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Difference Between Agreement and Contract

The document discusses different types of contracts: 1. Agreements become contracts when they are enforceable by law, creating legal obligations. Contracts have elements of offer, acceptance, and enforceability. 2. The main types of contracts are fixed price, cost reimbursable, and time and material. Fixed price contracts assign more risk to the seller and predetermined prices. Cost reimbursable contracts reimburse the seller's costs plus a fee or incentive. Time and material contracts have aspects of both. 3. Specific fixed price contract types are firm fixed price (buyer pays set amount), fixed price incentive fee (allows for deviation with incentives), and fixed price economic adjustment (allows for price changes over multiple years

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71 views

Difference Between Agreement and Contract

The document discusses different types of contracts: 1. Agreements become contracts when they are enforceable by law, creating legal obligations. Contracts have elements of offer, acceptance, and enforceability. 2. The main types of contracts are fixed price, cost reimbursable, and time and material. Fixed price contracts assign more risk to the seller and predetermined prices. Cost reimbursable contracts reimburse the seller's costs plus a fee or incentive. Time and material contracts have aspects of both. 3. Specific fixed price contract types are firm fixed price (buyer pays set amount), fixed price incentive fee (allows for deviation with incentives), and fixed price economic adjustment (allows for price changes over multiple years

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hkaqlq
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Lecture 3 Contract and Agreement by :Asmar .

K 4/4/2019

Difference Between Agreement and Contract

BASIS FOR
AGREEMENT CONTRACT
COMPARISON

1 When a proposal is accepted by the When an agreement is


person to whom it is made, with enforceable by law, it becomes
Meaning requisite consideration, it is an a contract.
agreement.

2 Elements Offer and Acceptance Agreement and Enforceability

3 In writing Not necessarily Normally written and registered

4 Legal obligation Does not creates legal obligation Creates legal obligation

5 One in other Every agreement need not be a contract. All contracts are agreement

6 scope Wide Narrow

A contract is basically an agreement between two parties creating a legal


obligation for both of them to perform specific acts. Each party is legally bound
to perform the specified duties such as rendering a payment or delivering goods
Project Contract Types
If an organization decides to “buy” from one or more outside sources, it must
select the type of contract it needs. In selecting what type of contract to use, the
primary objective is to have risk distributed between the buyer and seller so that
both parties have motivation and incentives for meeting the contract goal.The
following factors may influence the type of contract selected:
Ø Type and complexity of requirement.
Ø Extent of price competition.
Ø Cost and price analysis.
Ø Urgency of requirement or performance period.
Ø Frequency of expected changes.
Lecture 3 Contract and Agreement by :Asmar .K 4/4/2019

Ø Industry standards of types of contracts used.


Ø Whether or not there is a well-defined statement of work.
Ø Overall degree of cost and schedule risk

Types of Contracts
There are generally 3 types of bilateral (signed by 2 parties) contracts:

1. Fixed price
2. Cost reimbursable ( or Cost Plus )
3. Time and Material contracts.

1- Fixed Price Contracts (FP)


Fixed price (FP) contracts (also called lump-sum contracts) involve a
predetermined fixed price for the product and are used when the product is well
defined. Therefore, the seller bears a higher burden of the cost risk than the
buyer. There are 3 types of contracts in this category:

a) Firm Fixed Price (FFP) means that buyer will going to pay one amount
regardless of how much it costs the contractor to do the work. A fixed price
contract only makes sense in cases where the scope is very well known. If there
are any changes to the amount of work to be done the seller doesn’t get paid any
more to do it, unless the scope of the work changes.

b) Fixed price plus incentive fee (FPIF) This fixed-price arrangement gives the
buyer and seller some flexibility in that it allows for deviation from performance,
with financial incentives tied to achieving agreed upon metrics. Typically such
financial incentives are related to cost, schedule, or technical performance of the
seller. Performance targets are established at the outset, and the final contract
price is determined after completion of all work based on the seller’s
performance. Under FPIF contracts, a price ceiling is set, and all costs above the
price ceiling are the responsibility of the seller, who is obligated to complete the
work
Lecture 3 Contract and Agreement by :Asmar .K 4/4/2019

c) Fixed Price Economic Price Adjustment (FPEPA) is a fixed price contract


which allow for price increases if the contract is for multiple years. It is a fixed
price contract but with a special provision allowing for pre defined final
adjustments to the project contract price due to change conditions, such as
inflation, cost increases ( or decrease) due to specific commodities. The FPEPA
is intended to protect both buyer and seller from external conditions beyond their
control.
2-Cost reimbursable (or Cost Plus):
Cost reimbursable (CR) contracts involve payment based on sellers’ actual
costs as well as a fee or incentive for meeting or exceeding project objectives.
Therefore, the buyer bears the highest cost risk. Common forms of cost
reimbursable contracts include:

a) Costs plus fixed fee (CPFF) or Cost Plus Percentage of Costs


(CPPC) means buyer will pay the seller back for the costs involved in doing
the project work, plus an agreed amount (or fixed fee) that buyer will pay on
top of that. If this agreed amount or fixed fee is calculated as percentage of
the initial estimated project costs it is referred as CPPC type of contract. This
fee does not change with seller’s performance. However fee amount can
change if the project scope changes

b) Costs plus incentive fee (CPIF) means buyer will reimburse the costs of the
project and pay a pre determined fee (e.g. bonus) if seller meets certain
performance goals or any other specific performance target as decided in the
contract. In CPIF if the final costs are less or more than the original estimated
costs, then both the buyer and seller will share the costs based on pre negotiated
sharing formula .
c) Costs plus award fee (CPAF) is similar to the CPFF contract, except that
instead of paying a fee on top of the costs, buyer agrees to pay a fee based on the
buyer’s evaluation of the seller’s performance.
Lecture 3 Contract and Agreement by :Asmar .K 4/4/2019

3-Time and Material Contracts(T&M)


Time and material (T&M) contracts (sometimes called Unit Price Contracts)
contain characteristics of both fixed price and cost reimbursable contracts and are
generally used for small project cost amounts. These contracts may be priced on a
per-hour or per-item basis (fixed price) but the total number of hours or items is
not determined (open-ended cost type arrangements like CR contracts). T&M
contracts are often used for staff augmentation, acquisition of experts and any
outside support, when a precise statement of work cannot be quickly prescribed.
A Purchase Order is a simple form of unit price contract that is often used for
buying commodities. It is a unilateral contract and only signed by 1 party instead
of the above bilateral contracts that are signed by both parties.

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