Contracts and types (habib)

HABIB RAHMAN HADIER
MBA 2ND YEAR
PROJECT MANAGEMENT
KALINGA UNIVERSITY, CG, INDIA

Prepared by Habib Rahman email: habibrahman20@gmail.com

Project Contract
and its types

PROJECT CONTRACTS
• As a project manager you need to understand the different types of contracts. You need to
understand the need to each type, its pros and cons. There are three main types of contracts:
• 1. Fixed Price (Lump sum) Contracts
• 2. Cost Reimbursable Contracts
• 3. Time and Material Contracts or Unit Price Contracts

1. FIXED PRICE (LUMP SUM) CONTRACTS
• The seller and the buyer agree on a fixed price for the project. The seller accepts the risk in
this type of contracts.
• The buyer has less risk as the price is already fixed and there is an agreement on the same
from seller side as well. There must be a clear, specific and detailed project scope.

ADVANTAGE OF FPC
• Advantages of fixed price contracts include throwing all the risk on the seller. The main
disadvantage is that the seller may start cutting scope or quality in order to finish on
time and on budget.

TYPES OF FIXED PRICE CONTRACT
• There are three subtypes of fixed price contracts
1. Fixed Price Incentive Fee (FPIF)
2. Fixed Price Award Fee (FPAF)
3. Fixed Price Economic Price Adjustment (FPEPA)

1.FIXED PRICE INCENTIVE FEE (FPIF)
• If project finished little bit earlier, an additional amount will be paid to the seller.
• This type of contract contains IF CLAUSE which means that if the project is completed
prior to the deadline then the extra amount will be paid.
• Let us suppose the end date of the project is 2019 December and the party handover the
project at the month of November under this condition the incentive fees is charged.

2. FIXED PRICE AWARD FEE (FPAF)
• If the performance of seller exceeds as planned earlier an additional amount will be paid to
the seller.
• Again in this type of contract IF CLAUSE plays role. It explains that if the implementing
party handover the project with better quality as expected than the award fees is being
charged.

3. FIXED PRICE ECONOMIC
PRICE ADJUSTMENT (FPEPA)
• The fixed price can be re-determined depending on the market pricing rate.
• Under the EPEPA the price will be set according to the market pricing. The fluctuation of exchange
rate or price of raw material play vital role in the selecting of the price for the project.

COST REIMBURSABLE CONTRACTS
• It has three following types.
1. Cost Plus Fee (CPF) or Cost Plus Percentage of Costs (CPPC)
2. Cost Plus Incentive Fee (CPIF)
3. Cost Plus Award Fee (CPAF)

1.COST PLUS FEE (CPF) OR
COST PLUS PERCENTAGE OF COSTS
(CPPC)
• The seller will get the total cost they incurred on the projects plus a percentage of fee over
cost (as a profit). Always beneficial for seller.
• It means that the seller will receive certain amount of fees or percentage for meeting a
certain criteria which was assigned.
• Let us suppose that A receive a contract selling 1000 product and he was told that if you sell
this product in the particular duration of time than the company will pay 2% as extra.

2. COST PLUS INCENTIVE FEE (CPIF)
• A performance based extra amount will be paid to the seller plus actual cost they have
incurred on the projects.
• Based on the good performance extra amount will be paid to implementing party for the
better performance in the completion of the project.
• Let us suppose that the cost of the project is 10000$ due the better performance the company
agrees to pay some extra amount to i.e 10500$.

3. COST PLUS AWARD FEE (CPAF)
• The seller or implementing party will get a bonus amount plus the actual cost incurred on the
projects.
• Under the CPAF the seller will receive some extra amount in the shape of bonus as award.

TIME AND MATERIAL CONTRACTS
OR UNIT PRICE CONTRACTS
• The contract is based on unit price or hour (day) price.
• For example, if the seller works 2,000 hours for a project, and the agreed rate is $100 / hour,
the buyer will pay the seller $200,000.
• This type of contracts is typical in outsourcing work.
• The advantage of this type of contract is that the seller will make profit for every hour spent
on the project. The advantage for the buyer is to get resources to do the task under the
buyer’s control without having long-term commitment with the resources. It’s also beneficial
for having scarce resources. The disadvantage is that the buyer has the risk of exceeding
budget.

ADVANTAGES OF TIME AND
MATERIAL CONTRACT
• The advantage of this type of contract is that the seller will make profit for every hour spent on the project.
• The advantage for the buyer is to get resources to do the task under the buyer’s control without having
long-term commitment with the resources.
• It’s also beneficial for having scarce resources.
• The disadvantage is that the buyer has the risk of exceeding budget.

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