What are the different types of procurement contracts?
When it comes to procurement contracts, there is no "one-size-fits-all" approach which can work. As requirements differ, so do contracts. Any contractual agreement, regardless of the business function, depends on various factors. Therefore, it is necessary to understand the subtleties and different nuances of procurement contracts. Procurement leaders and those spearheading procurement functions in their organizations should understand the nitty-gritty of the procurement contracts well so that they can enter into agreements without running the risk of jeopardizing business interests.
Procurement Contract: A procurement contract is an agreement between two or more parties( generally, it is between two groups: buyers and sellers) where the buyer agrees to pay the seller for the goods and services received. It is a customary practice to enter into a contract with a vendor or service provider and clearly define the terms of engagement to ensure steady and frictionless business operations.
Types of Procurement Contracts :
Fixed Price Contracts: Fixed price contracts are also known as lump-sum contracts. A fixed-price contract is the best way to make sure that you keep your costs low and get certainty around the scope of work for a fixed tenure. As long as the scope of work is defined and mutually agreed, it is beneficial for both, the business and the vendor/service provider, to get guaranteed results because there is no unpredictability or uncertainty around the scope of work. Fixed price contracts make it easier for businesses to control price fluctuations. These contracts are ideal for turnkey projects or the ones which are outsourced to third parties.
Fixed price contracts can be further classified into :
*Firm Fixed Price
*Fixed Price with Incentives
*Fixed Price with Economic Price Adjustment Rider
Cost Reimbursable Contracts : Cost reimbursable contracts are executed to reimburse the acutal costs incurred while carrying out the agreed scope of work. These contracts are also known as "Cost-Plus Contracts". Cost reimbursable contracts are best suited for projects such as construction and research driven assignments. These contracts, more often than not, include clauses specific to incentivization , if the performance targets are met or exceeded. The flip side of these contracts is that a rogue contractor might engage in unscrupulous activities to understate costs to pocket incentives. Cost reimbursable contracts should be chosen when the project demands a higher degree of flexibility, or the scope of work is yet to be defined or loosely defined due to dynamic factors at play.
Choosing the right procurement contract will depend entirely upon the business objectives, clear definition of scope of work and flexibility with respect to time and cost. It is advisable to evaluate procurement contracts with a prism of requirements at hand. Be meticulous in laying out the contract terms to avoid conflicts and unnecessary delays in the project execution.