Lesson 1, Topic 1
In Progress

Type of contracts

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In risk management, we have already looked at how risk can be distributed to the nominated parties by selection of an appropriate contract type, based on the respective parties’ abilities to manage it. There is a proliferation of names given to the various types of contract strategies, and this unfortunately causes more confusion than assistance. In essence, there is a continuum of contract strategies that reflects the allocation of risk and the extent of incentives for parties to perform their obligations. At one end of the spectrum is ‘fixed price’, where the contractor takes on the risk, and at the other end is the ‘cost reimbursable’ arrangement where the client takes all the risk. In between, there is a wide range of options that allow sharing of risk, with appropriate rewards for taking on a higher proportion of risk, and incentives for doing so. Although the emphasis is on ‘cost’ risk, there are other risks, such as time and quality, and these are affected by the choice of strategy and contract. In many cases, one risk is traded off for another.

The classification is not important, but project manager should understand the implications for the project of selecting one or the other. Figure 3-2 provides an illustration of the types contract and risk distribution by contract type.