There different types of contracts that are used in procurement management, as explained by PMI in PMBOK Guide, such as Fixed type, Cost Reimbursable, and Time & Material. This article will explain the Fixed type of contract, and will be useful for study during PMP certification course designed for the PMP exam prep training.
Fixed Price Explained
A fixed price is established for an identified product or service that will be provided by the
seller. These contracts can include monetary enticement for attaining, or providing characteristics that are more than the required objectives, like delivery schedule, technological functioning, or something which can be evaluated. Sellers are lawfully obliged to finish such contracts, even if market conditions change. The buyers must accurately identify the characteristics of the product of services being bought, since thereafter the cost will be fixed, and any change will involve cost increase.
Firm Fixed Price Contract
It is the most common contract that is used for purchasing goods. It is preferred by the business since the cost for products is decided at the beginning, and not subject to be amended, unless there is change in the scope. Any cost enhancement due to unfavorable execution, or market conditions, is not the responsibility of the buyer. The seller is obliged to finish the tasks. Therefore, the product specifications should be precisely specified, and any change in the specifications will imply cost increase.
Fixed Price Incentive Fee Contract
This type of Fixed Price Contract has some flexibility for buyer and seller that tolerate variation from the agreement, with monetary motivation coupled to achieve established terms. Normally, such incentives relate to schedule, cost, or some technical operations. Performance objectives are created at the beginning, and the ultimate price is established after conclusion of all the work. A cost upper limit is decided, and all expenditures above this limit are the liability of the contractor, who is obliged to finish the effort.
Fixed Price with Economic Price Adjustment Contract
This form of contract is preferred when the duration of contract performance extends over a significant time, as is favored with prolonged term associations. The price is fixed, but has a provision for economic adjustment based on economic conditions, like inflation, or change in cost due to other reasons. This adjustment is linked to some firm financial index that is used to establish the final cost. This contract cares for both the seller and the buyer in the circumstances that are not within their control.
Use of Right Contract
Procurement management is important for projects and it involves working with customers, clients and other businesses. When dealing with these entities, right contract should be used since it involves significant elements like cost, schedule, quality, etc. The terms used in this article are in accordance with the details provided by PMI in the PMBOK Guide, and will also be helpful for the PMP certification test.