You Might Just Be a Fixed-Price Contract If...
My internal customers sometimes get confused with the major differences between a fixed-price contract type and a cost-reimbursement contract. For example, a customer may come to me with a contract that specifies a named resources, named skills, no truly tangible deliverables, and a monthly "fixed" fee (which is, in reality, the named resource's hourly rate multiplied by 160 hours)—and the customer argues that the contract is a fixed-price contract. Here's a chart I drafted to help eliminate confusion between what constitutes a fixed-price contract and what constitutes a cost-reimbursement contract.
|
Contract Type |
Fixed-Price
(Using Firm-Fixed-Price Example) |
Cost-Reimbursement
(Using Time and Material Example) |
|
Basic Description |
A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the seller’s cost experience (other than buyer-initiated modifications such as change orders) in performing the contract. This contract type places upon the seller maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the seller to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties. |
A cost-reimbursement contract type provide for payment of allowable incurred costs, to the extent prescribed in the contract. |
|
Application |
Use when requirements and acceptance criteria are known with sufficient accuracy. |
Use when uncertainties involved in contract performance do not permit requirements, acceptance criteria, costs, etc. to be estimated with sufficient accuracy. |
|
Performance |
Deliverable |
Effort |
|
Level of Requirements Detail |
Well-Defined |
Unknown or Broad |
|
Level of Acceptance Detail |
Well-Defined |
Unstated or Vague |
|
Payments |
On Delivery |
As Incurred |
|
Buyer-Specified Type of Resources (e.g., Skills) |
No |
Yes |
|
Buyer-Specified Quantity of Resources (e.g., Headcount, Hours) |
No |
Yes |
|
Contract Administration Effort |
Low |
High |
|
Change Controls |
As Needed |
Primarily for Extensions |
|
Risk to Buyer |
Low |
High |
|
Risk to Seller |
High |
Low |
And even if you say you're a "fixed-price" contract, you might just be a cost-reimbursement contract if...
- The substance of work is research or investigatory
- You don't contain tangible, detailed requirements
- You don't contain tangible, detailed deliverables
- You state quantity of resources
- You state resource names
- You describe resource skill sets (such as skills required or years of experience required)
- You don't contain a deliverables schedule
- You contain a milestone schedule (that is not deliverables-based)
- You contain a payment schedule (such as a monthly “fixed-fee”)
- You describe a “fixed-fee” that is in reality a resource hourly rate aggregated over the contract term and then is divided by some time period (such as a monthly “fixed-fee”)
Categories: General Negotiations, Terms and Conditions Negotiations
Tags: Contract Drafting Contracting Negotiating Procurement Negotiations Project Procurement Sourcing Terms and Conditions Structured Procurements
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