All About Contracts!


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This presentation talks about different types of contracts used in project. This topic is part of PMBOK (Project Human Resources Management knowledge area) and is helpful in your preparation for PMP or CAPM certification exams. Or you can use this to understand more about project management.

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All About Contracts!

  1. 1. A guide to passing PMP® exam! series..All About Contracts!Based on the PMBOK® bookVisit for a free eBook on ProjectManagement, and brain-friendly notes for PMP® and CAPM® certificationexams!Brought to you
  2. 2. How many types of Contracts?• Fixed Price• Cost Reimbursable• Time & Material
  3. 3. Fixed-Price Contract
  4. 4. The basic version of Fixed Price contractinvolves buyer paying a fixed sum to theseller for producing a product or service.Variations of this contract involve payingadditional money based on certain criteria.If initial estimates are found to be incorrectthen seller assumes all additional cost.This type of contract is mostly favored bythe buyers, not many sellers would likethis.
  5. 5. What happens to the contract whenthere is a change in scope midwayof the project?You analyze impact on schedule anddeliverables, update the contract for impactareas such as scope, acceptance criteria anddelivery dates, rework the price increase (ordecrease) and update the contract with pricingdetails.
  6. 6. Firm Fixed Price contract (FFP)This is most commonly used Fixed Pricecontract type.The price of product or service is fixedupfront and will change only if there ischange in scope - as agreed by both sellerand buyer.Upon completion of project seller gets paidthe amount written in contract.
  7. 7. Fixed Price Incentive Fee Contract(FPIF)In this type of Fixed Price contract, sellergets a chance to make more money ifpredetermined performance metrics areachieved. This incentive is in addition tothe fixed price of the contract.These performance metrics could berelated to cost, schedule or technicalperformance and set by buyer.
  8. 8. Fixed Price with Economic PriceAdjustment Contract (FP-EPA)This is a favored contract type for longterm projects that span years. The priceadjustment comes into play due to factorssuch as inflation, cost changes to rawmaterials, or changed environmentalconditions under which the project iscarried out.
  9. 9. Cost-reimbursableContract
  10. 10. This is the second type of contract.Here buyer reimburses all legitimate costsincurred in carrying out the contract workby the seller. In addition, buyer pays a feewhich is the profit component of seller.The fee may be fixed or tied to certainperformance expectations, such ascost, time, or quality of the deliverables.
  11. 11. Cost Plus Fixed Fee Contract(CPFF)This is a straight forward case ofreimbursement of costs and a fixed fee.In some cases this fee could be certainpercentage of the overall cost, subject to aceiling limit.
  12. 12. Cost Plus Incentive Fee Contract(CPIF)Apart from the fixed costcomponent, additional incentive fee issubject to achieving performanceobjectives as written in the contract.
  13. 13. Cost Plus Award Fee Contract(FPAF)This is similar to CPIF type of contract, witha difference that award fee is subject toachievement of certain performanceaspects which are subjective, rather thanobjective. These may not be clearlymeasurable and amount of award fee isdetermined by the buyer purely based onhow happy she is with the deliverables.
  14. 14. Time and Material(T&M) Contract
  15. 15. This is the third type of contract.Buyer pays seller for all materials (hardware,machinery, tools and equipment) and a per unitrate for the effort spent by the team. This typeof contract is favored when 100% ofrequirements cannot be scoped up front. If therequirements are subjected to changes quiteoften where buyer himself is not able to decideon requirements upfront, this is the contracttype to go.
  16. 16. Many new software products are builtusing this contract type. Productrequirements evolve based on how endusers use it. For this reason the full value ofcontract cannot be determined accuratelyup front. Sometimes there are clauses onthe ceiling amount for the materialcost, and a time limit for complete delivery.
  17. 17. PMI is a registered trademark and service mark of the Project Management Institute, Inc.PMP is a registered certification mark of the Project Management Institute, Inc.PMBOK is a registered trademark of the Project Management Institute, Inc.For more PMP® and CAPM® study notesvisit http://www.PMExamSmartNotes.comThank you!