Types of Contracts - Part Two

In the previous topic; Types of Contracts - Part one , we explain the first types of contracts and I mentioned that Contracts are divided according to pricing arrangement to two main categories which are: 
  1. Fixed-price contracts. 
  2. Cost-reimbursement contracts. 
Today I will continue explaining the second type of contracts “Cost Reimbursement Contracts “ as follows:

Second: Cost Reimbursement Contracts

this type of contracts has the following features:

  • Provides for payment of allowable incurred costs, to the extent prescribed in the contract. Establishes an estimate of total costs for the purpose of obligating funds and establishes a ceiling that the contractor may not exceed, except as his own risk. 
  • Cost reimbursement contracts place the least cost and performance risk on the contractor. 
  • Cost-reimbursement contracts are suitable for use only when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use and type of fixed price contract. 
  • Used for research and development contracts. Prohibited for the acquisition of commercial items. 

Within the cost reimbursement category there are: 

  • cost type - which involves payment of all incurred costs within a predetermined total estimated cost. 
  • cost sharing - where the Government and the contractor agree to split the cost of performance in a predetermined manner. No fee is given. 
  • cost-plus-fixed-fee - which allows for payment of all incurred costs within a predetermined amount plus an agreed upon fee which will not change. 
  • cost-plus-incentive-fee - which provides for adjustment of the fee (either up or down) using a predetermined formula based on the total allowable costs in relation to total targeted costs. 
  • cost-plus-award-fee - which provides for negotiation of a base fee with an award fee which can be given based upon a judgmental evaluation by the Government of contractor performance and cost control. 
Third: Other Types of Contracts

1- Time and Material Contracts

this type of contracts has the following features: 
  • Direct labor hours at specified hourly rates.
  • Materials at cost.
  • Used only when not possible to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. Used of supplies and materials. 

1.1 Labor-hour contracts
A labor-hour contract is a variation of the time-and-materials contract, differing only in that materials are not supplied by the contractor.

2- Letter Contracts

this type of contracts has the following features:
  • Written preliminary contractual instruments that authorize the contractor to begin immediately manufacturing supplies or performing services. 
  • A letter contract may be used when (1) the government’s interests demand that the contractor be given a binding commitment so that work can start immediately and (2) negotiating a definitive contract is not possible in sufficient time to meet the requirement. 

3- Indefinite Delivery Contracts

There are three types of indefinite delivery contracts as follows: 
  1. Definite quantity contracts.
  2. Requirements contracts.
  3. Indefinite quantity contracts. 

3.1 Definite quantity contracts
Provides for the delivery of a definite quantity of specific supplies and service for a fixed period. Deliveries or performance to be scheduled at designated locations upon order. A definite quantity contract may be used when it can be determined in advance that:

A definite quantity of supplies or services will be required during the contract period; The supplies or services are regularly available or will be available after a short lead-time.

3.2 Requirements Contract
A requirements contract provides for filling all actual purchase requirements of designated Government activities for supplies or services during a specified contract period, with deliveries or performance to be scheduled by placing orders with the contractor.

A requirements contract may be appropriate for acquiring any supplies or services when the Government anticipates recurring requirements but cannot predetermine the precise quantities of supplies or services that designated Government activities will need during a definite period.

3.3 Indefinite Quantity
An indefinite quantity contract provides for an indefinite quantity, within stated limits, of supplies or services during a fixed period.

The Government places orders for individual requirements. Quantity limits may be stated as number of units or as dollar values. Contracting officers may used indefinite-quantity contracts when the government cannot predetermine, above a specified minimum, the precise quantities of supplies or services that the Government will require during the contract period, and it is advisable for the Government to commit itself for more than the minimum quantity. The contracting officer should use an indefinite-quantity contract only when recurring need is anticipated.

4- Agreements

There are two types of  Agreements as follows: 

4.1 Basic Agreements 

  • A written instrument of understanding, negotiated between an agency or contracting activity and a contractor that (1) contains contract clauses applying to future contracts between parties (2) contemplates separate future contracts. 
  • Should be used when a substantial number of separate contracts may be awarded during a particular time period and significant recurring negotiating problems have been experienced. 

