Contract Project Management and Types of Project Contracts

By Indeed Editorial Team

Updated June 10, 2022

Published December 7, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Contracts are a vital component of project management. A contract specifies the duties of a team member or another company in the project's completion. If you're interested in a career in contract management, understanding proper contract strategies can help your professional advancement. In this article, we define contract project management, explore what a contract manager is, share why contract management is important, explain project contracts, and discuss the types of project contracts.

What is contract project management?

Contract project management is an aspect of project management that entails overseeing a contractual agreement throughout the contracting process. As a formal document, it is necessary for a project contract to follow careful design and planning. A contract is typically mutually agreed upon to ensure that parties have a consensus on the scheduled project.

Read more: The 5 Phases of the Project Management Life Cycle

What is a contract manager?

A contract manager is vital to a company's success. They are in charge of contracts throughout a project's life cycle. They may also serve as a liaison between businesses, employees, suppliers, and clients. An efficient contract management team can assist in ensuring careful review of contractual partners, that the contract conditions agreed upon are reasonable and advantageous to all parties, and that there's minimal risk involved in any contractual arrangement.

Some of their key responsibilities include the following:

  • Draft, create, negotiate and implement the contract

  • Establish contract policies and processes to ensure the agreement's effectiveness

  • Handle and close the contracts during the course of the project

  • Build a contract archive and refresh it regularly

Contract manager work environment

Contract managers usually report to either finance, regulatory, commercial operations, or marketing and sales departments. This role is responsible for ensuring proper monitoring of every contract and the fulfillment of all deliverables in accordance with the agreement's terms. Contract managers are responsible for every phase of the contract timeline after the preparation, review, approval, and transfer of the agreement from the contract management department.

Qualities of an effective contract manager

Acquiring the right set of skills and attributes can help you succeed in a contract management role. Here are some common qualities of an excellent contract manager:

Time management

It requires time to manage contracts throughout their duration properly. As a result, effective contract managers are usually very skilled at organizing their time. They can identify approaches to optimize the contract procurement process for improved efficiency.

Risk management

Contract management has a connection to risk management. Every time professionals sign a new contract, you may assume a certain level of risk, so knowing how to protect the company and minimize unnecessary risk is vital. You can use these abilities to keep the project on track and help ease any possible concerns before they become significant issues by maintaining a strict log on contract dates and deliveries.

Compliance dynamics knowledge

It can be easy to connect contracts to compliance. Staying updated on contract terms can help the organization maintain compliance with relevant laws and regulations. Effective contract management may be particularly crucial in regulated sectors such as healthcare, banking, and manufacturing.

Attention to detail

Minor details can make or close a contract. A professional contract manager can pay close attention to the finer details of a contract and help uncover any mistakes or inaccuracies that might lead to significant issues, if not handled promptly. Contract managers usually employ contract management software to keep track of a contract's details. Doing this may help ensure that teams meet crucial deadlines on projects that may benefit the company.

Technical knowledge and abilities

Businesses with an extensive contract portfolio or those in charge of high-value or high-risk agreements typically turn to specialized software to help them manage these crucial contracts. As a result, having a fundamental understanding of how to use these software platforms can be beneficial for contract managers. Using these technological skills, they can effectively uphold their contracts and commitments.

Related: Essential Project Manager Technical Skills

Why is contract management important?

Project contracts define and provide metrics for vital company strategies, workflows, and interactions. Effective contract management can help businesses and project organizations compete more effectively on a global scale, particularly for companies with remote teams working with different time zones and cultures. Because contracts incorporate terms of payment, service requirements, and compliance expectations, contract management can help reduce project risk by ensuring compliance when required. Efficient contract management can also offer project companies monitoring and tracking capabilities using contract management software. This software can provide real-time insight into contract performance and can assist leadership in making project choices effectively.

It's essential that initiated contracts represent project targets, deadlines, budget allocation, and resources available. They may also define regulatory requirements, industry standards, and possible risks. A contract management team can help connect all project components by establishing an audit trail during amendments and ensuring communication with the appropriate individuals at the correct time. Contract management can help project companies evaluate how project efficiency, performance, cost, and inventory affect their overall development and revenue.

Related: What Are Contract Jobs? With Tips, Challenges, and Benefits

What is a project contract?

In project management, a contract is a consensual agreement between the buyer and the seller to procure services or products required for an agreed project. It involves performing certain professional services in exchange for stipulated compensations, like costs. The agreement contains terms and criteria that it requires interested parties to observe. A contract may create a legal binding between companies or individuals involved.

Types of contracts in project management

The type of project usually determines the type of contract to apply. Depending on project requirements, it may be possible to use two contract types simultaneously. You can categorize most contractual relationships into the following:

Fixed-price contracts

In this classification, the contract includes a set price for a specified service or product or the expected outcome of that service or product. You can use these kinds of contracts when the extent of the service is fully outlined and definitive. Below are the different forms of fixed price contracts used in project management:

Firm Fixed Price (FFP)

The prices of products and services can be fixed and never change unless there's mutual agreement to alter the scope of pricing. This type is primarily advantageous to purchasing organizations because the price doesn't change even if unforeseen costs arise or extra resources are necessary. FFP contracts are usually suitable when acquiring commercial products, equipment, or services subject to thorough and precise specifications and presented at a fair price.

Related: What is a Project Management Plan? With Tips and Examples

Fixed Price Incentive Fee (FPIF)

Here, there's a fixed price ceiling, and the seller can execute and satisfy the contract specifications within that price. The seller is responsible for all costs beyond the price ceiling. This kind of contract gives both the buyer and the seller some performance flexibility through technical incentives. The incentives depend on meeting agreed-upon indicators, including cost, timelines, and technical knowledge.

Fixed Price with Economic Price Adjustments (FPEPA)

This arrangement may be appropriate when the parties execute contracts across different countries and make transactions in varying currencies. This contract is also suitable if the seller's work may last a few years (usually three to five years). This contract may allow for modifications to the predetermined final payment as agreed upon in the contract. These modifications may be subject to unpredictable circumstances, such as inflation rates (which might go up or down) on specific products.

Cost reimbursable contracts

This category of contract entails cost reimbursement for the expenses incurred during the finalization of the contractual task. It comes with a predetermined fee that represents the seller's profit. You can apply this type when the scope of work may change within the contract duration. This type of contract includes:

Cost Plus Fixed Fee (CPFF)

The seller receives all of the contract's authorized costs. The seller also gets a fixed fee reimbursement calculated as a part of the initially expected project costs. This cost typically doesn't change unless the project scope changes.

Cost Plus Incentive Fee (CPIF)

The seller gets reimbursed for all the expenses involved in completing the contractually agreed service. The buyer and the seller divide their expenses based on the eventual costs spent (which may be higher or lower than the original anticipated cost). The sharing depends on a pre-discussed cost-sharing formula. Although, parties may divide costs in an 80/20 split based on the seller's actual performance.

Related: Project Procurement: The Benefits, Responsibilities, and FAQs

Cost Plus Award Fee (CPAF)

In this type of contract, the seller receives legitimate reimbursements. Although, the bulk of the fee is dependent on fulfilling certain technical or subjective performance goals outlined in the agreement. The sole determinant of the fee is the buyer's subjective evaluation of the seller's performance.

Time and material contracts (T&M)

This contract is a hybrid type of agreement incorporating the attributes of fixed and also cost reimbursable contracts. Parties may apply this contract when the contractual requirements (scope) are unknown or undefined. This kind of contract may also be appropriate for hiring experts and project employees contracted for a specific amount of time.

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