In procurement, there are several types of contracts that are commonly used to establish legal and commercial agreements between buyers and suppliers. Here are some of the most common types of contracts used in procurement:
Fixed-Price Contract: Price agreed upon upfront, remains fixed throughout the contract. Suitable for goods or services with stable scope and quantity.
Cost-Plus Contract: Supplier reimbursed for costs incurred, plus additional profit or fee based on pre-agreed percentage or amount. Ideal when total costs cannot be estimated upfront.
Time and Material (T&M) Contract: Supplier paid for actual time spent and materials used, typically for projects with changing scope or requirements.
Blanket Purchase Order (BPO): Long-term agreement with pre-agreed pricing and terms for recurring purchases of standardized items or services.
Indefinite Delivery/Indefinite Quantity (IDIQ) Contract: Provides for indefinite quantity of goods or services over a specified period of time, with specific delivery or task orders issued as needed.
Service Level Agreement (SLA): Defines expected level of service performance and quality. Commonly used for critical services like IT support or outsourcing.
Framework Agreement: Establishes long-term relationship between buyer and supplier, without specifying quantities or delivery schedules. Suitable for strategic or preferred supplier relationships.
Lease or Rental Agreement: Temporary use of equipment, vehicles, or facilities for a specified period of time and cost.
Understanding the right type of contract to use is crucial for successful procurement. However the overall, type of contract chosen for a procurement will depend on a range of factors, including the nature of the goods or services being procured and the specific market industry, the risks associated with the project, and the contractual relationship between the buyer and supplier.
Effective management of right contracts in procurement is crucial to achieving successful outcomes. By following key considerations and strategies, organizations can navigate challenges and optimize the process for a successful procurement effort.
From analysis, market studies, global sourcing, due diligence, purchasing, logistics to developing capabilities, recommendations & strategic decisions, we are here to assist. Using our expertise and deep understanding of the procurement field & markets we provide solutions with valuable results.
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