Multiple contracts are available for procuring products and services by an organisation. The contracts to be used while procuring products and services are based on the marketplace, the type of project, and the nature of products or services.
These contracts can be categorized into the following types
- Fixed-Price Contracts
- Cost Reimbursable Contracts
- Unit Price Contracts
The fixed price contract, which is also called the lump-sum contract, is an agreement to provide a well-defined product to the buyer at a fixed total price.
This type of contract may involve incentives from the buyers to the sellers for exceeding project objectives by the seller, such as delivering end-products to the buyer before the deadline.
For example, a contract between a buyer and a seller says that `10,000 is payable to the seller if the seller completes his/her part of the contract as scheduled. Further, the contract has a condition that 5% of the contracted price is provided as incentive to the seller, if he/she completes the work before the scheduled time, the buyer has to pay a total price of (10,000 + 5% of 10,000) `10,500. However, this type of contract may involve risk for both the buyer and the seller, in case the product is not well-defined.
Cost reimbursable contracts
The cost reimbursable contract requires the buyer to pay the seller for the direct and indirect expenses incurred in the product. In addition, a profit margin is attached to the cost.
This margin is the difference between the sales amount and the actual cost of the product. Three types of contracts exist within the cost reimbursable contract, Cost Plus Incentive Fee (CPIF), Cost Plus Fixed Fee (CPFF) and Cost Plus Percentage of Cost (CPPC).
Unit price contract
The unit price contract, also known as the time and material contract, requires the buyer to pay the seller a preset amount per unit of services provided. The total cost under this contract is determined as a function of the number of unit of work provided by the seller.
For example, a buyer agrees to pay `100 per unit of steel-plate, provided by the seller. Therefore, if the seller provides 100 units of steel-plates, the buyer has to pay (`100×100 units) `10,000 to the seller. There is no discount from the seller or any incentive from the buyer.