4.2 Basic Ordering agreements
  • A written instrument of understanding, negotiated between an agency, contracting activity and a contractor that contains 
  • Terms and clauses applying to future contracts (orders) between parties 
  • A description, as specific as practical, of supplies or services provided and 
  • Methods for pricing, issuing and delivering future orders. This is not a contract. 
  • Used to expedite contracting for uncertain requirements for supplies and services when specific items, quantities and prices are not known at the time of agreement inception, but a substantial number of requirements for the type of supplies or services are anticipated to be purchased. Blanket purchase agreements are under this category. 

5- Purchase Orders:
  • Are issued on fixed-price basis for acquisition of commercial items. 
  • Specific quantity of supplies and services.

5.1 Government Commercial Purchase Card (Credit Card)
  • Used to make purchases for supplies and services.
  • Used of micro purchases (less that $2500).
  • Does not require provisions or clauses.

The most common types for contracting contracts :

in the following table, you will find the most common types for contracting contracts used in construction industry. 

Type of Contract
When to Use
Some Examples
Lump Sum Contracts or Fixed Price
Used mainly in projects in which the content and the duration of the required outputs are clearly defined. Payments are linked to outputs (deliverables), such as reports, drawings, and bills of quantities, bidding documents, and software programs. Lump sum contracts are easy to administer because payments are due on clearly specified outputs.
They are widely used for services and works based contracts e.g. simple planning and feasibility studies, environmental studies, detailed design of standard or common structures, preparation of data processing systems, construction contracts.

Time Based Contracts or Fee Based Contracts
This type of contract is appropriate when it is difficult to define the scope and the length of services, either because the services are related to activities by others for which the completion period may vary, or because the input of the consultants required to attain the objectives of the assignment is difficult to assess. Payments are based on agreed hourly, daily, weekly, or monthly rates for staff (who are normally named in the contract) and on reimbursable items using actual expenses and/or agreed unit prices.

This type of contract is widely used for complex studies, supervision of construction, advisory services, and most training assignments.
Price Based Contracts
These contracts are used when contracting authorities need to have "on call" specialised services to provide advice on a particular activity, the extent and timing of which cannot be defined in advance. The unit rates to be paid for the experts are agreed and payments are made on the basis of the time actually used.

These are commonly used to retain "advisers" for implementation of complex projects, expert adjudicators for dispute resolution panels, ongoing procurement advice, technical troubleshooting etc.
Percentage Contracts
Percentage contracts directly relate the fees paid to the Consultant on the estimated or actual project construction cost. The contracts are negotiated on the basis of market norms for the services and/or estimated staff-month costs for the services, or competitively bid.

These contracts are commonly used for architectural services.
Performance Based Contracts
The contracts focus on the purpose of the work as opposed to how the work is done. The focus is on the overall cost for a particular service or works while complying with quality standards. The contract sets out the price and the required outcomes, outputs and targets.

Examples of service contracts include landscape maintenance for public parks, recruitment services, ICT solutions. Examples of works contracts include the fast track construction of a public golf course.
Service Level Agreements
These are used when contracting authorities wish to outsource a service to a supplier and are usually drawn up for a one year (maximum) period. It is important with these contracts in particular to spell out the terms of service that and supplier will provide and how the agreement will be monitored.

Particularly common for ICT services such as ongoing website management or operational support on ICT projects.
Design and Build Contracts
In this contract one supplier performs both design and construction under a single contract. The contracting authority has less risk in the construction of a large contract.

These are used for the construction of capital infrastructure and are normally awarded to construction companies.
Turnkey Contracts
In this contract one supplier is the single point of contact for all facets of the project, from design through to commissioning and the start up of the facility/installation of the product.
One example is the design, development and implementation of a major software solution. These contracts can often awarded through public private partnerships and can include large construction works such as the design, build and operation of health care facilities.

In the next Topic, I will explain the Invitation to Bid “Advertisement to Bid”. So, please keep following.

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