Types of Contract Agreements

Types of Contract Agreements

A contract agreement occurs between two parties, and it serves as legal protection for all parties involved in a deal. These agreements occur in different types, and each outline the duties and rights of all sides. However, the most common contract agreements include;

  • Fixed-price contracts
  • Time and materials contract
  • Cost-plus contracts.

Contracts generally entail details concerning the work scope, legal jurisdiction, project schedules, and quality control. A contract is essential to all businesses that contain an exchange of value. It shows the agreement terms in an enforceable way in the court; suppose any party does not meet their expectations.

Let us dive right into the types of contract agreements and the benefits of online contract management.


Types of Contract Agreements

Contractors, vendors, and sellers gather specific project details before taking on a project concerning the estimated labor and materials needed to complete the project. In some instances, buyers provide a detailed description of their wants, and different situations need different contract types.

Side contracts occur in different forms, and each has its use and purpose. Below are the common types of contract agreements;

  1. Fixed-Price Contracts

They are also called lump-sum contracts and are perfect in situations with clear work scope. In such instances, the buyer describes the result, including expected timeframes, product dimensions, and material specifications.

The seller makes a formal statement using the buyer’s information outlining the entire project’s cost. Any changes made to the work scope mean extra charges from the seller. Buyers know the project’s exact cost using fixed price contracts, which is their main benefit.

Fixed price contracts mean reduced risks for buyers and are among the most common. However, sellers cannot ask for more money from the seller with these contracts when they go over budget. This means sellers take the most risk and must look for ways to mitigate this risk.

  1. Cost-Plus Contracts

Cost-plus contracts are also called cost-reimbursable contracts, and buyers pay for the entire task’s cost and add a fixed percentage for providing services and goods. Sellers charge for the cost of equipment, materials, and overhead involved with operating the project.

Sellers track an additional fee based on the contract terms, and others prefer incentive payment options to fixed percentages. This contract defines all percentages, rates, incurred costs, and allowable expenses. It also entails the maximum amount sellers can spend.

The material and labor rates are not fixed with a cost-plus contract. This means costs can fluctuate in the project’s life. Also, buyers do not know the project’s cost before it commences. The cost-plus contract makes it hard to track the materials and effort used in the project.

However, most people prefer this approach despite its risks and uncertainties for buyers. This happens because buyers only pay for what they get, which is a significant advantage.


  1. Material and Time Contracts

Material and time contracts are ideal for buyers who do not know their needs when beginning a project. Sellers use material and time contracts when it becomes hard to know the amount of time needed to spend on the project and the materials needed to complete a project.

This contract type enables sellers to charge for their materials and a daily or hourly wage. All rates are included in the contract’s terms, including markup charges. These rates stay in place after the contract is accepted and finalized.

This contract is ideal for software developers who wish to create an application for a business that is unsure about its function. These developers charge for time spent designing, programming, and testing the application. Sellers keep records of the time spent on specific projects when they charge buyers based on materials and time.

Material and time contracts are ideal for budget-conscious buyers. This contract offers an excellent way for buyers to improve their team’s skills if they keep an eye on the contract’s costs.

How to Choose a Contract Management Solution

Below we discuss tips on choosing a good contract management solution;

  • Assign responsibility and define the search project

First, start by outlining the issues to be solved using the contract management solution, and create accountability by deciding who should lead the search.

  • Set guidelines and a timetable

Next, establish specific guidelines to support the leading objective. Remember, finding a product that suits your contract management needs is key to your enterprise’s success. Also, include what vendors will charge for customization, implementation, and maintenance.

  • Gather preliminary information

Build a general feature awareness regarding the products under review. Also, pay close attention to the price, and include the capabilities you want in your system. Try keeping this list as short as possible and all categories short to keep you focused.

Final Thoughts

Contract management is essential in all business setups, and the above article has discussed why. They exist in different types, and we have discussed a few above. Kindly reach out for more information.

Michael Smith

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