A contract is a mutually binding agreement which obligates the seller to provide the specified product and obligates the buyer to pay for it. Contracts generally fall into one of three broad categories:
- Fixed price or lump sum contracts–this category of contract involves a fixed total price for a welldefined product. Fixed price contracts may also include incentives for meeting or exceeding selected project objectives such as schedule targets.
- Cost reimbursable contracts–this category of contract involves payment (reimbursement) to the contractor for its actual costs. Costs are usually classified as direct costs (costs incurred directly by the project, such as wages for members of the project team) and indirect costs (costs allocated to the project by the performing organization as a cost of doing business, such as salaries for corporate executives). Indirect costs are usually calculated as a percentage of direct costs. Cost reimbursable contracts often include incentives for meeting or exceeding selected project objectives such as schedule targets or total cost.
- Unit price contracts–the contractor is paid a preset amount per unit of service (e.g., $70 per hour for professional services or $1.08 per cubic yard of earth removed) and the total value of the contract is a function of the quantities needed to complete the work.