Procurements as a specialty are sometimes a little out of the wheelhouse of most Project Managers. The majority of my knowledge of procurements comes from a seller perspective, and over time, has expanded significantly. It’s important for PM’s – even those of small businesses to realize the differences between the types of procurements and be able to recognize the advantages they offer.

Fixed Prices

They offer the buyer the most protection. It handcuffs the seller to a firm price. It works best if the buyer either has a perfect idea of what’s going on for the project and includes details of that in the RFP (or in the bidder conference), or for commodities (or iterated services). The heavy lifting in terms of the scope definitions and quality will be articulated pretty plainly by the buyer. They know exactly what they want and will say it- and facilitate price shopping.

Acme: I’ll do the project for $700.
United: I’ll do it for $670.
Coopers: I’ll do it for $650!

Fixed Price Plus Incentive Fee

Same as above in terms of the seller providing a firm quote, but there is incentive for performance- for example being able to attain perfrormance indicators in regards to time or quality.

I’ll pay you $600. If you get it done before the 20th, I’ll give you an extra $60. If you have below a 5% reject rate, I’ll toss in another $60 on top of that.

Fixed Price with Economic Adjustment

This is suitable for long term contracts where the value of the price will be affected by fluctuations in the market economy.

We’re going to pay $9,500,000 over 10 years, assuming the price of steel for construction will be at current levels. The prorata cost and agreed mark up will be adhered up to an increase of 7% overall.

Cost Plus Fixed Fee

This arrangement covers the cost of the seller, plus an agreed fee. In film noir movies, detectives usually have this contract.

My rate to tail your husband is $200 per day plus expenses.

Cost Plus Incentive Fee

Remember the Incentive Fee from the Fixed Price contract? Well, same thing, but instead of the base contract being fixed price (which probably has markup and profit built in) there is no markup involved in this. The base covers the costs, so if you need to emphasize the importance of a constraints (i.e: A quality measurement, hard deadline, a cost cap or another measure), you can use this contract type. It incentivizes the seller to meet those metrics or not get paid beyond covering costs. It’s brutal, but if you need to ensure a performance metric is met- this is a way to do it.

NB: an issue with cost reimbursement contracts is the potential for the seller to game you in terms of costs. Unless you’re going to be auditing the costs very carefully, or have a lot of trust in the seller, these present a high risk for overcharging potential.

Cost Plus Award Fee

It’s related to Cost Plus Incentive Fee, but less metric based. The Award Fee is based on buyer satisfaction at completion and not generally subject to appeal. It gives the buyer all the power in the end to decide if the seller is profitable and how much, or if the project takes a loss. (The Cost reimbursement concerns direct and variable costs, not overhead and fixed costs which would be where the loss for the project would be involved).

Time and Materials

This is an open ended contract that allows the seller to bill unlimited amounts at an agreed rate for time, in addition to covering the costs of material. The hourly rate has profit built in. The seller invoices the buyer for any time and labor incurred in relation to he project. If the seller sends an invoice for $2000 for 2 days work by the database developer, who’s to say that the database developer was working consistently on the buyer’s project? Could be they were working on other projects and the company was double billing on the database developer. Could be the database developer was working on internal projects and the company was trying to cover costs on that.

These contracts are scary for that reason, but have a time and place. They’re perfect for the following scenario

1. The seller and buyer have a longstanding relationship with a high degree of trust and transparency between the two parties
2. The the seller represents expertise, highly skilled work, or specialized skills.
3. There is an unknown component which makes estimation and forecasting imprecise or impossible.

A place I’ve often used this type of contract is when a current client has a custom developed application built for them which is buggy. I’ve been in situations where my company built the original framework, I’ve worked in situations where we’re supporting the application another company has built- but in both cases, there was a high degree of communication between me and the client detailing what efforts we were pursuing to resolve the issue and setting the time for the subsequent follow up (likely the next day with an update). This way, the buyer actually has some control over the process and is not just fitting their operating budget with a pair of walking shoes and opening the front door it.

Time and Materials with Cap

This is actually an excellent contract because it gives the buyer unparalleled risk mitigation. You do your best to estimate and forecast the costs, and then use that as a ceiling in that you agree to not charge the client more than $X, and if you come in under, you don’t charge the client full price (and perhaps use it as an opportunity to sell other services to meet the ceiling).

In conclusion, contract types can be an overlooked goldmine of ways to kick off a great project on the right note.