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Project Management Tutorial

Contracts are legally binding agreements between at least 2 different legal entities named a buyer and a seller. The buyer wishes to buy certain goods or services from a seller. The seller, in return for the goods or services provided, expects monetary or other values to be paid to them.When a buyer and seller agree to work together as mentioned above, both sides will have expectation to receive some value from the other party. And both sides also have certain obligations to fulfil towards each other. A legally binding contract will help protect the rights of both sides by ensuring both sides fulfil their obligations. In case of any issues, any of the aggrieved side can take legal recourse. Elements of a legally binding contractContract is an elaborate document containing the detailed scope of work along with all other agreed terms and conditions, stating the rights and obligations of both sides.A legally binding contract will have the following components:There must be an offer from one side. The offer must be a genuine offer.There must be acceptance from the other side. The acceptance must be a willing acceptance without any kind of pressure.There must be equal exchange of values between both the sides. Must be signed by authorized personnel.The work in the contract must be legally allowed work. There can’t be a legal contract for illegal work.While all the above elements must be present in a legally binding contract, it is said that the consideration is the most important factor, as that defines the benefits received by both sides. It is also said that the consideration must be win-win for both sides. Contract TypesThere are three broad categories of contracts as mentioned below:Fixed Price Contract (FP)Time and Material Contract (T&M)Cost Reimbursable Contract (CR)Fixed Price Contract Fixed Price contracts are used when the scope of work is clearly defined and the requirements are well understood. Once the scope is clearly defined, then it is expected that the seller will come up with a fixed price quotation for the agreed scope of work. The seller needs to understand the requirements and also all the associated risks which may occur during the project work, while making a fixed prices quotation. Hence for a fixed prices contract the seller also needs to be very matured and capable.Once agreed, it becomes a win-win for both sides. The buyer is assured of a fixed price to be paid once the defined scope of work is completed by the seller. The payments will be made based on delivering well defined outcomes. The seller here assumes all the cost related risk once agreed. The seller may lose money in this kind of a contract, at the same time the seller may make maximum profit also in this kind of contract if they can complete the work in less cost.It will take solid maturity and clarity on both sides to come up with fixed-price contracts. Negotiation may take some time. Fixed price contracts once finalized, will use change requests for any kind of changes to be made in scope or any other terms and conditions. There are 3 different flavours of fixed-price contract as below:Firm Fixed Price Contract (FFP)Fixed Price with Incentive (FPIP)Fixed Price with Economic Price Adjustment (FP-EPA)Time and Material Contract (T&M)Time and Material contracts are very popular contract type which is used for regular purchases for standard items. Items may include augmenting temporary manpower for the project with well-defined skills and expertise level. Item also includes standard materials which may be needed for consumption in the project.In T&M contracts, the organization will select some preferred suppliers of such manpower and materials. The vendors will be selected based on their capabilities and experience. There will be a negotiated price (or rate) for such supplies. The final price paid will be for the amount of quantity of such resources consumed or purchased. Managing T&M contracts is pretty simple. T&M contract uses both the flavours of fixed price and reimbursement based on consumption.Cost Reimbursable Contract (CR)In cost reimbursable contract the buyer pays the actual cost incurred by the seller and an additional fee or profit. There are 2 components paid separately in this kind of contract. While actual cost is reimbursed as per actual, the fee amount is somewhat decided upfront.This kind of contract is used when the requirements are not clear. The team also does not much clarity about the details of how the product will be developed. Hence in absence of clarity on all accounts, this becomes the best possible arrangement.Cost reimbursable contracts are used for new research and development, proof of concept developments which requires immense innovation without a guarantee of predicted outcome. Following are some of the flavours of Cost-Reimbursable contracts.Cost plus percentage of cost (CPPC)Cost plus fixed fee (CPFF)Cost plus Incentive Fee (CPIF)Cost plus award fee (CPAF)Cost plus contracts puts all the risk on the buyer, as the seller is assured of all the actual cost plus some fee. The entire responsibility lies on the buyer. These contracts sometime can be misused also. As the seller will not bother much about cost control, as they are assured of all actual costs. This requires the buyer to audit and micro manage all the expenses.ConclusionThe above contract types are used worldwide. Specific contract type can be used for specific kind of purchases. Contracts have legal binding on both sides that are part of a contract.
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Project Management Tutorial

Project Contract Types

Contracts are legally binding agreements between at least 2 different legal entities named a buyer and a seller. The buyer wishes to buy certain goods or services from a seller. The seller, in return for the goods or services provided, expects monetary or other values to be paid to them.

