The Best Kind Of Contract To Manage Is…(3 of 3)

 Unfortunately, there is no ONE best type of contract to manage. The risk the vendor and customer share is determined by the contract type. The best thing you can do is understand the risks and benefits of each. There are three categories of contracts: Fixed-Price, Cost-Reimbursable, and Time and Material (T&M). In this 3 part series, I defined the contracts in each category. Hopefully, it will help you on the PMP exam and out in the real world.

Time and Materials (T&M) is a hybrid type of contractual arrangement that contains aspects of both cost-reimbursable and fixed-price contacts.  They are often used for staff augmentation, acquisition of experts, and any outside support when a precise statement of work cannot be quickly prescribed.

These types of contracts resemble cost-reimbursable contracts in that they can be left open ended and may be subject to a cost increase for the buyer.  The full value of the agreement and the exact quantity of items to be delivered may not be defined by the buyer at the time of the contract award.  Thus, T&M contracts can increase in contract value as if they were cost-reimbursable contracts.  Many organizations require not-to-exceed values and time limits placed in all T&M contracts to prevent unlimited cost growth.  Conversely, T&M contracts can also resemble fixed unit price arrangements when certain parameters are specified in the contract.  Unit labor or materials rates can be preset by the buyer and seller, including seller profit, when both parties agree on the values for specific resource categories, such as senior software engineers at specified rates per hour, or categories of materials at specified rates per unit.

Image courtesy of Marc Lemmons via Flickr