Contract Type Selection Situation

ContractType Selection


Type of contract to use

You want to buy an expertise in determining what need to be done

Cost reimbursable

You know exactly what needs to be done

Fixed price

You are buying the services of a programmer to augment your staff

Time and material

You need work done but you do not have time to audit invoices on this work

Fixed price

BuyingExpertise in Determining what needs to be done

Inthis type of situation, it is good to use the cost reimbursablecontract. Often, this type of contract is used when the requirementsand scope of work are unknown. Also, the total price of the expertiseis not known. The buyer buys expertise in determining what needs tobe done and the supplier has the responsibility to write the scope ofwork in a detailed manner. In this situation, the buyer can opt to doone of the cost reimbursement forms (Malcomson, 2012). These formsinclude cost plus fixed fee, cost plus percentage of cost, and costplus incentive fee. Cost plus fixed fee is best because the supplierwork hard to be in line with the cost because any additional costwill not generate more fees. Also the buyer can choose cost plusincentive fee, where the supplier is being paid all costs and aspecific fee. In addition, a bonus may also be paid for the good workdone. Cost reimbursement contract involves scope of work that issimpler and requires low costs price. This is because there is notmuch cost added for risk, by the supplier.

Youknow exactly what needs to be done

WhenI have knowledge of what exactly is to be done, the best contract touse is the fixed price contract. According to Malcomson (2012), thistype of contract requires both parties to agree upon a specific pricefor the work done. Thus, the buyer will pay the amount he or shefeels is appropriate for the work since there is an agreement betweenthe two. Also, the supplier bears the risk of high cost and the buyertherefore experiences low cost risk. The buyer has the advantage ofknowing the total price before the start of a project. In addition,the supplier tries every means to control the costs.

Youare buying the services of a programmer to augment your staff

Whenthere is a need to increase my staff, the recommended contract is thetime and material contract. This type of contract has elements ofboth fixed price and cost reimbursable contracts. The buyer pays adaily or an hourly rate for the work done. The programmer can be paidper item or per hour basis. The control of the work relies on thebuyer. If the contract is for short-term and the scope of work isincomplete or unknown, this is the contract to go by. Malcomson(2012) suggests that its creation consumes less time and the durationis brief, thus making it a good choice when in need of staffaugmentation.

Youneed work done but you don’t have time to audit invoices on thiswork

Whenthere is no time to audit invoices, the best choice would be fixedprice contract. This type of contract does not require the buyer toaudit the supplier’s invoices since the supplier is the one whocontrols the costs. Any high costs are also borne by the supplier.The firm fixed price contract is the best since the price is set andcannot change unless there is a change in the scope of work. Theobligation to complete the work is borne by the supplier who in turnis responsible for invoice auditing. The buyer also knows the totalprice before the work begins and has complete knowledge anddescription of the scope of work (Malcomson, 2012).


Malcomson,M. J. (2012). RelationalIncentive Contracts: The Handbook of Organizational Economics. NewJersey: Princeton University Press.