For many procurement items, the procuring organization may prepare its own estimates as a check on contractor proposals. A contract is a mutually binding agreement which obligates the seller to provide the specified product and obligates the buyer to pay for it. A contract is a legal relationship subject to remedy in the courts. There are two basic types of contracts that reflect how the total price is determined. The fixed price contract has an objective of a pre-determined end price while the cost plus contract has an objective of a target end price.
Seller bears all risk but is compensated with greatest profit potential.
Most common contract. Cost reimbursable contracts - involves payment to the contractor for its actual cost. Used in the construction industry. The buyer is most at risk due to the fact that they fund all overruns. Unit price contract or Labor Hour contract - the contractor is paid a preset amount per unit of service and the total value of the contract is a function of the quantities needed to complete the work 4.