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Last updated on 2024年7月9日

How do you align the contract type with the project objectives, risks, and uncertainties?

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Choosing the right contract type for your procurement project is crucial for achieving your objectives, managing your risks, and dealing with uncertainties. Different contract types have different implications for the allocation of responsibilities, incentives, and risks between you and your supplier. In this article, you will learn how to align the contract type with the project characteristics and the best practices for selecting and negotiating the most suitable option.

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Sunny Prakash (Bansal)

Helping Project Leaders & Industrialists achieve excellence with top-quality industrial products | Transforming Supply…

1 Project objectives

The first step in aligning the contract type with the project objectives is to define what you want to accomplish and how you will measure it. Depending on the nature and scope of your project, you may have different objectives such as cost, quality, time, performance, innovation, or sustainability. You should also consider how specific, measurable, achievable, relevant, and time-bound (SMART) your objectives are and how they align with your overall strategy and stakeholder expectations.

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Ahmad Hassan Khan

Technical Procurement Engineer - ( Value Engineering/Contracts Management/ Negotiations /Compliance /Package Finalization /Material Sourcing/ Payment Terms / Planning)
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In order to achieve this, a detailed and thorough understanding of the contract should be achieved and contract shall be studied well. After carefully analysing all points , the contract should be finalised and keeping the things in favour of your company in general

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Usman Khalid

Purchasing Specialist at SEWA | Power and water plant
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Aligning the contract type with project objectives, risks, and uncertainties requires a careful assessment of various factors to determine the most suitable contract approach. Firstly, it's essential to understand the project's objectives, including scope, timeline, and deliverables. This understanding helps in determining the level of flexibility and control required in the contract. For example, a fixed-price contract may be more appropriate for well-defined projects with stable requirements, while a cost-reimbursable contract may be better suited for projects with evolving requirements or high uncertainties. Consider factors such as market conditions, technology risks, and external dependencies.

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Deijane Vidinha Rodrigues

Regional Purchasing Manager
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I consider the importantance of including an SLA (Service Level Agreement) clause, so that the contractor can understand how they will be assessed on their delivery. In this way, by making payment conditional on achieving targets, it will be possible to monitor compliance with objectives throughout the duration of the contract.

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Amr Mohsen -MBA-CIPS L4 Candidate

Procurement | CIPS, Purchasing, Contracts Management
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These are the specific goals that the project aims to achieve. They define the desired outcomes, deliverables, and success criteria of the project.

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Olga C.

Consultora de Compras | Formadora | Mentora. Soy una apasionada consultora de compras con un enfoque en ayudar a las PYMEs a alcanzar la tranquilidad y rentabilidad que merecen con mi metodología exclusiva 7C.
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Imagínate que estás planeando un proyecto. Bueno, el tipo de contrato que elijas para ese proyecto es como el pegamento que mantiene todo unido. Quieres que se ajuste como un guante a lo que estás tratando de lograr y a los riesgos y sorpresas que podrían aparecer en el camino. Primero, piensa en los objetivos de tu proyecto. Si son claros y directos, un contrato de precio fijo puede ser el camino a seguir. Pero si sabes que las cosas podrían cambiar, un contrato más flexible que permita ajustes podría ser mejor. Y no olvidemos las sorpresas. Los proyectos siempre tienen alguna incertidumbre. Un buen contrato debería tener un poco de flexibilidad incorporada para adaptarse a esos giros inesperados que a veces nos lanza la vida.

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2 Project risks

The second step is to identify and assess the potential risks that may affect your project and how they can be mitigated or shared. Risks can be internal or external, technical or commercial, and vary in probability and impact. You should also evaluate your risk appetite and tolerance, as well as your supplier's. Some contract types are more suitable for low-risk projects, where the scope and requirements are clear and stable, and the price can be fixed in advance. Other contract types are more flexible and adaptable for high-risk projects, where the scope and requirements are uncertain or changing, and the price is based on actual costs or performance.

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José Tovar Taracena

Ingeniero Industrial I Senior Management Buyer I Scania Comercial Mexico
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Definitivamente conocer el proyecto desde sus entradas y cuales son sus salidas ( objetivo a lograr ) nos da la ventaja, por que en base a eso lograr customizar las acciones para asegurar que podamos lograr el objetivo y mas importante, mantenerlo a flote.

