The term firm fixed price or lump sum contract refers specifically to a type or variety of fixed price contract where the buyer or purchaser pays the seller or provider a fixed total amount for a very well-defined product, however there is the allowance within these for a variance in the event there are incentives attained through project incentives achieved or targets met. There are benefits of this type of contract to both the buyer and the seller, and these are similar to those for the fixed price incentive fee contract. To the seller, it is beneficial because it typically allows for the seller or provider to charge a reasonable base fee, yet also allows for exceptional performance to be rewarded further. However, for the buyer that also provides a very tangible benefit. The buyer typically will be paying a very reasonable base fee up front, but there is of course the chance that the price will go up in the future if certain conditions are met.
This term is defined in the 3rd edition of the PMBOK but not in the 4th.
Hello:
Between lump sum and cost plus, which is the least risky?
Thanks!
Depends on whether you are the seller or the buyer and also on the payment terms. Ideally, you would agree on payments for milestones after a major deliverable has been accepted so that the seller has cash coming in and the buyer is assured that the deliverables are met. Lump sum may have the disadvantage for the seller that cost for external resources rise whereas the lump sum stays the same.
Hi,
I have an idea for a contract, I was wandering if there is a defined term for this type of contract: A lump sum contract, however in the case the sellers cost to deliver are less than expected, the seller refunds some of the returns to the purchaser. One explanation for the purpose of this would be that the seller doesn’t want to rip off the customer but still wants to protect against risk.
The other way to decribe this would be as a reimbursable contract with a capped maximum value. The labor rate would probably be at a higher than normal rate as the seller is taking on some risk.
Wouldn’t this be a Fixed Fee plus Incentive contract?
Incentives are usually based on performance (as an aside, they can be used in both Fixed Price and Cost Plus contracts).
I think Aaron’s idea would fall under Fixed Price with Economic Price Adjustment since the amount of the ‘refund’ would be based on lower costs for materials or smaller labor effort required to deliver. Note that during negotiations, the seller will want the ability to adjust the cost upwards if materials are more expensive or if the job takes more effort than expected. Generally, it’s good form to have a maximum allowable adjustment.