A contract is an official document outlining an agreement between two parties. In project management, the contract solidifies an agreement between a buyer and supplier — or seller. Find out why it’s important to have a good contract when working in project management and what types of contracts are useful in various scenarios.
What is a contract in project management?
In project management, the contract outlines the agreement made by a buyer and a seller or supplier. The contract the buyer and seller sign dictates all aspects of their business transaction. According to the Project Management Institute, a contract between parties can be oral or written and is a legally binding agreement that defines their relationship. Any use of PMI’s registered mark or mark of the project in your services or products has to include the proper trademark symbols.
Within the category of contracts for project management, there are various types of contracts. These include Fixed Price Contracts, Time and Material Contracts and Cost Reimbursable Contracts. The contract dictates the timeframe within which the deal or transaction takes place, what payment will be and when the payment is due.
Why are contracts important in project management?
Having a proper contract for a project provides a legal framework for the job that reduces any uncertainty about timelines and payment details. The contract dictates what work is required, who is responsible for completing the specified tasks, when the deadline for the project is, and how payment will be received. Having a legally binding contract for a project helps facilitate a positive relationship between buyer and supplier by creating trust that the task will be completed on time and payment will be received in the agreed upon amount.
3 types of contracts in project management
In project management there are three primary types of contracts. Depending on the type of project you’re creating an agreement for and how payment will occur, one of these is the best starting point for drawing a legal framework of the working relationship.
Fixed price (FP) contracts
Fixed price contracts are useful when the scope of the project is clearly defined and easy to understand. Since the parameters of the project are clearly outlined from the outset, the seller or supplier can provide a definitive price quote for the work. As the name suggests, the price is fixed and cannot be altered (without making formal contract amendments) once the buyer agrees to the terms and conditions. FP contracts can be beneficial to the seller if they can complete the work outlined in the contract for less than they originally thought, allowing them to capitalize on the profit. However, in a FP contract the supplier is assuming cost-related risks because they cannot increase their prices if unexpected expenses crop up over the course of the project.
FP contracts are considered lump sum contracts because there is one price to be paid upon project completion. There are a few types of FP contracts, including:
- Firm fixed price contract
- Fixed price incentive fee
- Fixed price with economic price adjustment
Time and material (T&M) contracts
T&M contracts are a good choice for buyers who aren’t sure exactly what they want from the outset of the project. With a T&M contract, the buyer contracts the seller based on rates for variables such as materials used and hours or days worked. The contract should include all rates with possible markups on the cost of materials. Once the contract is signed, the agreed upon rates remain in place throughout the course of the project and are used to calculate the final amount the buyer owes the supplies based on the work they do.
Cost reimbursable (CR) contracts
A CR contract is often the best choice when there’s little information for all parties starting out on a project. For example, if it’s a research or development initiative, the CR model removes the need to set fixed rates for work that is difficult to predict or foresee. Instead, the buyer fronts the costs for whatever materials, products or labor is necessary to see the project through to completion.
The responsibility falls solely on the buyer, guaranteeing the supplier that all material costs plus a fee for their services will be covered. In the case of CR contracts, the buyer needs to closely monitor the expenses of the project because there is no obligation on the part of the seller or supplier to keep costs down to stay within a budget. All costs incurred within the scope of work fall on the buyer. The various types of CR contracts are:
- Cost plus percentage of cost
- Cost plus fixed fee
- Cost plus incentive fee
- Cost plus award fee (CPAF)
Managing projects and contracts on monday.com
Within monday.com’s powerful Work OS, it’s easy to project managers to oversee one or multiple projects in one place, at one time. The easy-to-use interface is intuitive and makes it possible to collaborate with team members in real time from anywhere around the world. Assign individuals to specific tasks, set deadlines with notification reminders and color code project tasks using templates for project management available on monday.com
Related templates to project management
Business owners can benefit from using free templates available on monday.com to create budgets, schedules and other documentation to support project management.
Single project template
The single project template from monday.com helps your team understand the flow of all phases of the project. Assigns specific tasks to team members which enables them to receive automatic notifications when a deadline is approaching. The template also enables you to build groups for each area of the project and organize them based on who is spearheading them.
The template also makes it easy to organize tasks based on their priority level and completion status. It keeps everyone up to date about project progress through convenient monitoring.
Project portfolio management template
The project portfolio management template from monday.com is a great tool for planning and tracking complex projects that require collaborations across multiple departments or teams. The template helps project managers create a clear overview of the project and the status of all tasks. Using the portfolio management template it’s possible to manage multiple projects in one place and streamline requests.
The project portfolio management template helps project managers track their budget and avoid overspending. User-friendly dashboards make it possible to monitor progress on tasks across various projects and keep your teams on target to meet deadlines.
FAQs about contracts
These are some of the most frequently asked questions about the types of contracts for project management.
What are some types of contracts?
There are many types of contracts for use in project management and beyond. Some of the most useful types of contracts in project management are fixed priced contracts, cost reimbursement contracts and time and materials contracts. Other types of contracts are implied contracts, unit price contracts, unilateral contracts, express contracts and bilateral contracts.
What are examples of contracts?
Some real world applications for contracts include:
- Employment contracts
- Lease agreements
- Financial agreements
- Insurance agreements
One example of a contract is an employment contract that may be project based. In which case, it could be fixed price (paying out a lump sum when the project is complete) or time and material (paying an hourly rate to the employee based on how much they work).
What are the stages of a contract?
The stages of a contract can be broken down into five areas from inception to completion:
- Creation: This is the stage of drawing up the contract to meet the needs of both the buyer and the seller. The seller typically draws up the contract.
- Negotiation: In the negotiation stage, the seller presents the proposed contract to the buyer. They discuss any changes the buyer would like to see before they feel comfortable entering into the agreement.
- Signatures/Award: This is the part of the process where both parties agree to the terms outlined in the contract and sign in acceptance.
- Execution/Administration: All parties must carry out the duties they agreed to as part of the contract. This may include performance monitoring, managing disputes, and adhering to a specified budget.
- Close-out/renewal: When a contract expiry date approaches, there are a couple of options for the involved parties to consider. They can renew the contract with the same terms and conditions or they can re-negotiate the existing terms. If a contract expires and there is no renewal, the contract must be closed-out and all parties must be notified. In some cases, a party may have obligations that continue after the contract’s expiry.
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