Zoho Contracts 2.0 is live! Robust CLM, now supercharged by AI.Explore What’s New

x
Skip to main content
close
EXPLORE ALL PRODUCTS

Sales

CRM

Comprehensive CRM platform for customer-facing teams.

CRM
Voice

Cloud Contact Center Software for businesses.

Voice
Sign

Digital signature app for businesses.

Sign
Forms

Build online forms for every business need.

Forms
Bigin

Simple CRM for small businesses moving from spreadsheets.

Bigin
SalesIQ

Live chat app to engage and convert website visitors.

SalesIQ
Bookings

Appointment scheduling app for consultations with customers.

Bookings
RouteIQ

Comprehensive sales map visualization and optimal route planning solution.

RouteIQ
Thrive

Complete loyalty and affiliate management platform.

Thrive
Suites
CRM Plus

Unified platform to deliver top-notch customer experience.

CRM Plus

Marketing

Campaigns

Create, send, and track targeted email campaigns that drive sales.

Campaigns
Voice

Cloud Contact Center Software for businesses.

Voice
Sign

Digital signature app for businesses.

Sign
Forms

Build online forms for every business need.

Forms
Social

All-in-one social media management software.

Social
Survey

Design surveys to reach and interact with your audience.

Survey
SalesIQ

Live chat app to engage and convert website visitors.

SalesIQ
Sites

Online website builder with extensive customisation options.

Sites
Backstage

End-to-end event management software.

Backstage
PageSense

Website conversion optimization and personalisation platform.

PageSense
Marketing Automation

All-in-one marketing automation software.

Marketing Automation
LandingPage

Smart landing page builder to increase conversion rates

LandingPage
Webinar

Webinar platform for webcasting online webinars.

Webinar
NEW
LeadChain

Sync, manage, and convert leads across channels seamlessly.

LeadChain
NEW
Domains

Easy domain registration, transfer, and secured DNS management.

Domains
NEW
CommunitySpaces

Online community platform for individuals and businesses to grow their network and brand.

CommunitySpaces
Thrive

Complete loyalty and affiliate management platform.

Thrive
Publish

Manage all your local business listings on a single platform.

Publish
Suites
Marketing Plus

Unified marketing platform for marketing teams.

Marketing Plus

Commerce and POS

Commerce

eCommerce platform to manage and market your online store.

Commerce

Service

Desk

Helpdesk software to deliver great customer support.

Desk
Assist

Remote support and unattended remote access software.

Assist
Voice

Cloud Contact Center Software for businesses.

Voice
SalesIQ

Live chat app to engage and convert website visitors.

SalesIQ
Bookings

Appointment scheduling app for consultations with customers.

Bookings
FSM

End-to-end field service management platform for service businesses.

FSM
Lens

Interactive remote assistance software with augmented reality.

Lens
Solo

The all-in-one toolkit for solopreneurs.

Solo
Suites
Service Plus

Unified platform for customer service and support teams.

Service Plus

Finance

Books

Powerful accounting platform for growing businesses.

Books
Expense

Effortless expense reporting platform.

Expense
Sign

Digital signature app for businesses.

Sign
Inventory

Powerful stock management and inventory control software.

Inventory
FREE
Invoice

100% Free invoicing solution.

Invoice
Billing

End-to-end billing solution for your business.

Billing
NEW
Payroll

Payroll software with automated tax payments and filing.

Payroll
Commerce

eCommerce platform to manage and market your online store.

Commerce
Checkout

Collect payments online with custom branded pages.

Checkout
Practice

Practice management software for accounting firms.

Practice
Solo

The all-in-one toolkit for solopreneurs.

Solo
NEW
Payments

Unified payment solution built for all businesses.

Payments
Suites
Finance Plus

All-in-one suite to manage your operations and finances.

Finance Plus

Email, Storage, and Collaboration

Mail

Secure email service for teams of all sizes.

Mail
Voice

Cloud Contact Center Software for businesses.

Voice
Sign

Digital signature app for businesses.

Sign
WorkDrive

Online file management for teams.

WorkDrive
Bookings

Appointment scheduling app for consultations with customers.

Bookings
Cliq

Stay in touch with teams no matter where you are.

Cliq
Notebook

Beautiful home for all your notes.

Notebook
Meeting

Online meeting software for all your video conferencing & webinar needs.

Meeting
Connect

Employee experience platform to communicate, engage, and build positive employee relations.

Connect
Learn

Knowledge and learning management platform.

Learn
Office Integrator

Built in document editors for web apps.

Office Integrator
Writer

Word processor for focused writing and discussions.

Writer
TeamInbox

Shared inboxes for teams.

TeamInbox
ZeptoMail

Secure and reliable transactional email sending service.

ZeptoMail
Show

Create, edit, and share slides with a sleek presentation app.

Show
Tables

Work management tool to connect people, processes, and information.

Tables
Sheet

Spreadsheet software for collaborative teams.

Sheet
Office Suite

Powerful collaborative work platform for teams.

Office Suite
Calendar

Online business calendar to manage events and schedule appointments.

Calendar
ToDo

Collaborative task management for individuals and teams.

