A fixed-price contract, also known as a “lump sum contract”, determines the terms of the project, determines the goods or services delivered, when and what price the buyer pays. The advantage of a fixed-price contract is that both parties have clearly defined roles and responsibilities. The seller knows exactly what he has to deliver, and the buyer knows exactly how much he has to pay once the contract is concluded. Fixed-price contracts are simple and easy to manage and are the most common type of supply contract. To create the basis of the business relationship, supply contracts define the parameters of the company, including: This type of contract is best suited for turnkey or outsourced projects. Suppliers and suppliers usually require payments during the term of the contract. For contracts that last several months, the contractor incurs significant costs and the project must pay these costs as soon as possible. Instead of waiting for the contract to end, a payment plan is usually developed as part of the contract and is associated with the completion of a defined amount of work or project milestones. These payments, which are made before the end of the project and are based on the progress of the work, are called progress payments. For example, the contract could develop a payment plan that is paid for the curriculum design, then for the development of the program, and then for the final payment when the program is completed and accepted. In this case, three payments would be made. There is a defined amount of work to be done, a schedule to perform that work, and a quality standard that the work must achieve before the contractor is paid for the work. With this type of contract, the buyer assumes the risk, but it is less because an incentive offer is part of the conditions.
The contractor receives a refund for his expenses, but receives a royalty based on his performance. These fees are usually set in advance and represent a percentage of the savings the buyer receives based on the seller`s performance. As a rule, the savings are divided between the two parties. Once the contract is awarded, the project team tracks the contractor`s performance against the contract`s performance criteria and contribution to the implementation of the project. Typically, contractors provide the product or service that meets quality expectations and supports the project schedule. As a rule, there are also one or two contractors who do not meet the expectations of the project. Some project managers refer to the contract and try to convince the contractor to improve performance or be penalized. Other project managers will explore creative ways with the contractor to improve performance and meet project requirements.
Contract management allows both approaches to deal with underperforming contractors, and the project team must evaluate which method works best in each situation. Once the project team has selected the bidder who offers the best value for the project, a project representative validates all the terms of the bid and contract with the potential contractor. Less complex assignments, such as contracts for printed materials, require reading and signing the contract to ensure that the supplier understands the terms and requirements of the project schedule. More complex projects require a detailed discussion of objectives, potential obstacles to achieving those objectives, project timeline and critical deadlines, as well as processes for resolving conflicts and improving work processes. This is the simplest type of supply contract. The seller must complete the order within a previously agreed period. The seller is responsible for any increase in costs and is legally obliged to perform the task under the contract. The fixed-price contract with incentive fees provides an incentive to carry out the project using the baseline set out in the contract. The contract may include an incentive to complete work on an important stage of the project.
Contracts often include a penalty clause if the work is not performed in accordance with the contract. For example, if the new software is not completed in time to support the implementation of the training, the contract may penalize the software vendor with a daily amount of money for each day the software is late. This type of penalty is often used when the software is essential to the project and the delay costs the project a lot of money. For large, complex projects, critical elements can be programmed for delivery after they are needed for the project. The procurement team then reviews the ideas with the contractor to expedite the manufacture or transportation of the equipment or materials. The contract can often prioritize the manufacture of the equipment and the delivery of the equipment to meet the project schedule. The project logistics team can also look for ways to shorten the transport time. For example, a project in Argentina flew some critical equipment out of Sweden instead of transporting it by boat to save several weeks on the transport route. Logistics costs were higher, but the overall value of the project was higher.
You can divide refundable contracts into four categories: you need to understand procurement, whether you`re a buyer or a seller. Every organization, whether projected, functional or matrix, uses supply contracts. This contract is easy to float and bid, and it is evaluated on a cost basis, which is quite fast. Just as the project has a scope of work that defines what is included in the project and what work is outside the project, suppliers and suppliers have a scope of work that defines what they will produce or deliver to the company. (Partners generally share the scope of project work and may not have a separate scope of work.) Often, changes occur to the project that require changes in the scope of the contractor`s work. How these changes are managed over the life of the project is usually documented in the contract. It is important to capture these changes early on, document what has changed and how the change has affected the contract, and develop a change order (a change to the contract) to keep the project moving forward. Conflicts between team members can occur when changes are not documented or when the team cannot agree on the change.
Developing and implementing an effective change management process for key contractors and suppliers minimizes this conflict and the potential negative impact on the project. Although companies have already done everything they need independently, this can be impractical and lead you to incur significant costs and develop a lower quality product, which is bad for your business. For this reason, your company must establish a purchasing management process to find the best suppliers and negotiate advantageous contracts that take into account the interests of both parties. I have seen contractors arguing with project managers about scope. They initially agreed, but then argued over small questions to ask the amendment. Here, the seller is paid for his fees plus a premium commission. This supplement is based on achieving satisfaction in accordance with the performance objectives described in the contract. The type of contract determines the effort and skills required to manage the contract. The Supplier Contract Manager develops detailed specifications and ensures compliance with those specifications. The Supplier Contract Manager ensures that contractors bidding for the work have the skills and ability to perform the work according to the project schedule and monitors the supplier`s performance against the project requirements and provides support and guidance as required. The Manager of Partnership Agreements develops a direction towards common objectives and work processes. Each of these approaches requires different skills and efforts.
Unless the project requirements are very specific and clearly defined in the contract, sellers can try to consider the scope to anticipate rising costs. .