Contracting Types

There are many ways to price a contract, the most common being Firm Fixed Price and T&M. Selecting the right contract type for your project shouldn’t be a big deal; each one has its own advantages and disadvantages. The Project Manager should have a firm understanding and working knowledge of the various contract types and how their use may affect project outcomes.

• Firm Fixed Price (FFP): The fee to provide the product or services is quoted and fixed for the duration of the contract. FFP contract shifts the project risks to the Provider, who is responsible for cost, performance and profit or loss. The Buyer pays a fixed fee and does not need to know what the Provider is actually spending on the project.
• Time and Materials (T&M): The fee is quoted as an hourly rate plus the cost of materials, supplies, or travel expenses. The T&M contract is used when the Buyer wants full control over the project. Provider profits are factored into the hourly rate and the Buyer is billed for the hours worked.
• Cost Plus: There are actually several variations of Cost Plus, they include: Cost Plus Incentive Fee (CPIF), Cost Plus Fixed Fee (CPFF), and Cost Plus Percentage of Cost (CPPC). Each of these covers the Provider’s costs and an additional fee that is calculated in various ways in an attempt to limit the Buyers costs. A major distinction between CP and FFP or T&M contracts is that with CP contracts, the Provider costs are disclosed to the Buyer for reimbursement.
• T&M with Not to Exceed (NTE): This is a variation of the FFP contract where the Buyers try to get the best potential price while capping total fee paid to the Provider. NTE contracts are usually an attempt by the Buyer to benefit if the project finishes early, and limit exposure if the project runs long.

Tip: Establish a level of signing authority for the project’s budget. If you have to get multiple approvals for spending money, you will waste a lot of time thus impacting your ability to get your project done on time.

There is always business risk with any contract. The business risk can have a positive or negative impact to contract depending on many factors that affect the outcome of the project. From the Buyer perspective, cash is important and cash flow is to be protected. From the Provider perspective, cost control is important to prevent loss of profits. Selecting the appropriate contract type can limit project costs by shifting cost risks or other constraints to the other party.

The project manager, however, may not always be able to choose the contract type and should try to understand the business needs of the clients or customers. All project managers must learn to manage the risks for their respective parties and to be honest about scope, quality, resources, and scheduling.

Responsible project managers will approach project risks in a logical and methodical manner. The project manager should select an appropriate contract type that protects their interests in the contract and limits their risks. Throughout the project, the project manager should aggressively defend the project scope and prevent scope creep using all available tools. Some of those tools include scope control and change management procedures.