Contract Types and Risk Fixed Price (FP) Firm Fixed Price (FFP) or Lump Sum.

Fixed Price Plus Incentive Fee (FPIF) Fixed Price Award Fee (FPAF) Fixed Price Economic Price Adjustment (FPEPA)

1. Fixed Price 2.Time & Material 3. CostReimbursable Reasonably definite specifications (e.g. SOW). Shift risk to seller. Good when deliverable is not a core competency. Fixed Price (FP) is the most common type of contract in the world. High-value projects involving long performance periods bonus to the seller based on performance (e.g. 100K + 10K for every designated incremental quality level reached. Allow Price increase if the contract is for multiple years A form of contract that is normally unilateral and used for simple commodity purchases. It is simplest type of fixed price contract and is usually unilateral(Signed by one party instead of bilateral) Good if the buyer wants to be in full control and/or the scope is unclear/not detailed or work has to start quickly. Profit factor into the hourly rate. The buyer pays the actual incurred costs plus a margin to the seller. appropriate when there's a high level of uncertainty in what will be required to provide the contracted product, service, or result Used for research and development contracts (which generally have low level of detail in the scope); fixed fee can change if there is a change to the contract (usually through change orders). The risk rests with the buyer. This is the most common cost reimbursable contract. Buyer and seller share in savings based on predetermined %s; long performance periods and substantial development and test requirements (incentive to the vendor to perform on or ahead of time) No valid for federal contracts buyer pays all costs and a base fee plus and award amount (bouns) based on performance. FP FPIF FPAF FPEPA T&M CPIF CPAF CPFF - CPPC Fixed Price T&M - Cost Reimbursable Buyers risk from low to high Sellers risk from high to low

Purchase Order

Time & Material (T&M) or Unit Price

Cost Reimbursable (CR)

Cost Plus Fixed Fee (CPFF)

Cost Plus Incentive Fee (CPIF)

Cost Plus Percentage of Cost (CPPC) Cost Plus Award Fee (CPAF)

Contract type Vs Risk

FIXED PRICE Overall Risk Pros

Buyer Less 1. Easiest to manage 2. Easier to budget for since expense is known. 1. Requires explicit statement of work. 2. If market or labor prices decrease, buyers cost doesnt decrease.

Cons

COST REIMBURSABLE Overall Risk Pros

Buyer More 1. Usually allows for more flexibility in how objectives are met. 2. More adaptable to changing market conditions. 1. The seller may have few incentives to keep costs low. 2. More difficult to accurately budget for. 3. Requires more rigorous management of the contract. 4. Rigorous internal change control needed so that scope creep doesnt result in unplanned seller costs.

Cons

TIME & MATERIAL Overall Risk Pros

Buyer More 1. More transparency than other contracts in the sellers effort expended since bills are usually itemized. 2. The buyer may have insufficient input into the skill and experience level of the contractors, resulting in them spending more hours than is necessary to complete the objectives. 2. Difficult to accurately budget for in the project. 3. Milestones and objectives need to be managed closely

Cons

Seller More 1. Easier to budget income for since it is known. 1. Requires rigorous oversight of expenses and labor. 2. Requires strict contract change management and control procedures. 3. If market or labor prices increase, sellers price cant be increased.

Seller Less 1. Less rigorous change control. 2. A well-managed cost-reimbursable contract may result better buyer-seller partnership on future needs. 1. A high level of transparency is needed with the buyer on costs. 2. Requires regular communication with the buyer, especially on cost variances or trends that show increases.

Seller Less 1. Less rigorous change control. 2. A well-managed T&M contract may result better buyer-seller partnership on future needs. 1. Requires regular and thorough communication to the buyer on progress.