Procurement contract type is an important PMP topic. It is one such topic that which forms the base for procurement knowledge areas
The webinar on Procurement Contract Type is a base that forms the relationship between the buyer and the seller. This is a formal agreement unlike any other verbal agreement it has to be documented with precise details.
Three types of Procurement Contract Type are discussed with examples. Pros and cons of each contract type are given so as to give a clear idea of what all is involved while making the legal agreement.
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4. Creates Buyer Seller Relationship
Legally enforceable
Should be formally written
Should explicitly describe the goods , service or
result
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Price and Scope - Fixed
Scope of work clearly defined
Work , time , material needed can
be accurately estimated
Seller is at Higher Risk
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Pros / Cons Buyer Seller
• Easier to manage
• Easier to budget
• Easier to budget
Income
• Requires explicit
statement of work
• If material / labor
rate decreases
buyer does not
get the benefit
• Requires strict
cost control
• Require strict
contract change
management
• If market price
increase , seller
price does not
increase
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Commonly used
Fee is fixed for the Product or Service
No Incentives
Change increases the costs to the buyer.
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Incentives and Bonus to the sellers
based on performance targets
Motive sellers for better performance
It is Firm Fixed Price Contract with
Incentive attached.
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Price can be adjusted based on some agreed
parameters like
Inflation rate
Currency rate
Oil
Metal Index
Best suited for projects where period spans
for number of years.
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Seller get the actual cost incurred plus
seller’s profit
The Type of cost reimburse are spelled out
in contract
Seller’s profit could be fixed or percentage
of actual cost
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When scope is uncertain
Total cost not known at start of the project
Requires more administrative work
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Pros / Cons Buyer Seller
•More Flexible for changing
market need
• Less Rigorous
Change Control
• The seller has no incentive to
keep cost low
• More difficult to budget
• Rigorous contract
management
• Rigorous Internal Change
Control
• High level of
transparency
• Require regular
communication
especially on Cost
Variance
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The Buyer is responsible for
labor cost at agreed upon rate
Hybrid Type of contract having
essence of Fixed price and Cost
reimbursable
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Pros / Cons Buyer Seller
• More Transparency • Less Rigor
Change Control
• Inefficient input may
spend more hours
• Difficult to estimate
budget
• Milestones needs to
be managed closely
• Require regular
communication
with buyer