Contracts Management

Contract Types

What Are The Common Contract Types?

Contract Types

A contract is a legal agreement between two or more people for an exchange of goods or services. Contracts are enforceable by contract law. There are many different types of contracts and they vary between industry and according to the type of goods supplied or services performed. Contracts are usually categorized according to the type of payment but can be tailored to incorporate common elements from several different contract types. Some of the common forms of contract are examined below.

A fixed price or lump sum contract is an agreed price for the performance of work, supply of labor, or supply or goods at a designated time. The scope of the contract defines the expectations of both parties. This type of contract provides a degree of certainty for both parties because the contract scope clearly spells out what is involved. They can be short term or ongoing in duration.

Contract Types

Unit rate contract types are an agreed to rate for the performance of specified work. Monetary exchange takes place when work is performed and is directly proportional to the volume and range of work. These types of contract are most prevalent in the building industry. An example of a unit rate contract would be the supply of timber where the monetary amount would be defined by the volume of units supplied. The terms of this type of contract often accommodates flexibility for price adjustment. The agreed to value may be subject to amendment if the volume is reduced or exceeds the original negotiated terms and price.

A reimbursable contract type (cost plus) is an upfront payment by the client party to the contractor. These types of contracts are used when the scope of the work is difficult to define. An example of this type of contract is the procurement of specialized services to solve a problem that may take an indefinite period of time. The upfront payment covers the contractor's commitments to the project. Renegotiation for increased tenure or reimbursement may take place if the contract comes to an abrupt end. These types of contract sometimes contain a fixed cost component.

Financing contracts are a type of contract that involves the raising of debt and equity during the project duration by the contracted party. The financing contractor ultimately bares the risk of profitability in this type of agreement. Financing contracts are used in the mining, building, oil and gas, transportation and infrastructure projects.

Project management contracts are a supply type of contract where the contractor agrees to manage the contract, as defined by the scope of the agreement, for a specified duration of time for monetary consideration. This type of contract can be short term or long term.

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