As a project manager you can often be expected to negotiate, review, execute and terminate contracts. There can be any number of reasons for these contracts, from agreements with vendors to outsourced assistance to the understandings with clients or end users. Though they can be such a large part of the job, contracts and project management are all too rarely discussed in the same context, even if more informal advice and contracting tips are quite easy to glean from others in the trade.
So, what do you need to know about contracts and project management? What are the most common types? How do you keep track of them? What to do if they go wrong? Well, if you’re looking for the answers to any of those questions and more, here are some contracting tips that will give you more insight into what you can expect.
Common Types of Contract
Fixed Price Contracts are those that you sign at the start of your arrangement with another party. It sets out an agreed amount that will be paid by your side for the delivery of certain deliverables. The contracts can also come with terms, such as a Fixed Price Incentive Fee, which provides a bonus for extra conditions met, such as higher quality or meeting set deadlines. A Fixed Price with Economic Price Adjustments can help protect your project against future price volatility by hedging it at a set foreign exchange price or having it linked to interest rates or index-linked. As fixed price contracts set out a definite price that will be paid, it gives your project a degree of price-security to plan around though it also means you need to be very aware of the deliverable’s value to your overall project as agreeing to high a price can constrict your budget later on.
Cost Reimbursable Contracts are where the vendor gets paid back for all of their expenses as well as receiving a set fee as their profit. This type of contract can be particularly fraught with danger for project managers as vendors will get reimbursed for everything so can become lax about their own cost controls and end up costing your project far more than you had intended.
Time and Materials Contracts are a mixture of fixed price and reimbursable contracts. The vendor will receive a set price for their time but are reimbursed for whatever materials are used. The advantage to a project manager is that these types of contract are easily scalable as your project needs grow, not committing you to a definite amount but giving you the flexibility to increase your use of the supplier if necessary.
Tracking Contracts has become a lot easier recently with the use of online project management software. With all contracts, it is wise to keep a keen eye on how much it is costing you and how it is fitting into the progress of your project. If the vendor is not holding up their end of the deal or it is no longer beneficial to keep them, then a PM will have to look at terminating the contract.
Terminating Contracts can happen for a variety of reasons, some more serious than others, here are some of the most important aspects to keep in mind:
- Penalty Clauses: Can be written into the contract at the beginning so that you are protected against delays or poor supply. If these should happen a penalty clause can help you to recoup your costs from the vendor, as well as helping to keep them in line while the contract is in progress.
- Breach of Contract: If material terms of the contract, such as money paid or goods to be delivered, is breached, then it may be possible to terminate the contract on this basis without the need for compensation.
- Termination by Default: If one party stops holding up their end of the bargain, like a building services company failing to maintain your premises, then a contract may be terminated by default. Usually there is a time limit that defines how long this should have happened for, this can be either written into the contract at the start or provided for by legislation.
Whether you’re a first-time project manager or a seasoned pro, taking the time to understand the ins and outs of contracts is key to your success. When it comes to everything else, Clarizen can help.