the projects, in that case its called decentralized contracting.
In case of decentralized contracting, the contract manager is assigned to the project and reports to the project manager. While centralized contracting helps in standardizing the best practices, in decentralized contracting the project manager has more control and procurement process can be speeded up. In some cases, both type of contracting is used.
There are 3 types of contract. 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.
Time and Material contracts are generally used for smaller projects, where in customer pays by per item or per hour or per day basis.
Fixed price contracts are generally signed when the scope of the work is very clear.
In fixed price contracts, sometimes an incentive fee is also introduced to incentivize the seller to complete the work before time.
