This topic is in the procurement management section of the PMBOK, and is relatively important. On a scale of 1-10 (with 1 be not very important to 10 being very important), it is a 4. There are a few questions on the type of contracts. They would usually give you a scenario and ask you to recognize the type of contract.
Contract is an agreement between the organization and an outside provider of a service or materials. After a project management team determines the kind of services or materials that need to be outsourced, the procurement team develops the contract. The two main kinds of contracts are: fixed-price and cost-reimbursable contracts.
Fixed-price contracts: legal agreement between the project organization and an entity (person or company) to provide goods or services to the project at an agreed-on price. Kinds of fixed-price contracts are:
o Fixed total cost contract: legal agreement between the project organization and an entity (person or company) to provide goods or services to the project at an agreed-on price. The contractor assumes the risks for unexpected increases in labor and materials that are needed to provide the service or materials and in the materials and timeliness needed.
o Fixed-price contract with price adjustment: Most common type of this contract is the inflation-adjusted price. Usually used with long spanned contracts. In periods of high inflation, the client assumes risk of higher costs due to inflation, and the contract price is adjusted based on an inflation index.
o Fixed-price with incentive fee: This provides an incentive for performing a project above the established baseline in the contract. o Fixed unit price: If there are a set number of materials or services that can be measured in standard units, the price per unit is fixed.
Cost-reimbursable contract: the organization agrees to pay the contractor for the cost of performing the service or providing the goods. They’re also known as cost-plus contracts.
o Cost-reimbursable contract: A fixed fee provides the contractor with a fee, or profit amount, which is determined at the beginning of the contract and does not change.
o Cost-reimbursable contract with a percentage fee: It pays the contractor for costs plus a percentage of the costs, such as 5% of total allowable costs. The contractor is reimbursed for allowable costs and is paid a fee.
o Cost-reimbursable contract with an incentive fee: It is used to encourage performance in areas critical to the project. Often the contract attempts to motivate contractors to save or reduce project costs. The use of the cost reimbursable contract with an incentive fee is one way to motivate cost reduction behaviors.
o Cost-reimbursable contract with award fee: It reimburses the contractor for all allowable costs plus a fee that is based on performance criteria. The fee is typically based on goals or objectives that are more subjective. An amount of money is set aside for the contractor to earn through excellent performance, and the decision on how much to pay the contractor is left to the judgment of the project team. The amount is sufficient to motivate excellent performance.
o Time and materials (T&M): Usually used for small projects the contractor charges an hourly rate for labor plus the cost of materials, plus the total percentage of the total costs.