CONTRACT TYPES

Three varieties of contracts exist—cost-plus, fixed price, and time and materials.

The cost-plus contract requires payment of costs incurred for the service provided. In some circumstances, pure cost-plus contracts can be modified to include fixed, incentive, and award clauses.

The fixed price contract requires paying a specified amount for the service provided. In some circumstances, pure fixed price contracts can be modified to include escalation, redetermination, and incentive clauses.

The time and material contract requires payment for services using a specified labor rate (e.g., hourly) and materials cost.

A well-written contract offers three benefits. One, it prevents miscommunication between the major parties. Two, it prevents rework that results from misunderstandings. Three, it reduces the cost impact of fixes since the opportunity for rework has lessened.

for Contracts

• Ensure that no ambiguities exist in the contract by clarifying all terms and conditions in writing.
• Prior to contract negotiation, determine requirements, particularly must-haves and nice-to-haves.
• Obtain solid, expert advice on legal and subject matters prior to signing the contract.
• Use the contract to develop the statement of work (or understanding).
• Periodically revisit the contract to determine compliance.
• Determine the risks associated with each contract type.