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Contract Types Shifts risk of cost overruns, to a certain degree, to the Government because the actual costs is unknown so the contractor will be compensated based on the costs incurred.
b. There are two fundamental types of contracts: Fixed-price and cost-reimbursement. Performance risk is higher for the U.S. Government under a firm fixed-price contract, while cost-reimbursable contracts place a higher cost risk on the U.S. Government.
1. Fixed Price. The most common type of contract is the fixed price contract, also known as the lump sum or stipulated sum contract. Fixed price contracts carry more risk to contractors than owners.
Generally, a firm fixed price type contract is the most preferred and cost reimbursement type contracts the least preferred.
The uncertainty of the scope of work needed. The party assuming the risk of unexpected cost increases. The importance of meeting the scheduled milestone dates. The need for predictable project costs.
Contract selection is based on uncertainty of scope, assignment of risk, need for predictable costs, and the importance of meeting milestone dates. Total fixed cost is a single price where the scope is well defined. In a cost reimbursable contract, the project pays for costs.
The most common types of contracts that are used for construction projects include: Lump sum or fixed price contracts. Lump sum contracts involve the buyer agreeing to pay a set price and the contractor or builder agreeing to complete the project for that set price.
Federal government contracts are commonly divided into two main types, fixed-price and cost-reimbursement. Other contract types include incentive contracts, time-and-materials, labor-hour contracts, indefinite-delivery contracts, and letter contracts.
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