From the course: Project Management Foundations: Procurement
Contract types
Compensation drives behavior. At least that's what I was told when I was in corporate sales. And since compensation, aka a paycheck, drives sales people's behavior, you can bet it also drives vendors behavior. You see in procurement management, contracts tie what vendors do to how they'll eventually get paid. Because of this, you can expect vendors to perform based on the terms of the contract. This is the power of a well constructed contract. It drives vendor's behavior. So now that you're aware of why contracts motivate vendors, let's look at the different types of contracts you can use. You'll find a list of the pros and cons of each in a handout. First, there are fixed price contracts. These contracts set a fixed price for clearly defined deliverables. They are best used when no significant scope changes are expected. Second, there are cost reimbursable contracts. These contracts reimburse the vendor for their allowable costs and give them a fee on top so they can make a profit. They are best used when significant scope changes are expected. Third, there are time and materials contracts. These are hybrid contracts that have aspects of both fixed-price and cost-reimbursable contracts. They are best used for small projects and staff augmentation. And fourth, there are indefinite delivery, indefinite quantity aka IQ contracts. These contracts provide an indefinite quantity of goods to services with predetermined upper and lower limits within a fixed time period. They are best used for engagements such as architectural, engineering, and IT, where project delays and budget overruns can occur due to uncertainty over when goods to services will be needed. Keep in mind, you have multiple options to choose from when it comes to fixed price and cost reimbursable contracts. For example, fixed price contract options include: Firm fixed price, fixed price incentive fee, as well as fixed price with economic price adjustments contracts. And cost-reimbursable contract options include: Cost plus fixed fee, cost plus incentive fee, and cost plus award fee contracts. Are you starting to get overwhelmed? Don't worry, I feel your pain. It's not an exact science. The type of contract you choose will depend on a number of factors, including the size of the purchase, how stable your scope is, along with your risk tolerance. My best advice for you is to get comfortable with being uncomfortable, especially when you're just getting started. Maybe this will give you some comfort. Let the needs of your project direct you to the best type of contract to use. Take for example, a new railroad project. Since projects like these tend to be large and take a long time to implement, you'd most likely favor some form of fixed price contract. If for no other reason, it would help you determine your budget and reduce cost uncertainties, assuming you have a good idea what your scope is. However, this is not always the case. What if you're under a tight deadline due to an emergency and you need the railroad operating as soon as possible? Minimizing costs might not be your top priority. Getting the railroad up and running is more important. In this case, a cost-reimbursable or time and materials contract might make more sense. Again, it's not an exact science. You have to use your best judgment. Here's the thing, picking contract types is no laughing matter, but neither is project management. If you want to be a strong project manager and complete projects successfully, you'll need to get good. And I mean really good at negotiating win-win contracts that encourage vendors to deliver the outcomes you expect.
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