Friday, November 3, 2017

Typical types of procurement contracts

Procurement is the acquisition of goods, services or works from external source. A procurement contract is a legal binding agreement between the buyer and the seller.

In general, there are 3 broad categories of procurement contracts:

  • Fixed price (FP)
  • Time and material (T&M)
  • Cost reimbursement (CR)

Firm Fixed Price (FFP) or Lump Sum
  • Specifications or requirements are well-defined with clear statement of work.
  • There exist sufficient competition to determine a fair and reasonable fixed price.
  • If actual cost is more than agreed upon, seller bear the additional cost.
  • Buyer has the least cost risk.
  • To be fair to both parties, both buyer and seller need to have complete know-how of the work for precise price fixing.

Fixed Price Incentive Fee (FPIF)
  • Profits are adjusted based on seller meeting performance criteria in a progressive manner.
  • Performance can be measured in term of cost, time, and quality.
  • Successive targets are given to the seller.

Fixed Price Award Fee (FPAF)
  • An award (a.k.a. bonus) will be paid based on performance.
  • The total possible award amount is determined in advance and apportioned out based on actual performance.

Fixed Price Economic Price Adjustment (FP-EPA)
  • Normally applicable to long contract with uncertainties in future prices.
  • Price is adjustable depend on future cost of supplies and equipment required to be used.

Purchase Order (PO)
  • Simplest type of fixed price contract.
  • Only needs to be signed by buyer (unilateral party signing).

Time and Material (T&M)
  • Commonly used for service efforts whereby the level of effort is difficult to be determined when contract was awarded.
  • Buyer pays on per-hour or per-item basis.

Cost Contract (CC)
  • Cost is unable to be estimated accurately for fixed price due to exact scope of work is uncertain.
  • Seller receive no fee and make no profit. Charge as per actual cost.

Cost Plus Fee (CPF) / Cost Plus Percentage of Cost (CPPC)
  • Seller makes profit on top of the cost.
  • Fee varies with the actual cost.

Cost Plus Fixed Fee (CPFF)
  • Fee is pre-negotiated and fixed before work begins.
  • Fee does not vary with the actual cost.

Cost Plus Incentive Fee (CPIF)
  • Target cost is estimated and target fee is determined before work begins.
  • Seller will earn incentive from the savings if actual cost is less than the target cost.
  • Meanwhile, seller will also need to share cost overrun with buyer.

Cost Plus Award Fee (CPAF)
  • Buyer pays all the cost and a base fee plus performance bonus.
  • The award amount is pre-determined and apportioned out depending on actual performance.
  • Seller has the least cost risk.


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