Reference no: EM131721674 , Length: word count : 300

Discussion: List three types of procurement contracts and define what types of projects they would be used on. In addition, explain how the contract manages risk and who holds the risk in each example.

Discussion should be at least 200-300 words

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Referenced

Procurement Contracts

A procurement contract is defined as an agreement where a buyer, in exchange for consideration, gets services and goods from a seller. Most are usually agreements in written form which specify the role and obligation of each of the involved parties. The contents are usually price lists, business provisions, payment information and the applicable legal terms and conditions (Bajari, P., and Tadelis, S. 2011).

People go for procurement contracts when they lackthe expertise to carry outa certain job, when one cannot do the job alone and alsoif resources are procurable outside of your firm for a discounted price. The analysis must be done first to ensure the procurement contract is cost-effective before going through with it.

There are different types of procurement contracts used in project management. The first one is the Fixed-Price contract or the lump-sum contract. It is used when the scope of work has no uncertainty. The seller is usually bound by contract to complete the task within the allocated time using the allocated resources. It has an advantage in that both parties know the work scope and cos before the work starts.

The downside is that the cost of change in the scope is usually very steep.
The second type is the Firm Fixed-Price Contract (FFP), which is the simplest. The fee is usually fixed, and therefore any cost increments are usually catered for by the bad performer, usually the seller. It is used in government contracts due to its ease of float on the market. Another downside is that it provides an opportunity for a dispute between buyer and seller if the scope is not clear.

The third type is the Fixed-Price Incentive Fee Contract (FPIF), whereby the price is fixed but sellers are given additional incentives based on their performance. It lowers the risk that is usually borne by the seller and can be tied to other project metrics such as time, cost and technical performance.

When choosing a procurement contract one should, choose a contractwhich is most suitable and friendly to their situation.
 
References

Bajari, P., &Tadelis, S. (2011). Incentives versus transaction costs: A theory of procurement contracts. Rand journal of Economics (2011): 387-408.