ToDo
FREE
PDF Editor

Collaborative online PDF editing tool.

PDF Editor
Suites
Workplace

Application suite built to improve team productivity and collaboration.

Workplace

Human Resources

Expense

Effortless expense reporting platform.

Expense
Recruit

Intuitive recruiting platform built to provide hiring solutions.

Recruit
People

Organize, automate, and simplify your HR processes.

People
Sign

Digital signature app for businesses.

Sign
NEW
Payroll

Payroll software with automated tax payments and filing.

Payroll
Shifts

Employee scheduling and time tracking app.

Shifts
Workerly

Manage temporary staffing with an employee scheduling solution.

Workerly
Suites
People Plus

Comprehensive HR platform for seamless employee experiences.

People Plus

Security and IT Management

Creator

Build custom apps to simplify business processes.

Creator
Assist

Remote support and unattended remote access software.

Assist
Vault

Online password manager for teams.

Vault
Directory

Workforce identity and access management solution for cloud businesses.

Directory
Lens

Interactive remote assistance software with augmented reality.

Lens
QEngine

Test automation software to build, manage, execute, and report testcases.

QEngine
Catalyst

Pro-code platform to build and deploy your apps.

Catalyst
RPA

Automate manual, tedious, and repetitive tasks easily.

RPA
NEW
eProtect

Comprehensive email security and archiving for every business.

eProtect
FREE
OneAuth

Secure multi-factor authenticator (MFA) for all your online accounts.

OneAuth
Toolkit

Complete resource for any admin-related lookup queries.

Toolkit

BI and Analytics

Analytics

Modern self-service BI and analytics platform.

Analytics
DataPrep

AI-powered data preparation service for your data-driven organization.

DataPrep
NEW
IoT

Harnessing IoT analytics for real-time operational intelligence.

IoT
Embedded BI

Embedded analytics and white label BI solutions, tailored for your needs.

Embedded BI

Project Management

Projects

Manage, track, and collaborate on projects with teams.

Projects
Sprints

Planning and tracking tool for scrum teams.

Sprints
BugTracker

Automatic bug tracking software for managing bugs.

BugTracker
Solo

The all-in-one toolkit for solopreneurs.

Solo
Suites
Projects Plus

Unified project management platform for intelligent, data-driven work.

Projects Plus

Developer Platforms

Creator

Build custom apps to simplify business processes.

Creator
Flow

Automate business workflows by creating smart integrations.

Flow
Office Integrator

Built in document editors for web apps.

Office Integrator
DataPrep

AI-powered data preparation service for your data-driven organization.

DataPrep
ZeptoMail

Secure and reliable transactional email sending service.

ZeptoMail
Tables

Work management tool to connect people, processes, and information.

Tables
QEngine

Test automation software to build, manage, execute, and report testcases.

QEngine
Catalyst

Pro-code platform to build and deploy your apps.

Catalyst
RPA

Automate manual, tedious, and repetitive tasks easily.

RPA
NEW
IoT

Build, deploy, and scale IoT solutions for connected businesses.

IoT
Apptics

Application analytics for all apps.

Apptics
Embedded BI

Embedded analytics and white label BI solutions, tailored for your needs.

Embedded BI

IoT

NEW
IoT

Low-code IoT platform and solutions for connected businesses.

IoT
CRM Plus

Unified platform to deliver top-notch customer experience.

Try now
CRM Plus
Service Plus

Unified platform for customer service and support teams.

Try now
Service Plus
Finance Plus

All-in-one suite to manage your operations and finances.

Try now
Finance Plus
People Plus

Comprehensive HR platform for seamless employee experiences.

Try now
People Plus
Workplace

Application suite built to improve team productivity and collaboration.

Try now
Workplace
Marketing Plus

Unified marketing platform for marketing teams.

Try now
Marketing Plus
Projects Plus

Unified project management platform for intelligent, data-driven work.

Try now
Projects Plus
All-in-one suite

Zoho One

The Operating System for Business

Run your entire business on Zoho with our unified cloud software, designed to help you break down silos between departments and increase organizational efficiency.

TRY ZOHO ONE
Zoho Marketplace

With over 2000 ready-to-use extensions across 40+ categories, connect your favorite business tools with the Zoho products you already use.

EXPLORE MARKETPLACE

The types of contracts in procurement: Everything you need to know

  • Last Updated : November 9, 2023
  • 2.0K Views
  • 5 Min Read
Types of contracts in procurement

What is a procurement contract? 

Procurement contracts are legally binding agreements between a buyer and a seller that governs the purchase of goods or services. This contract specifies the purchase terms and establishes a legal framework to minimize risks and prevent disputes. Once both parties sign the contract, the supplier is responsible for meeting terms related to quantities, quality, and delivery, while the buyer acknowledges receipt and processes payment.

Why choosing the right type of procurement contract is important 

Procurement contracts vary widely based on the nature of the procurement, industry standards, and legal requirements. Understanding these nuances is crucial for project managers and procurement professionals because selecting the wrong contract type can result in long-term costs and significant risks.

What are the types of contracts in procurement? 

