Thus, if the scope of work has a decent chance of changing after the bid is submitted, a cost plus type contract should be chosen from the beginning. They are paid monthly according to percent complete. Some form of technical performance is common, however it lends itself to difference of opinion when people define it based on different things. For example, one person might think that the building is too small, while the other thought it was large enough, but is not energy efficient enough.
The FPEPA contract is also a lump sum contract, but the value is adjusted based on predetermined economic indicators. These indicators are usually economic indicators like inflation, currency fluctuations, and so forth.
Hence, this contract allows the owner to assume the risk of project economics , reducing contractor prices. Usually this happens on large infrastructure projects that are expected to span several years, or projects that are part of a program in which projects start and stop frequently, for example a highway paving project that is part of a larger government paving program.
Due to the onset of winter, the work must wait until the next year to be completed. When the inflation index is released, it is 3. The CPFF is the standard cost plus contract where the contractor is reimbursed for costs incurred, and a fixed fee paid in addition to that. Hence, there are two components to the contract:.
In a competitive bid, the contractor is selected based on the total. This type of contract is effective when the scope of work is expected to change significantly. For example, a design-build project where the actual costs are not readily known until the design is completed.
Used for acquiring supplies and services with reasonably definite specifications, and reasonable prices can be established at the outset. Cost Reimbursement Contracts Provides for payment of allowable incurred costs, to the extent prescribed in the contract.
These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed except at its own risk without the approval of the contracting officer.
This places cost risk on the government. Used only when circumstances do not allow the agency to define its requirements sufficiently to allow for a fixed-price type contract, OR uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use any type of fixed-price contract.
Cost Contracts subtype of Cost Reimbursement Contract A Cost contract reimburses allowable costs up to the specified total awarded amount of the contract in which the contractor receives no fee or profit. Used for research and development work, particularly with nonprofit educational institutions or other nonprofit organizations. Cost Plus Fixed Fee Contracts subtype of Cost Reimbursement Contract Provides payment to the contractor for a negotiated fee profit that is fixed at the inception of the contract.
The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed. This permits contracting for efforts that might otherwise present too great a risk to contractors, but provides the contractor only a minimum incentive to control costs. Time and Materials Contracts Acquires supplies or services on the basis of: Direct labor hours at specified fixed hourly rates that include wages, overhead, general expenses, and profit Actual cost for materials including: Direct Materials Subcontracts for supplies and incidental services for which there is not a labor category specified in the contract; Other direct costs travel, computer usage etc.
Applicable indirect costs. Conclusion As Project Manager, it is your responsibility to enter into the right kinds of contracts with a variety of service providers to reduce risk and deliver the project on time. Are you looking forward to making a mark in the Project Management field? If yes, enroll in the Project Management Fundamental Program now and get a step closer to your career goal!
Next Article. Recommended Resources. PMP Certification in Bangalore. PMP Certification in Charlotte. PMP Certification in Dubai. PMP Certification in Delhi. PMP Certification in Cairo. PMP Certification in Pune. Here the contract includes an incentive or bonus, typically for the early or on-time completion of the deliverable. In this type of contract all the costs that the seller incurs during the project are charged back to the buyer, and thus the seller is reimbursed costs.
The costs which are allowable will be defined in the contract. In this type of contract more risk is carried by the buyer as the final cost us uncertain. If problems arise during the execution of the project then the buyer will have to spend more. The advantage of this type of contract to the buyer is that obviously scope changes can be easily made to the work being done.
One problem with this type of contract is that the seller has very little incentive to be efficient and productive and complete the work quickly. It should come as no surprise that this type of contract is most often used when there is a lot of uncertainty associated with the final deliverable.
There are three kinds of cost-reimbursable contracts you should understand:. This type of contract is a cross between fixed-price and cost-reimbursable contracts.
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