Project Management: Foundations to Practice · Procurement and Contract Management
Contract Types
Choosing the wrong contract type for a given scenario is a frequent, predictable source of vendor disputes. This chapter covers how each type allocates risk and where each fits best.
Once a make-or-buy decision favors buying, the contract type chosen allocates risk between buyer and seller in different ways. Fixed-price contracts set a single agreed price regardless of the seller's actual cost, putting cost risk on the seller and working best when scope is well-defined upfront, since the seller has effectively agreed to absorb the risk of any cost overrun in exchange for keeping any upside if the work turns out to cost less than anticipated.
Key Takeaways
- Fixed-price contracts put cost risk on the seller and work best with well-defined, stable scope.
- Cost-reimbursable contracts put more cost risk on the buyer, suiting projects where scope is likely to evolve.
- Time-and-materials contracts are a hybrid offering flexibility with more cost visibility than pure cost-reimbursable arrangements.
- Mismatching contract type to scope certainty (fixed-price on undefined scope, or vice versa) is a frequent, predictable source of disputes.