Time and Materials Contracts

Time and Materials is one of three broad types of contracts—Fixed Price, Cost Reimbursable, and Time and Materials. Contract Types is a tool of the fourth edition PMBOK®’s Plan Procurements process. Time and Materials contracts are useful when the full scope of the project is unknown. They resemble Fixed Price contracts in that there can be a fixed price for each unit. However, it is unknown how many units will be purchased so there is not a fixed price for the entire contract. As an example, Katy’s neighbor knows that there will be numerous times this summer that she’ll want to purchase homemade cookies from Katy. Katy’s neighbor doesn’t know exactly how many times, but she and Katy agree that each time over the summer she wants a dozen cookies she’ll pay Katy $10 for them. Although the unit price is set at $10, it is unknown how much Katy will earn in total by the time summer is over.

Cost-Reimbursable Contracts

As project managers work with procurements, it’s important that they understand the different types of contracts. Contract Types is a tool of the fourth edition PMBOK®’s Plan Procurements process. There are a variety of contract types falling under the general categories of Fixed Price, Cost Reimbursable, and Time and Materials. The types of Cost Reimbursable contracts (as termed in the PMBOK®) are Cost Plus Fixed Fee (CPFF), Cost Plus Incentive Fee (CPIF), and Cost Plus Award Fee (CPAF). Note that the definitions have changed slightly since the last edition of the PMBOK®. Cost Reimbursable contracts reimburse the seller for their actual costs. Below are examples of each.

Cost Plus Fixed Fee (CPFF). The seller is reimbursed for their actual costs plus given a percentage of those costs. Katy’s neighbor pays her for the cost of ingredients plus 50% of those costs in return for ten dozen of Katy’s homemade oatmeal raisin cookies. The ingredients cost $40, so Katy is paid $40 plus 50% of $40 (which is $20), which totals $60.

Cost Plus Incentive Fee (CPIF). The seller is reimbursed for their actual costs plus given a financial incentive if an agreed-upon objective is met. Katy’s neighbor offers to pay her for the cost of ingredients in return for ten dozen of Katy’s award-winning sugar cookies, plus $20 if she can finish the cookies before 7:00pm this evening.

Cost Plus Award Fee (CPAF). The seller is reimbursed for their actual costs plus a financial incentive based on criteria that are at the buyer’s discretion. Katy’s neighbor offers to pay her for the cost of ingredients for 100 of Katy’s peppermint chip cookies, plus $50 if the neighbor decides they are the best cookies she has ever eaten in her entire life.

Fixed Price Contracts

Project managers increasingly need to be knowledgeable about procurement and contracts. Contract Types is a tool of the fourth edition PMBOK®’s Plan Procurements process. There are a variety of contract types falling under the general categories of Fixed Price, Cost Reimbursable, and Time and Materials. The types of Fixed Price contracts (as termed in the PMBOK®) are Firm Fixed Price (FFP), Fixed Price Incentive Fee (FPIF), and Fixed Price with Economic Price Adjustment (FP-EPA). Fixed Price contracts are generally preferred by project managers. Below are examples of each type of Fixed Price contract.

Firm Fixed Price (FFP). The price is set and cannot be changed unless the scope of work changes. For example, Katy has agreed to bake ten dozen cookies for her neighbor for the price of $40.

Fixed Price Incentive Fee (FPIF). The price is set, but there is the potential for the seller to also receive a financial incentive if an agreed-upon, objective metric is met. Katy has agreed to bake ten dozen cookies for her neighbor for $40, and if she is able to finish baking by 2:00pm this afternoon, the neighbor will pay her an additional $10.

Fixed Price with Economic Price Adjustment (FP-EPA). The price is set, but especially for contracts over long periods of time, it may be adjusted due to changing economic conditions. Katy has agreed to bake ten dozen cookies every year for her neighbor’s annual office party. This year she will receive $40, and every year afterwards she will receive 3% more than the year before to account for inflation.

Make-or-Buy Analysis

The project management technique of deciding whether certain work should be performed in-house or whether it should be purchased is called Make-or-Buy Analysis. Make-or-Buy Analysis is listed as a technique for the fourth edition PMBOK®’s Plan Procurements process. A project manager may have a Procurement Management Plan for the project that offers guidance in making these decisions. There are many considerations to take into account when deciding whether or not to purchase, and these considerations will vary across organizations and projects, and over time. Seller’s price will typically be a key consideration. Whether there is currently the level of in-house expertise for the work that needs to be done and the time project team members have available are also important to consider. An example Make-or-Buy Analysis question is: should you mow your own lawn or hire a lawn service company to do it? You may consider whether you currently own a mower, how much time you have to devote to lawn mowing, if allergies or other health issues would make mowing difficult for you, and how much you’re willing to pay a lawn service. The decisions on whether to make or buy something are called Make-or-Buy Decisions. These Make-or-Buy Decisions are an output to the PMBOK®’s Plan Procurements process and then used as an input to the Conduct Procurements process.

Plan Procurements Process

Plan Procurements is one of the 42 project management processes described in the fourth edition PMBOK®. It’s one of the four Procurement knowledge area processes, and one of the twenty Planning processes. The purpose of this process is to document the purchasing decisions and approach as well as identify potential sellers. There is much information needed beforehand to accomplish this, which is represented by eleven inputs to this process. The Scope Baseline and Requirements Documentation are important inputs used to describe the project work to be performed. The specific work that is to be performed in a contract is called the Procurement Statements of Work.

It must first be decided whether certain work is best done in-house or whether it should be purchased. This is called Make-or-Buy Analysis, and its outcome is Make-or-Buy Decisions. There are advantages and disadvantages of the different types of contracts that need to be considered as well. The types of contracts that should be used, in addition to much other information, is written in the Procurement Management Plan that provides guidance for performing the procurement processes. Procurement Documents describing what work is needed are made available to sellers in order to elicit their offers. Source Selection Criteria are the criteria developed in this process that will be used to choose among sellers’ responses. For example, sellers representing larger or local organizations might be preferred.