The trade off skills are among the essential skills that a project manager and any leader within an organization needs to possess, to facilitate the achievement of both project and organizational goals. The Firm-Fixed Price (FFP) contracts Is a form of a fixed contract where the buyer pays the seller a specific amount which is set within the contract. The FPP contract fails to take into consideration any additional costs that a seller may incur when offering the product. This type of contract, therefore, places all the risk associated with costs to the contractor. The seller, to this end, is motivated to control the costs, with the buyer exempted from being overly involved in cost monitoring and management .
The Fixed price incentive fee (FPIF) contract, on the other hand, is a type of contract that sees a buyer pay a designated amount to the seller, with an option left for the seller to earn more depending on their performance. To this end, the contract negotiation process involves the specifications of cost, price ceiling, and profits. Both parties agree on a formula that is used to calculate the final cost and the final price once the performance is completed. This contract motivates the contractor to control costs since there is an inverse relationship between profits and costs .
Another common contract that project managers need to be aware of is the Cost-Plus-Incentive-Fee (CPIF). This is a type of contract built on the principle of keeping the costs of production as low as possible. To this end, the contractors offered an incentive that will motivate them to minimize the production costs. The CPIF contract drawing exercise sees a negotiation of the incentive fee, which is only applicable when the actual costs of production are lower that the anticipated or contracted costs .
The Cost-Plus-Award-Fee (CPAF) contract, on the other hand, places emphasis on the quality of the performances of the contractor. To this end, a contractor is offered an incentive that is only earned when the contract requirements are excellently met. To this end, a buyer may consider aspects such as timely completion, high-quality work and minimization of costs when coming up with the incentive award. During the process of drawing the contract, the two parties agree on both the base amount and the award amount. The award amount is constituted in such a way that it provides enough motivation for a contractor to place emphasis on quality performance and delivery .
Another important type of contract to be considered in project management is the Cost-Plus-Fixed-Fee (CPFF) contract. This is a type of contract that seeks to come up with a fixed amount of fee at the inception. The negotiated fee within this contract, therefore, remains fixed irrespective of the actual cost of the whole project. This contract, however, gives room for the revision of the fee once the scope of the project changes. This type of contract is mostly applied in projects whose costs are difficult to estimate correctly. The implication here is that contractors are motivated to be involved in a rather risky venture . From the buyer’s point of view, however, the CPFF is not cost effective since the seller is not motivated to actively control the costs.
As a buyer, choosing the type of contract that works for my situation is informed by cost and efficiency. Every buyer yearns for a contractor who will deliver the best quality goods within the required period, but at a minimal cost . As a buyer, therefore, the most interesting contract is the Cost-Plus-Award-Fee (CPAF) contract. This is a type of contract that places emphasis on the two qualities of cost and efficiency. This contract allows for the contractor to be offered an incentive which is given once certain qualities are fulfilled. As a buyer, the Cost-Plus-Award-Fee (CPAF) contract gives me the ability to set the standards expected of the performance during negotiation. Given that the incentive will motivate the contractor to adhere to the set standards, the Cost-Plus-Award-Fee (CPAF) contract increases the likelihood of quality performance. This is the best option for a buyer since the required performance metrics are likely to be achieved by a contractor in search of the award fee . Precaution should, however, needs to be taken to place a limit on the award fee, to avoid an increase in the overall cost incurred by the buyer.
As a seller, my attention would be on the contract that has the potential to bring forth the best returns. In addition, the chosen contract needs to offer the contracting team the freedom to perform optimally, with unnecessary cost caps not emphasized . The most interesting contract from the seller’s perspective, therefore, is the Cost-Plus-Fixed-Fee (CPFF) contract. This is a contract that offers the seller the ability to first negotiate the fixed fee, which is liable to revisions as the project proceeds. This is the best contract from the seller’s perspective since it offers the production team immense freedom in performing their roles. This arises from the allowance given to contractors to incur more costs during the program, while at the same time changing the project as they see fit . Through this contract, therefore, a contractor is able to produce high-quality work due to the reduced restrictions on the side of the seller.
References
Brandis, M. (2001). "Another look at award fee contracting.". Contract Management , 91-25.
Cannon, J., & Perreault Jr, W. (1999). "Buyer-seller relationships in business markets.". Journal of marketing research, 439-460.
Wang, C., & Miguel, J. (2013). "Are Cost-Plus Defense Contracts (Justifiably) Out of Favor?.". Journal of Governmental & Nonprofit Accounting 2(1), 1-15.
