Project Management

[ Project Management Topics ]

Contract and Procurement Management

If you are a company that performs projects for other external companies, or if your company is planning to using an external source for a project, you will likely have to generate a some type of contact or procurement documentation. A contract is a legally binding agreement between two or more parties. Procurement has to do with procuring - obtaining or acquiring. It is important to make it clear that a contract is an agreement where both parties must agree that they will do the things set forth in the contract. Generally a contracting process includes a requirements stage, request (requisition), solicitation, award, and closeout stages.

A contract may also be referred to as: a contract, an agreement, a subcontract, a purchase order, or a memorandum of understanding.

Types of Contracts

There are two general types of contracts, a fixed price contract or a cost plus contract.

Fixed Price Contract

With a fixed price contract the project or assignment must be completed as specified for a fixed amount of money. "The seller agrees to sell something to the buyer for a price that has been agreed upon beforehand. The seller agrees to provide the buyer with something that meets the specifications as agreed, and the buyer agrees to give the seller a fixed amount of money in return." (Newell, 2002, p. 186) With this type of contract the supplier has a higher risk if the specifications are not clearly set in the beginning. This may also be referred to as a lump sum contract.

Cost Plus Contract

With a cost plus contract, also known as a cost disbursable contract or a cost-reimbursable contract, the cost is disbursable -- the buyer agrees to reimburse the supplier for the work done and money spent., and then pay a fixed fee (smaller than in the fixed price contract) when the work is completed. "Cost reimbursable contracts are usual when there is a great deal of risk and uncertainty in the project or a significant amount of investment must be made before the final results of the project can be reached...In a cost plus type of contract the buyer is actually taking the responsibility for the risk. If problems develop in the project, the buyer will have to pay for the corrective action that is necessary." (Newell, 2002, p. 189)

Costs are usually classified as direct costs or indirect costs Direct costs are incurred for the exclusive benefit of the project. Indirect costs (overhead costs) are costs allocated to the project by the performing organization as a cost of doing business (usually calculated as a percentage of direct costs)


Solicitation is the obtaining of quotations, bids, offers, or proposals as appropriate. During the solicitation phase ou would document product requirements and identify potential sources. Commonly you will request RFP's as described below and will then select a source (choose from potential sellers).

Request for Proposal (RFP)

Generally speaking, a Request for Proposal is a type of bid document used to solicit proposals from prospective sellers of products or services. It is also sometimes called a Request for Quotation, Invitation for Bid, or Invitation for Negotiation.

Some things that are good rules of thumb:

Request for Proposal Sample

More RFP Samples can be found at:

Blanket Orders

Blanket orders allow the buyer to order larger quantities at one time (usually with a discount) but then not acquire the materials until they are actually needed. The seller benefits because the buyer agrees to only buy that item from them, and has some degree of guaranteed future sales.

Case Study: Blaming ERP (Andrew Osterland; January 2000).

Good words to know:

----- REFERENCES -----

Newell, M. W. (2002). Preparing for the Project Management Professional (PMP) Certification Exam. New York, NY: American Management Association.