Project Management: Contract Types and Risks

Contract Types and Risks
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Contract Types and Risks
Contracts are important in defining a client’s expectations and laying down fundamental agreements between the client and the contractor. Hence, one can understand a contract as a written agreement between the contractor and the client that outlines all the necessary information about a project and the expected outcomes (Klastorin & Mitchell, 2020). There are several types of contracts that a client can choose from. They all vary in the level of risk that they bear. The risk can lean more toward the client or the contractor, depending on the type of contract. Therefore, different types of contracts are designed in such a way that their levels of risk are different, thus making it possible for people to choose the one that best fits their interests.
Fixed-Price Contract
A fixed-price contract is a type of agreement commonly used in projects, and the contract provides a given project’s exact price. Thus, the price of a project is predetermined before its beginning. In this case, aspects of time, labor, and resources do not affect the contract’s price (Klastorin & Mitchell, 2020). Some application areas for this type of contract can be in agreement involving the government or contraction contracts. Some of the advantages of these types include the ease and simplicity of use and the ease of understanding the scope of the task before it begins. In addition, the transaction part of the contract is relatively simple. Similarly, the contractors have an easy process and understanding of how the contract works. On the other hand, some of the limitations of the fixed-price contract include the high cost associated with the certainty of this contract and the risk of changes in the market (Klastorin & Mitchell, 2020). In addition, the seller takes a great risk since the changes in market prices only affect the seller. Thus, depending on the perspective, the fixed-price contract can be either an advantage or a disadvantage.
Cost-Plus Contract
A cost-plus contract is an agreement where the client agrees to compensate the project company for all the expenses they incur during project execution. However, the compensation, in this case, comes with a profit (Klastorin & Mitchell, 2020). One of the characteristics of this profit is that it is usually a percentage of the contract’s full price. Therefore, applying this project contract could fit the construction field well. Some positive aspects of using this type of contract include eliminating contractor risks, focusing on the quality of the task rather than its cost, and the contractor working with great flexibility in the budget. However, all these can also lead to disadvantages like poor time management, the unpredictability of project costs, and the act by c...