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Deijane Vidinha Rodrigues

Regional Purchasing Manager
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Something I find useful when it comes to adapting the contract to the risks is to map out these risks and include clauses in the body of the contract that protect the parties, such as clauses describing the parties' responsibilities, applicable penalty clauses or even cancellation clauses, including those for failure to comply with responsibilities, highlighting the penalties to be applied.

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Amr Mohsen -MBA-CIPS L4 Candidate

Procurement | CIPS, Purchasing, Contracts Management
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Risks are potential events or circumstances that may have a negative impact on the project’s objectives. They can arise from various sources such as technical challenges, market conditions, or external factors.

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3 Project uncertainties

The third step is to recognize and address the uncertainties that may arise during your project and how they can be managed or reduced. Uncertainties are different from risks, as they are unknown or unpredictable factors that may affect your project positively or negatively. You should also consider your uncertainty aversion and preference, as well as your supplier's. Some contract types are more rigid and prescriptive for low-uncertainty projects, where the outcomes and deliverables are well-defined and agreed upon. Other contract types are more collaborative and responsive for high-uncertainty projects, where the outcomes and deliverables are emergent and co-created.

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Deijane Vidinha Rodrigues

Regional Purchasing Manager
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In my experience of contracting services that were subject to factors that could not be predicted or that were unknown, such as those production line maintenance services which depend on line stoppages, for example, it is important to have contract lines that pay for mobilization and demobilization costs (fixed project costs) separated from productivity lines (activity paid for according to delivery, therefore variable). This more flexible modality will allow adjustments to be made, taking into account possible changes to the schedule.

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Amr Mohsen -MBA-CIPS L4 Candidate

Procurement | CIPS, Purchasing, Contracts Management
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Uncertainties refer to unknown factors that could affect the project but cannot be predicted with certainty. These may include changes in regulations, unforeseen market shifts, or unexpected delays.

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4 Contract types

The fourth step is to understand the different contract types available and their advantages and disadvantages. Contract types can be classified into three main categories: fixed-price, cost-reimbursement, and incentive-based. Fixed-price contracts are contracts where you pay a fixed amount to your supplier regardless of the actual costs or performance. Cost-reimbursement contracts are contracts where you pay your supplier for the actual costs incurred plus a fee or profit. Incentive-based contracts are contracts where you pay your supplier based on the achievement of certain targets or criteria.

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5 Contract selection

The fifth step is to select the most appropriate contract type for your project based on the analysis of your objectives, risks, and uncertainties. There is no one-size-fits-all solution, as each contract type has its pros and cons depending on the context and situation. You should weigh the trade-offs between control and flexibility, certainty and variability, simplicity and complexity, and alignment and misalignment. You should also consider the market conditions, the supplier's capabilities and reputation, and the legal and ethical implications.

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Sunny Prakash (Bansal)

Helping Project Leaders & Industrialists achieve excellence with top-quality industrial products | Transforming Supply Chains with certified products | Founder & CEO of Magna Industry driving Innovation & Reliability.
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Choosing the right contract type is critical for project success. It requires analyzing your objectives, risks, and uncertainties. Each contract type offers different pros and cons depending on the context. Weigh the trade-offs between control and flexibility, certainty and variability, simplicity and complexity, and alignment and misalignment. Consider market conditions, the supplier's capabilities and reputation, and legal and ethical implications. This thoughtful approach ensures you select a contract that best fits your project needs and goals.

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6 Contract negotiation

The sixth step is to negotiate the terms and conditions of the contract with your supplier to ensure that they reflect your interests and expectations. You should prepare a clear and comprehensive statement of work (SOW) that defines the scope, deliverables, milestones, quality standards, and acceptance criteria of the project. You should also establish a fair and realistic pricing mechanism that balances the costs and benefits of the contract type. You should also define the roles and responsibilities, the communication and reporting protocols, the change and dispute resolution procedures, and the risk and contingency plans.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you align the contract type with the project objectives, risks, and uncertainties?

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1 Project objectives

2 Project risks

3 Project uncertainties

4 Contract types

5 Contract selection

6 Contract negotiation

7 Here’s what else to consider

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