Fixed Price Contracts

1. Fixed Price Contracts Involves setting a fixed total price for a defined product or service Often include financial incentives for achieving or exceeding objectives such as time, cost and quality Suppliers assume much of the delivery risk and are legally obligated to complete the contract Financial and legal penalties are common if the contract conditions are not met Normally the most complex to negotiate and administer Adapted from PMBOK 4th Edition

2. Types of Fixed Price Contracts Firm Fixed Price Contracts (FFP) Most common form of fixed price contract, favoured by most buying organisations Price is set at the outset and only subject to change if the scope of work formally changes Any cost increase due to poor performance is the responsibility of the seller The buyer must precisely specify the requirements, any changes to the specification will normally result in additional costs Doesn’t normally result in the BEST price for the product or service Buyer Risk is LOW but must document detailed requirements Seller Risk is HIGH so normally charge a premium

3. Types of Fixed Price Contracts Fixed Price Incentive Fee Contracts (FPIF) Similar to basic Fixed Price but with some flexibility based on performance under the contract Financial incentives and penalties are often negotiated based on time, cost and quality The Seller can receive additional payment if they outperform or may be subject to addition costs if they under perform Not popular with Sellers for new products or services, or high risk procurement Under FPIF a price ceiling is set, all costs above this are the responsibility of the Seller Similar Buyer and Seller Risk Profiles to Fixed Price Much more COMPLEX to negotiate and administer

4. Types of Fixed Price Contracts Fixed Price with Economic Price Adjustments (FP-EPA) Normally used for long term contracts Basic Fixed Price with clauses allowing for a variation in price should economic conditions change Price adjustments may be allowed due to inflation, commodity price fluctuations and variations to exchange rates Best if related to reliable, standard and externally calculated financial indices Should ideally allow for both price increases and price decreases, but price decreases are often overlooked Intended to protect both the Buyer and Seller from economic conditions outside of their control Lowest Risk Profile but COMPLEX to negotiate and administer

5. Cost Reimbursable Contracts Involves paying the Seller for all legitimate actual costs incurred plus an agreed fee for Seller profit May also include financial incentive or penalty clauses Delivery risk is shared between the Buyer and Seller Gives flexibility to the Buyer to redirect the Seller whenever the scope of work changes Especially popular where the Buyer cannot define detailed requirements or for high risk projects Financial and legal penalties are harder to enforce if the contract conditions are not met, simpler than Fixed Price to negotiate and administer Adapted from PMBOK 4th Edition

6. Types of Cost Reimbursable Contracts Cost Plus Fixed Fee Contracts (CPFF) Seller is reimbursed for all allowable costs for performing the agreed work Seller receives a fixed fee payment calculated as a percentage of the initial estimated project cost The Fee is paid only for completed work and does not change due to Seller performance – no incentives or penalties The Fee can only be varied due to an agreed change in project scope Low Risk Profile but COMPLEX to negotiate and administer Loosely defined requirements can lead to disagreements over SCOPE

7. Types of Cost Reimbursable Contracts Cost Plus Incentive Fee Contracts Seller is reimbursed for all allowable costs for performing the agreed work Seller receives a predetermined incentive fee based on meeting agreed performance objectives If the final costs vary from the original estimate, then both the Buyer and the Seller share the cost overrun or underrun based on a predetermined percentage split Approach to changes in costs due to changes in scope is unclear and can cause conflict Medium Risk Profile and COMPLEX to negotiate and administer Loosely defined requirements can lead to disagreements over SCOPE

8. Types of Cost Reimbursable Contracts Cost Plus Award Fee Contracts (CPAF) Seller is reimbursed for all allowable costs for performing the agreed work The profit component of the fee is only earned based on the satisfaction of broad subjective performance criteria defined and incorporated into the contract The amount of the fee is based solely on the subjective assessment of Seller performance by the Buyer Generally includes a clause where no appeals can be made on the amount of the fee. Very unpopular with Sellers LOW Risk Profile for Buyer, HIGH Risk Profile for Seller

9. Time and Material Contracts (T&M) Hybrid type of contract containing both aspects of cost-reimbursable and fixed-price contracts Often used to acquire consultants, contract staff and subject matter experts Also used when the Buyer cannot, or doesn’t want to, specify the statement of work or requirements in detail Gives flexibility to the Buyer to redirect the Seller whenever the scope of work changes Many organisations will require not-to-exceed values or time limits on such contracts in order to manage and monitor costs VERY Common for contract labour Risk is shared between the Buyer and Seller