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2022 BU 221 Week 8 Session 3

The document outlines the characteristics of contracts, differentiating them from informal agreements, and identifies the various types of contracts such as fixed-price, cost-plus, and time and materials contracts. It also details the five essential requirements for a valid contract, including offer, acceptance, consideration, legal intent, and competency. Additionally, it provides an example activity for drafting a contract based on a business relationship.

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19 views12 pages

2022 BU 221 Week 8 Session 3

The document outlines the characteristics of contracts, differentiating them from informal agreements, and identifies the various types of contracts such as fixed-price, cost-plus, and time and materials contracts. It also details the five essential requirements for a valid contract, including offer, acceptance, consideration, legal intent, and competency. Additionally, it provides an example activity for drafting a contract based on a business relationship.

Uploaded by

marshabobbychin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Characteristics of a contract

LO(s) 3.2.1 Identify ways to accept an offer, validate consideration, incapacity, the
differences between valid and invalid contracts.
3.3.1 Analyze basic components of a contract such as offer, acceptance,
intention to create legal relations etc.

Objectives:

(i) Describe what a contract is and how it differs from an agreement.


(ii) List the different types of contracts.
(iii) State the five requirements for a valid contract.

Created by: Liz Riverol


Objective: Describe what a contract is and how it differs from an
agreement.

Agreement - is an informal accordance (acceptance)


between two or more parties, with no legal implications.
The parties rely only on the free will (word) of each other
and the understanding of their rights and responsibilities.
Objective: Describe what a contract is and how it differs from an
agreement.

Contract - is a formal (e.g. written) agreement between


two or more parties to create a legally binding obligation
and enforceable by law. It is expected that all parties
involved will keep their promises otherwise face legal
consequences.
Objective: List the different types of contracts.

Contracts are formed for the purpose of buying and selling goods or
services from one party to another.
Details include:
Agreed scope of work of the project
Quality control
Legal jurisdiction
Project schedules
Payment terms.
Three main types of contracts regarding cost

1. Fixed-price contracts
2. Cost-plus contracts
3. Time and materials contracts
Buyers sometimes do not know exactly what they want or need. Different
situations require different types of contracts. It is important for business
owners to understand the different types of contracts to select the most
suitable one for them.

1. Fixed-price contracts (or lump-sum contracts): are ideal when there is a


clear scope of the work.
- There are details from beginning to end of the project (execution)
- Product or service specification
- Material requirements
- Time frame
- Number of employees, etc.

They are less risky, buyers usually issue a lump-sum of the payment in the
beginning, the seller takes on the majority of the risk (since buyers only pay
when the project has been completed)
Objective: List the different types of contracts.

1. Fixed-price contracts

Example: Construction contractors usually charge a fixed price for materials,


labor, and equipment required to complete a project.
Objective: List the different types of contracts.

2. Cost-plus contracts (cost-reimbursement


contract): buyers pay for the cost of work and
additionally a fixed percentage for providing goods and
service to the seller. The seller also charges an extra fee
based on the terms of the contract (percentage).
Objective: List the different types of contracts.

Example: A Construction Company has a contract to build a $20 million


office building, and the agreement states that costs cannot exceed $22
million. The Construction Company’s profit is agreed at 15% of the
contract’s full price of $3 million ($20,000,000 X 15%). Additionally, ABC
Construction is eligible for an incentive fee if the project is completed
within nine months.

The company is expected to submit dated receipts for all expenses, and
the client will inspect the job site for quality to verify that specific
components are completed to specification such as the plumbing,
electrical, fixtures, etc.
Objective: List the different types of contracts.

3. Time and materials contracts: is great for buyers who don't know
clearly what they want when they begin the project. Sellers use time and
materials contracts when it's difficult to determine the amount of time
they need to spend on the project and the types of materials required to
complete the project.

● Materials are charged as they are purchased


● Hourly of daily labor rates (wages/ salaries) are used
● Markup charges are placed on wages and material
Objective: List the different types of contracts.

● Example: A technology company developers hired to create an app for


a company that is unsure about what the app needs to do.

The developers charge for any time spent programming, designing, and
testing the app, as well as any additional iterations required to finalize the
product. They submit their receipts and records of working hours at fixed
intervals as outlined in the contract to receive payment.

This experience will be recorded by the developers for future reference.


Objective: State the five requirements for a valid contract.

1. The Offer - an expression of willingness to form a formal agreement


binding by law.

2. Acceptance - the person receiving the offer accepts.

3. Consideration - what are the terms of service (relation) to payment

4. Legal Intent - terms that must be adhered to the law and regulations
that may exist, including exemptions.

5. Competency - parties involved must be of legal age, have the mental


capacity of understanding, and not impaired at the time of signing
(e.g. intoxicated or pressured by someone)
Activity: In groups of 4, draft a contract for the following
business relationship.

Mat’s supplies has entered into a contract with ITVET to supply


all their stationeries for one year, commencing May 1.

Include:
Agreed scope of work of the project
Quality control
Legal jurisdiction
Project schedules
Payment terms

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