Types of Contracts
A contract is a binding agreement regarding mutual responsibilities between two or more parties.
Here are the two most popular types of contracts in the world of websites and Project Management.
- Fixed Price Contract
The contractor with the lowest bid agrees to perform all work specified in the contract at a fixed price.
This is the contract that customers want. They want to know the price. They pay a lump-sum.
However, there are drawbacks. The customer must either write a contract, or accept one written by the contractor. In either case, specialized knowledge is required.
And there are drawbacks for the contractor, The main drawback is the great risk of underestimating costs. Underestimate it too much, and you might go out of business.
After any project gets going, there are the inevitable changes. With a Fixed Price contract, each change needs to be scoped out and the price negotiated.
- Cost-Plus Contract
The customer reimburses the contractor for all direct costs, such as labor and travel and materials. And the customer reimburses an additional fee to cover overhead and profit.
Think of hiring a temp. You pay an hourly rate. Plus the temp agency gets a fee for their overhead and profit.
This type of contract requires an amicable relationship between the customer and the contractor. They need to trust each other.
The risk to the customer is a little higher. They worry that they might be taken advantage of.
The risk to the contractor is a lot less. They will not be underbidding themselves. Also, almost every project turns out to be a lot more involved than anticipated. Those overruns are compensated.
Some customer add performance incentives. For example:
If you finish by February 4, 2016, we will pay you 10% more.
NOTES
This page is provided for reference. It is not legal advice.
Originally published on January 14, 2017
Last updated on October 28, 2022
TOPICS: Contracts,