Fixed price contract 

Definition: A fixed price contract is a straightforward agreement where buyers and sellers agree upon a fixed price for supplies, products, or services. It is also known as a lump sum contract.

Key factor: This contract type is ideal when the project's scope of work and requirements are well-defined.

Benefits: 

For buyers

For sellers

Low buyer risk: In a fixed price contract, any increase in price or additional costs are borne by sellers. This reduces the financial risk for buyers.

Minimum order assurance: Sellers benefit from a minimum order commitment from buyers.

Cost control: Fixed price contracts are perfect for controlling expenses because costs cannot change once they are agreed upon. Cost certainty also helps with project planning and budgeting.

Notes:  

  • As sellers bear the additional costs or unforeseen risks, they usually include a buffer in the initial cost of the project. This could sometimes result in higher costs for the buyer. It helps to keep this buffer in mind during your negotiations.

  • In competitive bidding situations, sellers may submit low bids to win deals, but this strategy comes with risks. When sellers face economic challenges or rising material costs during the project, they may resort to cost-cutting measures or compromise on quality to mitigate potential financial losses. Hence, buyers should assess seller stability and quality of their past projects and not arrive at the final decision with the bid value as the only criteria.

Example: You hire a construction company to build a house. You agree on a fixed price of $300,000 for the entire project, including design and construction.

Sub-contract types of fixed price contract 

 

 

 

 

Fixed price contract

 

 

Firm fixed price (FFP)

This contract type combines a fixed price and a set time frame. The seller is obligated to complete the job at an agreed price and within a set timeframe without any changes in cost.

 

Fixed price incentive fee (FPIF)

This contract type is similar to an FFP contract but with a bonus if the seller performs exceptionally well. For example, in time-critical projects, early completion with the necessary quality standards will be rewarded with an incentive.

 

Fixed price with economic price adjustment (FPEPA)

This contract type is commonly used for long-term projects to protect the seller from inflation. If inflation occurs after signing an FPEPA contract, the supplier can adjust prices to maintain their margins, often based on the Consumer Price Index (CPI).

Cost reimbursable contract 

Definition: A cost reimbursable contract is an agreement where buyers agree to reimburse sellers for the costs incurred in a project alongside a negotiated fee as a profit for the sellers. This contract type is also known as a cost-dispersible or cost-reimbursement contract.

Key factor: Cost reimbursable contracts are well-suited for projects where the scope of work is uncertain or expected to evolve during the project.

Benefits:

For buyers

For sellers

Flexibility: Offers flexibility in fee structure based on project objectives and execution.

Cost coverage: Ensures that sellers are reimbursed for capital invested in delivering services.

Profit potential: Gives the sellers a promised profit as the fee structure is cost + fixed fee/variable incentive.

Example: A software development project where the scope evolves.

Sub-contract types of a cost reimbursable contract 

 

 

 

 

Cost reimbursable contract

 

Cost plus fixed fee (CPFF)

 

In a CPFF contract, the buyer pays the seller for all incurred costs and an additional fixed fee. In risky projects such as complex research involving hazardous material, this fixed fee will be high. Hence, sellers would opt for this type of contract.

 

Cost plus incentive fee (CPIF)

 

Similar to CPFF, but with an extra incentive for the seller when specific performance goals in the contract are met. For example, if the project is finished under budget, the seller receives a percentage of the savings. In the CPIF model, the buyer and seller share expenses if the project is unsuccessful.

Cost plus percentage of cost (CPPC)

 

In the CPPC contract, the buyer reimburses all of the seller's expenses and pays the seller a fixed percentage of those costs as profit. Buyers should clearly define the expected spending and closely monitor the expenses during the actual project execution.

Time and material contract 

Definition: A time and material (T&M) contract is commonly used when sellers provide labor and materials. The contract outlines the desired experience and qualifications, and sellers propose hourly rates for their bids. The buyer pays for labor (at daily or hourly rates), the materials invested in the project completion, and a markup for profit.

Benefits:

  • Risk sharing: T&M contracts distribute project risk evenly between the buyer and seller, promoting a collaborative approach.

  • Resource flexibility: Allows adjustments to labor demands as required.

  • Transparent costs: Payment for actual time and materials ensures transparency in expenses.

Notes: Negotiating a time and material contract is crucial because it establishes clear terms and expectations, preventing misunderstandings and cost overruns. Generally, this type of contract includes a maximum price for the project, commonly called a “not-to-exceed” clause.

Example: This contract type is prevalent in industries like construction, where sellers provide labor and materials. Buyers cover material costs and pay a daily or hourly rate for the staff involved in the project.

Wrapping up 

Selecting the right procurement contract is vital, but it's one of the multiple aspects of the procurement process. For all purchase agreements in place, contract managers closely monitor contract performance and the supplier's adherence to contractual obligations. They are also required to promptly address any changes or amendments during the contract's duration.

To efficiently manage and monitor a large volume of procurement contracts, organizations often include digital contract lifecycle management (CLM) systems in their tech stack. The CLM tool plays a key role in automating and simplifying the procurement contract management process, ensuring smooth and seamless operations.

Related Topics

  • Heleena

    Heleena is a writer based in Chennai, India.

You may also like