Types of contracts

Deals and agreements can take many forms and shapes. You may be offered $100 to mow your neighbor’s lawn or $150,000 to design a house. Ultimately, the contract takes different directions as its specific terms and conditions are set out. As the final agreement is signed by the parties, it will fall under a specific category.

Types of contracts used in agreements refer to the structure of the document, the sort of compensation, legal enforcement requirements, or risks associated. The contracts listed below are not comparable and should not be utilized interchangeably.

Fixed-price contract

Fixed-price contracts are used in situations where the payment does not depend on time extended or uses resources. These kinds of contracts are also known as lump sum contracts, the seller can estimate the cost required to perform an action regardless of the actual cost. This leaves a wiggle room in the price presented in the agreement when unexpected costs do occur.

There is a risk involved for the seller using a fixed-price contract, so some will present a range of prices instead of one dollar amount.

Price fixed contracts have benefits of early termination and penalty for missing deadlines. This ensures that the action will be performed on time.

Fixed-priced contracts might take longer to be created and approved. The sellers should be extra careful when determining the price in order to make sure that they account for all the resources and time accurately.

Fixed-price contracts are mainly used for construction projects due to their simplicity. Buyers might end up paying a higher price upfront to avoid calculating the actual cost.

Cost-reimbursement contract

In this type of contract, the final cost is determined once the contract is completed or by a specific time frame given in the agreement. The contractor will give a rough estimate of the total costs and the buyer gets an idea of the required budget. In turn, the buyer makes the payment described in the contract.

The purpose of having such expectations with cost-reimbursement contracts is for the contractor to set up a price ceiling which the buyer agrees to pay where the contractor can not exceed. If the ceiling is reached the contractor can stop work.

Cost-plus contract

It is also used for construction projects but it is one of the cost-reimbursement types where the buyer pays for the total cost of the project including labor and material, and any unforeseen expenses.

The word "plus" refers to the contractor’s profits and overhead costs that the buyer agrees to pay. In turn, the buyer expects the contractor to deliver on their promise.

Time and materials contract

A time and materials contract is like a cost-plus contract, but a little more straightforward. In these deals, the buyer pays the contractor for the time spent to complete the project and the materials used in the process.

Time and material contracts are also used in situations where it is difficult to predict the size of the project or when the requirements for the competition are predicted to change.

In this case, the buyer will put out money for the material and the needed labor. At the outset of the project, the buyer has to come to some sort of agreement on the price for material and the hourly rates for labor.

Unit price contract

With the unit price contract, the total price for the project is calculated based on the units that make up the project. This type of contract is used in situations where the buyer and the contractor agree to the total price required for segments of the project.