read other articles
Types Of Contracts And What To Expect
Posted on October 16, 2007
Many companies solely exist by contract work through the government or other companies, and you'll likely work on a contracted project at some point in time. If you're are like me then you're wondering what the hell fixed price and cost plus are. I've listed the major types of contracts below with a brief description and also what to expect if you find yourself working within one of these contracts.
There are two main types of contracts, fixed price and cost reimbursement. Let's get to know these a little better shall we.
Fixed Price Contracts
The price of these contracts is decided up front. The contractor is at maximum risk as they will assume all responsibility for loss or profit. The incentive for the contractor is to deliver quality products or services as efficiently as possible. The requirements and bid must be nailed down in order for the contractor to estimate costs before the project begins.
If you find yourself working on one of these projects, be prepared to assume risk as well. Even though you probably had nothing to do with the bid amount or requirements, the project rests in your lap along with the other team members. Screw up and you just cut into the company's profit, do well and its your time to shine.
Firm Fixed Price (FFPP) Contract
The price of this contract is the bid. This type of contract is most used when the risk is low.
Your job is safe with a Firm Fixed Price contract. There is no need to worry about screwing up. Its just a matter of puttingin the hours.
Firm Fixed Price, Level Of Effort Term Contracts
A fixed price is set and the contractor agrees to devote a specified level of effort for a specified length of time.
If you find yourself on one of these contracts, prepare yourself for tedious work. You are likely pulled aside from all other projects and are designated as "that guy". Avoid these if possible.
Cost Reimbursement Contracts
These contracts have a ceiling price set up front. The contractor agrees to get reimbursed for all costs incurred while performing the work. It is up the contractor to manage their time and money throughout the project as to not run out of money. The contractor may choose to eat the cost if the work runs over the allotted contract amount.
If you find yourself working on these types, get to know your project manager. Managment will pay very close attention to the progress of these projects. If you look like you're ahead, they are happy. If you look like you're behind, they'll likely begin changing teams, firing folks, etc. The last thing managment wants to do is eat the cost of a project. It's your job to bring up issues as soon as they arise. Don't spend more than 20% more than the allotted time for any task without raising the issue to your higher ups. They must know what is going on in the way of time, money, and progress.
Cost Plus A Fixed Fee Contract
The contractors profit is fixed. The contractor is also reimbursed for all allowable, allocable costs. The price of the contract is not fixed.
If you find yourself working on these types of contracts, you'll likely be told to slow down and do things better. Managment will want to milk the contract for all it's worth in order to get the profit higher, since the profit is a percentage of the cost.
In closing...
I hope this review helps you. It sure turned a light on for me when I did some research. I wondered why the boss was on my ass about my project, but left the other teams alone. It turns out my project was a Cost Reimbursement Contract.