There are three different contract types that is widely adopted in the industry. These include:

  • Fixed Price Contracts (FP)
  • Cost Reimbursable Contracts (CR)
  • Time & Material Contracts (T&M)

I am sure many of you are familiar with these contract types as they are prevalent and used across industries and project types. Through this blog, I would like to explore the relevance of these key contract types for various business scenarios.

I have chosen 4 parameters to assess the type of contracts that are best suitable for specific scenarios. The parameters include:

  • Type of work
  • Role of Project Manager
  • Cost risk to a buyer
  • Flexibility to change

The above four parameters are just a handful of key ones that I have picked and there are more that can be added to the list. These parameters are essential for us to compare the 3 types of contracts and to determine their suitability for projects. In this blog, I will limit my focus detail the type of contracts used based on the first 2 parameters – Type of work and Role of project manager.

Before we get into the details of determining the suitability, the first step is really to understand these contract types better. Here is a simple table that explains the contract types:

Contract TypeDescription
Fixed PriceLargely used when:

·   There is high level of clarity on scope of project

·   Fair amount of clarity on the type of work and the process required to achieve the project results

·   Limited variability in project or high level of predictability

·   Heavy focus on accomplishing something within a predetermined cost

Type of work best suited for this contract type:

Purchasing an apartment or a holiday package, off-the shelf software packages, construction of road, etc.

Cost ReimbursableLargely used when:

·   Limited clarity on scope

·   High variability in projects

·   Projects are abstract and are expected to evolve over the course of time

·   Focused on creating the value & experience for the customer rather than completing the project on budget

Type of work best suited for this contract type:

Creative or innovative projects such as event décor, where you expect the organizer to decide on the purchases and you are willing to pay for it. Media Campaigns could also fall under this category.

Time & MaterialLargely used when:

·      Moderate level of certainty in the project

·      Reasonable visibility towards effort and type of resources required

·      Limited predictability of amount of resources required

·      Moderate variability as the process, material, people required are predictable

Type of work best suited for this contract type:

Customized Software Development and staff augmentation requiring labor hire for specific time periods.

As we have established the fundamentals of various contract types, let us explore how does the role of a Project Manager change with each contract type. We often ignore the type of contract; the performing organization has with the buying organization when we discuss PMBOK. It is important to recognize that the role and the key focus of the project manager changes with the type of contract involved:

Contract TypeRole of Project Manager
Fixed Price·   High focus on managing cost

·   Full accountability to manage a project within a given cost

·   Requires to perform highly refined estimation of project costs and resources required

·   Significant focus on risk management

·   Savings focused – Need to drive cost down while delivering high quality project

·   PM to balance the requirements of sponsors of the project (keeping cost down) and the customers (high quality project)

Cost Reimbursable·   Focused on maintaining transparency

·   Records all spend areas for the project and maintains all approvals required for purchasing

·   Focused on only providing options while the buy-decisions are taken by the customers

·   Ensures that all decisions are approved by the buyer so that all costs are reimbursed

Time & Material·   Highly focused on driving productivity

·   Ensures to include metrics that demonstrate productivity

·   Limited focus on scope and cost; however, focused on providing quality resources to customers

·   Ensures high level of efficiency from the resources provided to the customers

This blog is an excerpt from my recent video that details the various contract types and the role of project managers in each of them. You can visit the following link for the detailed video: