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In 100 words respond to the following posts, remember to cite using 1 reference each in APA formatAndrew VowellContracts are an integral aspect of the procurement process that, when negotiated successfully, can help organizations mitigate certain projects risks and establish competitive advantage. As defined by the PMBOK (Project Management Institute, 2017) contracts fall into the following categories and sub-categories:Fixed Price Contracts- used when project requirements are well established with no expectations for changes to a project’s scope to occur. A defined price is set for the delivery of a product, service, or result.Firm Fixed Price (FFP)- the price of goods/service/result rendered is fixed and will not change unless the scope of the overall deliverable changes. These contracts are favored by buyers since the seller shoulders the cost burden resulting from deviations of agreed upon terms. FFP contracts are suitable to transactions that involve highly repeatable functions that the seller has extensive expertise and experience with. One example is the purchase of standard model cars from a manufacturer. The manufacturer has a very detailed idea of the costs involved in producing a car and can guarantee that cost with limited risk of exceeding those costs.Fixed Price Inventive Fee (FPIF)- similar to FFP contract in that a fixed price is offered for the delivery of a good/service/result with the addition of predetermined incentives built into the contract that will be realized if certain performance metrics are achieved. Sticking with the car manufacturing example, incentives may be offered to the seller if the ordered cars are delivered early.Fixed Price with Economic Price Adjustments (FPEPA)- a fixed price contract that contains predetermined adjustment calculations. These types of contacts are utilized when there will be considerable time requirements for the seller to delivery the agreed upon good/service/result or in instances where different currencies will be used. These adjustments help to ensure that both the buyer and seller get a fair market price for the contracted arrangement. In individual instances, depending on commodity price changes, local inflation changes, either the buyer or seller could receive a better deal than originally agreed upon. Lets say that a US manufacturing firm has a supplier that does not operate in US dollars. Contractual amendments may be built in that allows for a reassessment of cost if changes in currency exchange rates exceeds a certain threshold. Cost-Reimburse Contracts- a reimbursement of the seller by the buyer of any legitimate costs incurred during the completion of a contract in addition to an agreed upon fee that allows the seller to turn a profit on the endeavor. These contracts should be used if the scope of the project is expected to be dynamic and allows the seller to pass some of the risk of rising input prices on to the buyer. Cost Plus Fixed Fee (CPFF)- seller is reimbursed for costs incurred as well as a fixed-fee payment that is calculated as a percentage of the initially agreed upon estimates for overall project cost. Unless the project scope is changed, these fees remain constant. An example of a CPFF contract compatible project would be the design on an app. Even though many apps have been developed, individual challenges encountered throughout each instance causes deviations to occur while fulfilling project delivery. Cost Plus Incentive Fee (CPIF)- seller is reimbursed for costs incurred and receives a pre-agreed upon incentive fee for meeting performance objectives. The buyer of an app may offer the seller incentives for completing delivery ahead of schedule. This type of contract allows risks to be shared by both the buyer and seller but it encourages quality work to be completed in a timely manner. Cost Plus Award Fee (CPAF)- similar to a CPIF contract but the award fee received by the seller is determined at the sole discretion of the buyer based on the meeting of prearranged performance criteria by the seller. In a CPAF contract, the buyer would set checkpoints throughout a project to monitor quality, milestone completion, etc… in order to determine the seller’s performance and decide on whether or not an award fee is merited. Time and Material Contracts (T&M)- a hybrid contract that contains aspects of both fixed price and cost reimbursable contracts that are used when the scope of the project is not easily determined at the outset. These T&M contracts may require the reimbursement of legitimate costs up to a predetermined ceiling. A company that is contracting the development of a new product could agree to reimburse all costs up to $1,000,000. Any associated costs beyond this threshold would be the responsibility of the seller.Something that I came across that I found to be interesting was the relationship between firm size and their responsiveness to changing prices. Kosmopoulou, Lamarche, and Zhou (2016) found that by instituting policies that incorporated price adjustment clauses to insulate governmental agencies from volatile commodity pricing fluctuations, there was an increase in the number of small firms that provided bids for road construction projects. This increase in the number of firms participating in the bidding process is due to the smaller firms being more nimble and able to adapt their prices to changing market conditions whereas larger firms tend to be slower moving in adapting to changing market conditions. Additionally, the more firms that are involved in the bidding process helps to ensure that the buyer is getting the best possible price for services rendered. Kosmopoulou, G., Lamarche, C., & Zhou, X. (2016). Price Adjustment Policies and Firm Size. Economic Inquiry, 54(2), 895–906. https://doi.org/10.1111/ecin.12286Project Management Institute. (2017). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) — Sixth Edition and Agile Practice Guide (ENGLISH). Newtown Square, PA: Project Management Institute.Cori NovakIn the PMBOK Guide three contract types are discussed: 1. Fixed Firm Price (FFP): This particular contract is used when a project or job is known and detailed so that one price can be affixed which will include everything needed to complete the job or project. There are three sub-types of a FFP, they are: a. Firm Fixed Price (FFP) this type is typically used when there is little anticipated change to the scope of a project. It allows for set pricing. An example may be carpet installation. A consumer would go to a seller, agree on the product and price per square foot as well as costs associated with room preparation, and installation. One price will encompass the entire product/service. This puts the risk on the vendors side. b. Fixed price incentive fee (FPIF) this type is typically used when when a contract or service is used for a project with little anticipated change but liquidated damages or early completion incentives may be imposed based on performance.An example may be bridge construction. A municipality may contract for new construction or modernization of a bridge with a contractor. The contractor provides a price which would be all inclusive through completion, however the contractor’s monetary intake can be adjusted based on whether the job was completed timely vs. late. If the job is timely or early, based on the terms of the contract the municipality would have to pay the contractor an incentive fee, conversely, if the contractor comes in late he would owe the municipality monies based on the project coming in over quoted deadline c. Fixed price with economic price adjustments (FPEPA). This type would be used for international contracts that span over periods of time. It allows for the fluctuation in costs +/- as well as changes in currency value which may not be the same as at the time of contract.An example of this may be construction of a building. If a foreign entity contracts to build in 2020 and the anticipated build has an estimated completion date of 2030 then a FPEPA would be used in order to protect the contractor as well as the buyer. The costs or labor and equipment, etc will not be constant throughout the ten year construction process, additionally the valuation of the foreign entities currency would also be expected to change either a higher or lower valuation per dollar, which in turn would result in monetary adjustment. Almost like COLA for contracting. 2. Cost Reimbursable Contracts are another type of contract which allows for the reimbursed costs associated with a job or project plus an incentive to the seller based on profit. There are three sub-types of this contract: a. Cost plus fixed fee (CPFF) This sub-type is based on a contract where the seller is paid for all costs included in the project (that were considered allowable), the seller also receives a percentage of the original costs estimated. Unless the scope changes the seller will receive the percentage and cost reimbursement. This would be an incentive for the contractor to produce a higher quality product however may a negative with leaving the costs to the contractor. The benefit to the contractor would be to come in under time and under budget.An example of this would be the restoration of an existing building. The buyer would need to entrust the project to a contractor who will need to procure and install specific goods. This is a niche business so the buyer may agree to pay the contractor a premium for the service.3. Time and material contracts (T&M): A contract that provides for a contract when the goods and services cannot be articulated. An estimate may be provided and accepted along with the costs of add ons and additional labor. An example of this may be the repair of a car. The consumer brings the car to the repair shop and is given an estimate, however, if additional parts and labor are needed to complete the job, the consumer will need to pay it.An example of this could be the construction of a new home. The contractor will build the home to a spec. he will leave the final finishes up to the buyer however, he will use a realtor to find the buyer and complete the transaction. The realtor and contractor will set the asking price, which will change based on change orders requested by the purchaser. The realtor will receive a percentage of commission based on the final sale price b. Cost plus incentive fee (CPIF) this sub-type is used when when the buyer and seller share the costs of change orders or over runs and the seller is reimbursed for costs associated with performing the contract. An example of this could be a contractor developing a new property and realtor partnership. If the two come together to develop a new residential neighborhood. In this case the seller would be the contractor as he would make the initial purchase and develop the land for subdivision and subsequent housing builds. The realtor would be considered the buyer as they would be investing in the project for ultimate sale. The contractor gets all costs associated to develop and build to an initial scope, but any change orders or over runs would be split according to a percentage predefined in the originating contract and final sales price per lot. c. Cost plus award fee (CPAF) This sub-type is used as performance based contract. The seller gets allowable costs reimbursed, however, his compensation is derived from performance criteria set forth in the original contract and is subjective to the satisfaction of the buyer. When entering into a contract the benefits and risks for both buyer and seller must be well laid out. Performing a project under a fixed-price contract is more risky than other projects. For example, the cost of such a project, agreed to with the buyer, typically is not subject to any adjustments based on the seller’s subsequent costs incurred in performing the work. (Lowden G & Thornton, J. 2015) however this type of contract has the risk v. reward. If the contractor can keep costs down he stands to gain more profit, however, it could influence the quality of the product. Lowden, G. & Thornton, J. (2015). The special challenges of project management under fixed-price contracts. Paper presented at PMI® Global Congress 2015—EMEA, London, England. Newtown Square, PA: Project Management Institute.
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