Cost Reimbursable, Time&Materials, and Fixed Price Contracts - Term Paper Example

Legally speaking, a contract is an agreement- It is an agreement between two parties carry on certain legal objective. In business terms, it is an agreement between a buyer and a seller to provide goods and services against some lawful consideration. It is however important to understand that once two parties form a contract with each other; they are legally binding to each other to perform their legal obligations. Failure to do so would entail one party to the legal damages under the contract. It is therefore critical that both the parties choose contract terms which suit them and are according to their needs and wants in order to avoid conflict of interest. Within the perspective of project management, such contract writing would require to give due attention to the choice of numbers, apparent risks in making the contract, terms of the payment of the main contract as well as subcontracts of the project. However, it is also important to understand that the terms of each contract mostly vary from project to project depending upon the requirements of the each project. These terms largely depend upon the preference for quality, economy, flexibility as well as speed with which agreed terms and conditions of the contract can be delivered. There are different types of contracts which are used for different purposes depending upon the needs of the project. However, three major types of contracts are: 1) Cost reimbursable 2) Time and Materials 3) Fixed Price Cost Reimbursable Under these contracts, the allowable costs associated with the contract are identified first as these costs would be major costs to make buying and selling on the agreed terms of the contract. All the costs incurred therefore by the sellers are reimbursed by the buyer in the end according to the agreed terms of the contract. This type of contract can be highly risky for the buyer because the total costs associated with the contract always remain uncertain despite they are being identified. Any cost over-runs has to be borne by the buyer if contract terms go awry and does not remain within the control of either the buyer or the seller. However, on the positive side, scope changes in such kind of contracts are easy to make and buyer can do it anytime he wants however, this may increase the total cost of the contract. As discussed above that the cost reimbursable contracts are highly uncertain therefore contractors have very little ambitions or advantage to produce efficiently and productively. However, such kind of contracts helps contractors or sellers to pass on the increasing costs to the buyer. Such types of contracts are used when there is a greater uncertainty associated with the project and are used for projects which involve large investments being made in early part of its life. There are also sub-types of cost reimbursable contracts. These are: 1) Cost plus Fee are contracts where contractors are not only reimbursed of their total cost incurred but also a certain percentage of the overall cost of the contract. The percentages are decided before entering into the contract and are mostly documented in the contract. 2) Cost plus fixed fee are contract where the whole cost is charged back along with certain agreed fixed fee as the contract completion fee. This fixed fee is often considered as the profit of the seller. (contractmanagement.com, 2007). 3) Cost plus incentive is a type of contract where the buyer not only reimburse the total cost to the seller but also provide a certain amount as an incentive fee for exceeding the performance against the agreed contract terms. Such kind of terms may ensure better performance on the part of the seller as it provide them an added incentive to perform and execute the contract in most efficient way. This type f contract can beneficial to both the buyer and the seller if well written and can be a good alternative to the cost reimbursable contract. Fixed Price Contracts Such types of contracts fix a certain specific fee for the goods and services to be rendered before entering into the contract. Both the seller and the buyer agree to the terms and conditions of the contract before entering into such contract. In this type of contract, the seller may have the largest amount of risk to bear because since the payment terms are fixed therefore any cost over runs has to be borne by the seller. In order to avoid such uncertainty, both the seller and the buyer first not only identify the risk associated with the contract but also include a risk factor which could be integrated into the total cost of the contract in order to cover different risks such as political, economical as well as technological factors.( ago.nooa.gov, 2006). It is also important to understand that such types of contracts can be very risky for both the buyer and the seller if the scope of the contract is not well defined therefore it is very important that the deliverables of the contracts are already decided. Time and Material Contracts This type of contracts fall between the above discussed types of contracts as the total costs of the contract are not well defined in advance. Under this contract, the cost of the project may continue to grow during the life span of the project. Buyer, in such type of contracts bears the highest risk as scopes are not well defined. For an organization such as APDC, it is important that a contract should be entered which carry low risk therefore a fixed priced contract can be a good and less risky option for the organization. This is also important in the sense that it can provide a kind of hedge to the company against fluctuations into the economic as well as other external conditions which may involve high costs over runs for company to bear. It is therefore recommended that the APDC should stick with the fixed price contracts specially for building residential as well as shopping malls. References 1) Afo.nooa.gov (2006). Types of Contracts. Retrieved September 03, 2008 from http://www.ago.noaa.gov/ad/contract_type.shtml 2) Contract. Management (2007). Contract Management: Contract Types. Retrieved September 03, 2008 from http://www.contracts-managements.com/contract-types.php Read More