Forms of contract
A contract is a legally binding agreement between two parties that sets out a set of mutual obligations and responsibilities. In project management, contracts are used to define the specific roles, responsibilities, and expectations of each party involved in a project. Contracts are designed to provide clarity, protection, and accountability between the parties, and can help to ensure a successful project outcome. Types of contracts used in project management include fixed-price, cost-plus, time and materials, and unit-price contracts.
Example forms of contract
- Fixed-Price Contract: A fixed-price contract is a type of contract where the price of the project is agreed upon before any work begins. The buyer and seller both agree to the same price for the entire project, regardless of any changes or additions that may occur along the way. This type of contract is often beneficial for both parties, as it provides clarity and stability throughout the project.
- Cost-Plus Contract: A cost-plus contract is a type of contract where the buyer pays for the costs of the project, plus a predetermined fee. This type of contract is beneficial for buyers, as they can be sure they are paying a fair price for the project, regardless of any changes or additions that may occur. The predetermined fee is typically based on the project's complexity and the seller's experience and skills.
- Time and Materials Contract: A time and materials contract is a type of contract where the buyer pays for the costs of the project, plus the seller's labor and materials used. This type of contract is beneficial for buyers, as they can be sure they are paying a fair price for the project, regardless of how long it takes or how many materials are needed. The seller's labor and materials used are typically invoiced on a regular basis.
- Unit-Price Contract: A unit-price contract is a type of contract where the buyer pays for the project based on a fixed rate for each unit of work completed. This type of contract is beneficial for buyers, as they can be sure they are paying a fair price for the project, regardless of how long it takes or how many materials are needed. The fixed rate for each unit of work is typically based on the project's complexity and the seller's experience and skills.
Types of contract
A contract is an agreement between two or more parties to carry out a particular activity or task. There are many different types of contracts that can be used in project management, each with their own specific terms and conditions. The most common forms of contracts include:
- Fixed-price contracts: This type of contract sets out a fixed fee for a given service or product, regardless of the actual cost of the project. This allows for budgeting and planning ahead with certainty.
- Cost-plus contracts: This type of contract sets out the cost of the project, plus an agreed-upon percentage or dollar amount for the contractor's services. This type of contract is most often used in government projects.
- Time and materials contracts: This type of contract sets out an hourly rate for labor, plus the cost of materials. This is a good option for projects where the total cost cannot be determined in advance.
- Unit-price contracts: This type of contract sets out a price per unit of a product. This type of contract is often used for large purchases, such as machinery or construction materials.
Steps of creating contract
A contract is an important tool for project management, as it outlines the specific roles, responsibilities, and expectations of each party involved. The following are the steps of forms of contract:
- Negotiation: Negotiation between the parties involved is the first step in the contract formation process. The parties must agree on the terms of the contract, including the scope of work, timelines, cost, payment terms, and any other relevant provisions.
- Drafting: Once the negotiation process is complete, the next step is to draft the contract. This involves writing a detailed document that outlines the terms of the agreement, the scope of work, the timeline, the payment terms, and any other relevant provisions.
- Review: After the contract is drafted, it must be reviewed by both parties. During the review phase, the parties should review the contract to ensure that it accurately reflects the agreement and that it is legally binding.
- Signing: Once the contract has been reviewed and both parties are satisfied, the parties must sign the contract to make it legally binding.
- Execution: The final step in the contract formation process is to execute the contract. This involves carrying out the duties and obligations outlined in the contract and ensuring that the project is completed on time and within budget.
Advantages of contract
Using contracts in project management can be incredibly beneficial for both parties involved. Forms of contracts provide clarity, protection, and accountability, and can help to ensure successful project outcomes. Below are some of the advantages of using forms of contract in project management:
- Fixed-price contracts provide clarity by setting the agreed-upon cost up front. This helps to avoid any potential disputes about the final price of the project.
- Cost-plus contracts provide protection by allowing for cost overruns, which can be beneficial if there are unexpected expenses.
- Time and materials contracts allow for flexibility, as they allow the project to be adjusted to accommodate changes in scope or timeline.
- Unit-price contracts are cost effective, as they are based on the volume of work completed, which can help to save time and money.
Limitations of contract
Contracts are an essential part of project management, providing clarity and protection to both parties involved. However, there are several limitations to the various forms of contracts that should be considered. These limitations include:
- Fixed-price contracts, which set a fixed price for the project regardless of the time it takes to complete, can lead to budget overruns if the project takes longer than expected.
- Cost-plus contracts, which set a fixed fee for the project plus a percentage of the costs, can lead to overspending if the project is more costly than anticipated.
- Time and materials contracts, which set a predetermined rate for the project and charge for the materials used, can be difficult to estimate and control costs.
- Unit-price contracts, which set a fixed price per unit of work, can lead to cost overruns if the amount of work is greater than anticipated.
Overall, it is important to consider the limitations of each type of contract before deciding which one to use for a given project.
In addition to the types of contracts used in project management, there are a few other approaches related to the forms of contract. These include:
- Collaborative Contracting - Collaborative contracting is a form of contract in which both parties work together to identify and manage risks, and to develop solutions to any issues that may arise. This type of contract allows for greater flexibility and can help to promote trust between the parties.
- Design-Build Contracting - Design-build contracting is a form of contract in which one party is responsible for both the design and construction of a project. This type of contract can be beneficial in that it allows for greater control over the project, as well as a streamlined approach to the delivery process.
- Performance-Based Contracting - Performance-based contracting is a form of contract in which one party sets specific performance goals, and then pays the other party for meeting those goals. This type of contract is beneficial in that it allows for greater accountability and can help to ensure that the project is completed in a timely manner.
In summary, there are several approaches related to forms of contract that can be used in project management, including collaborative, design-build, and performance-based contracting. Each of these approaches offers its own benefits and can help to ensure that the project is completed on time and to the highest possible standards.
|Forms of contract — recommended articles|
|Contract for project — Unit price contract — Labor and material — Bid documents — Cost reimbursement — Provisional sum — Construction management contract — Types of procurement — Firm fixed price contract|
- Esser, J. P. (1996). Institutionalizing industry: the changing forms of contract. Law & Social Inquiry, 21(3), 593-629.