The Contracts That Procure Success

The first contract being discussed is called a “Fixed-Price Contract,” and this contract involves having a fixed total price for a product or service. In this contract, the buyer would be the project manager and the project manager would see truly little risk in this type of contract as the price of what is being purchase is predetermined. The supplier in this type of contract would typically pad their estimates while maintaining a competitive price on the products being sold in order to reduce risk on their end. With this type of contract, the advantages that comes with this is that the roles and responsibilities of both buyer and supplier are clearly outlined in terms of what is to be delivered and what the cost of products will be. This is good especially in an agile project management environment as the goal of the project is to complete it in the most efficient way possible, which not only includes doing it in efficient time but also in efficient cost. Having set costs can help decrease the chances of variability from project plans when working on the project. The disadvantages to this contract, however, lies in the project team itself. Since costs are set in stone, this type of contract encourages some project teams to cut corners in order to increase their profits. Another disadvantage can be from the costs cutting into the profits of the team if the costs are not carefully managed. These factors are why project managers have to keep a close eye on their project plan when working with this form of contract.

The second type of contract is “Cost-Reimbursable Contracts,” which is when project managers agree to pay for resources as well as any indirect costs that are part of the making of that resource. To make this profitable for project managers, they are to be given a fixed fee or percentage of the profit that comes from the cost price, putting most of the risk on the supplier. Once the expenses are verified, then the money is reimbursed but if the project scope changes then the supplier takes on additional costs. To be profitable from a supplier standpoint, they can build in additional costs that keep adjustments from the project manager to a minimum. This type of contract is preferable is preferable to project managers in an agile project management environment as the risk of it is low and as the incentive to manage costs is already high due to the project style, this just adds another incentive to do so for them to make more profit. What disadvantages exist however is that the project costs are unknown and thus means that project manager could be spending an extensive amount to fund the project. If the project manager doesn’t keep a very detailed tracking on expenses and makes a mistake, they could loose money from their reimbursement.

The third contract type is called “Time and Material Contracts,” which are a mixture of both the fixed-price and the cost-reimbursable contracts. This contract is meant to reimburse project managers for material cost and also pay a fixed daily  or hourly wage for the costs of labor. This contract helps offer additional protections to the project managers as they now have greater assurance that their costs will be covered throughout the whole duration of the projects lifetime. This is contract doesn’t really benefit suppliers more than others but this contract also means that the project managers must keep a more engaged oversight of the project so that they can ensure that the project stays on schedule and doesn’t go passed the set budget. This contract is extraordinarily strong in favoring the project manager, but it is not without its flaws. The increased risk of not exceeding can cause managers to face unknown and possibly high costs and tracking these costs can be a burden. With how agile project management environments work, this time spent on tracking and ensuring things are running the way they need to can slow down the flow of the overall project.