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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