This article will inform the reader of contract knowledge within project management and improve effectiveness in this area.

General Information about contract 

knowledge is a crucial skill in vendor management and the procurement process within project management. Contracts are legally binding in the case that all conditions are met. Arrangements can be implied, expressed, or oral and should only be entered into for legal purposes. Verbal contracts are not recommended for use because there is no evidence of the agreement being entered into.

Conditions for contracts

There are four general conditions to make a contract a legally binding agreement. These four conditions are:

  1. Must be voluntarily entered into by one or more parties
  2. It must contain mutual considerations by all persons
  3. It must be created for legal purposes
  4. Must be signed by authorized persons

Contract elements contracts are different depending upon why the agreement is entered into and may or may not contain all of them. Some deals will have many more features than the ones below. The typical components of the contract are:

  • Scope statements that include deliverables, requirements, out-of-scope items, and assumptions
  • Milestone dates as well as time tables
  • Responsibilities of each party
  • Financial agreements that have the payment schedule, invoicing arrangements, and incentives
  • Identification of the person or persons authorized to make changes
  • Acceptance criteria
  • Change control procedures
  • Non-disclosure agreements
  • Security agreements
  • Ownership and property rights of project deliverables
  • Penalties for ending the contract prematurely
  • Communications plan to include status reporting and senior management meetings

Primary Contracts

Within project management, there are three common types of contracts.

First is the T&M or time and materials contract that is quick to create, has a brief duration, and is a reasonably good choice when hiring people to augment staff. This contract is best to use when the project manager needs to begin work right away and increase staff. The buyer takes the risk with this type of deal.

Second is the fixed price contract type that means less work for the buyer to manage, makes total project price available to the buyer, can include incentives, and are familiar to almost all companies. This type is best to use when the project manager does not have time to audit invoices and is knows what needs to be done. Both the seller and buyer can take the risk of this type if not well defined.

Lastly, the cost-reimbursable type can include incentives as well, is a lower cost than a fixed price, and includes a more exact scope of work. This type is best to use when the project manager does not want to determine what needs to be done, and the buyer takes all risks.

With the cost-reimbursable type, there are three variations to this contract, which are:

1. Cost plus fixed fee type

2. Cost plus percent of the cost

3. Cost plus incentive fee

Summary of contract types

With project management tasks, each contract type offers advantages to using each one. The benefits of using the labor and materials typically include providing daily direction to the seller, striving for concrete deliverables, and closely monitoring the project schedule. With the fixed price type, the advantages include establishing clear acceptance criteria, the ability to manage change requests, the ability to manage risks, and the ability to monitor project task dependencies and project assumptions.

Advantages of using cost-reimbursable contracts include auditing seller’s costs, monitoring seller work progress, ensuring added resources, ability to watch for shifting resources, and the ability to care for unexpected seller charges.



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