When a buyer and seller agree to work together as mentioned above, both sides will have expectation to receive some value from the other party. And both sides also have certain obligations to fulfil towards each other. A legally binding contract will help protect the rights of both sides by ensuring both sides fulfil their obligations. In case of any issues, any of the aggrieved side can take legal recourse. 

Elements of a legally binding contract

Contract is an elaborate document containing the detailed scope of work along with all other agreed terms and conditions, stating the rights and obligations of both sides.

A legally binding contract will have the following components:

  • There must be an offer from one side. The offer must be a genuine offer.
  • There must be acceptance from the other side. The acceptance must be a willing acceptance without any kind of pressure.
  • There must be equal exchange of values between both the sides. 
  • Must be signed by authorized personnel.
  • The work in the contract must be legally allowed work. There can’t be a legal contract for illegal work.

While all the above elements must be present in a legally binding contract, it is said that the consideration is the most important factor, as that defines the benefits received by both sides. It is also said that the consideration must be win-win for both sides. 

Contract Types

There are three broad categories of contracts as mentioned below:

  • Fixed Price Contract (FP)
  • Time and Material Contract (T&M)
  • Cost Reimbursable Contract (CR)

Fixed Price Contract 

Fixed Price contracts are used when the scope of work is clearly defined and the requirements are well understood. Once the scope is clearly defined, then it is expected that the seller will come up with a fixed price quotation for the agreed scope of work. The seller needs to understand the requirements and also all the associated risks which may occur during the project work, while making a fixed prices quotation. Hence for a fixed prices contract the seller also needs to be very matured and capable.

Once agreed, it becomes a win-win for both sides. The buyer is assured of a fixed price to be paid once the defined scope of work is completed by the seller. The payments will be made based on delivering well defined outcomes. The seller here assumes all the cost related risk once agreed. The seller may lose money in this kind of a contract, at the same time the seller may make maximum profit also in this kind of contract if they can complete the work in less cost.

It will take solid maturity and clarity on both sides to come up with fixed-price contracts. Negotiation may take some time. Fixed price contracts once finalized, will use change requests for any kind of changes to be made in scope or any other terms and conditions. 

There are 3 different flavours of fixed-price contract as below:

  • Firm Fixed Price Contract (FFP)
  • Fixed Price with Incentive (FPIP)
  • Fixed Price with Economic Price Adjustment (FP-EPA)

Time and Material Contract (T&M)

Time and Material contracts are very popular contract type which is used for regular purchases for standard items. Items may include augmenting temporary manpower for the project with well-defined skills and expertise level. Item also includes standard materials which may be needed for consumption in the project.

In T&M contracts, the organization will select some preferred suppliers of such manpower and materials. The vendors will be selected based on their capabilities and experience. There will be a negotiated price (or rate) for such supplies. The final price paid will be for the amount of quantity of such resources consumed or purchased. 

Managing T&M contracts is pretty simple. T&M contract uses both the flavours of fixed price and reimbursement based on consumption.

Cost Reimbursable Contract (CR)

In cost reimbursable contract the buyer pays the actual cost incurred by the seller and an additional fee or profit. There are 2 components paid separately in this kind of contract. While actual cost is reimbursed as per actual, the fee amount is somewhat decided upfront.

This kind of contract is used when the requirements are not clear. The team also does not much clarity about the details of how the product will be developed. Hence in absence of clarity on all accounts, this becomes the best possible arrangement.

Cost reimbursable contracts are used for new research and development, proof of concept developments which requires immense innovation without a guarantee of predicted outcome. 

Following are some of the flavours of Cost-Reimbursable contracts.

  • Cost plus percentage of cost (CPPC)
  • Cost plus fixed fee (CPFF)
  • Cost plus Incentive Fee (CPIF)
  • Cost plus award fee (CPAF)

Cost plus contracts puts all the risk on the buyer, as the seller is assured of all the actual cost plus some fee. The entire responsibility lies on the buyer. These contracts sometime can be misused also. As the seller will not bother much about cost control, as they are assured of all actual costs. This requires the buyer to audit and micro manage all the expenses.

Conclusion

The above contract types are used worldwide. Specific contract type can be used for specific kind of purchases. Contracts have legal binding on both sides that are part of a contract.

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Comments

Prakruthi

In these project management tutorials, I have learned the Techniques & methodologies and in this article, anyone can learn the basics of PMP to latest and advanced levels of PMP. I have referred some other website but no website provided this much detailed information about project management really thanks for the website for guiding the professionals to be good at our project management carriers.

Clife

Clear and understandable notes

Muwanguzi Edward

Good information to enhance good communication

Ali

Thanks .the information you provide is very important

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