Types of Procurement Contract

Fixed price contract

The simplest kind of contract is the fixed price contract, in which the suppliers and customers agree on a set price for the goods. In order to use this kind of contract, the buyer needs to meet the minimum order quantity. Essential supplies that are vital to the supply chain are typically obtained through fixed-price contracts that benefit the buyer financially. There will be fair prices for both the seller and the buyer, and the seller will receive a guaranteed minimum order quantity. There are three types of fixed-price contracts:

1. Firm Fixed Price (FFP): On the agreement, the buyers and sellers have precise numbers. The supplier will set a fair price, and the buyer will consent to purchase the minimum order quantity.
2. Fixed Price & Incentive Fee (FPIF): Suppliers benefit from FPIF contracts as the customer consents to pay an incentive in addition to the fixed price. If the provider fulfils and surpasses the terms of the contract, he will receive incentives. Suppliers will profit from the incentive to sell the item at a lower price, while buyers will receive an assured volume of their purchases. When a buyer wants to lock in the price of an item that is in high demand, they typically utilise this contract.
3. Fixed Pricing with Economic Price Adjustment (FPEPA): If the supply’s production cost changes, the seller may modify the price under the terms of the FPEPA contract. In this kind of agreement, both the vendor and the customer agree on a set price as long as the cost of production stays the same. The supplier may raise the price if they can demonstrate that the cost of production was higher than what was originally agreed upon. The buyer benefits from being able to lock in on a low price thanks to the contract, while suppliers, if they can support higher manufacturing costs, can safeguard their margins. FPEPA contracts are typically used to buy pre-built goods that the supplier requests on a regular basis.

Cost Reimbursement Contract

In a cost-reimbursement agreement, the seller invests capital costs in a product or service, and the buyer pays those costs back over the project’s duration. Cost reimbursement contracts come in four varieties:

1. Cost Plus Fixed Fee (CPFP): The buyer offers terms and conditions for a project, service, or good that the seller is supposed to provide after they both sign the CPFP contract. The contract makes explicit reference to the requirements for both quantity and quality. In order to fulfil the highlighted conditions, the seller must supply the project, service, or product, and the seller bears all financial responsibility for the delivery. The buyer will examine and confirm the quantity and quality of the given good or service at the time of delivery. In the event that the supplied product is accepted, the buyer will pay the seller a fixed fee, typically a percentage of the total cost, in addition to repaying the accumulated production costs.
2. Cost Plus Incentive Fee (CPIF): Both the vendor and the buyer agree to terms and conditions about the quality and quantity of the goods under the CPIF and CPFP models. The costs up until product delivery should be covered by the seller. Should the customer decide to accept the product, they will pay the seller’s incentive in addition to the full cost of the purchase. Conversely, in the event that the product fails to meet quality standards, the buyer retains the option to reject delivery; however, under the CPIF model, the costs associated with the failed project must be shared by the buyer and seller.
3. Cost Plus Award Fee (CPAF): Under a CPAF contract, the buyer consents to pay back the award fee as well as the supplier’s expenses. This reward fee is decided by the buyer.
4. Cost Plus Percentage Of Cost (CPPC): With the CPPC contract, the buyer is responsible for reimbursing the total cost of the product along with a percentage of the cost that is usually considered a profit.

Time And Materials (T&M) Contracts

The buyer and seller will split the cost of materials and labour for the project under the terms of the T&M contract. Buyers may specify a limit that the specified time and material must not beyond. This is necessary to avoid fraud and to obtain a fair price.

A procurement contract is an approved agreement between a buyer (the organization or person undertaking the project) and a seller (vendor or supplier) in which the buyer acquires supplies. These are essential contracts for projects that involve external sources, expertise, or materials. Many kinds of procurement contracts possess their particular attributes. For example: A fixed-price Contract, where the company is paid to construct an office building worth five million dollars for a fixed total price amount. The contract states that the constructor must complete the project under the specified scope and any extra incurred expenses are the responsibility of the contractor.