Procurement Contracting: Types of Contracts & Best Practices

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How you assemble the items you need to execute the project is called procurement, which is a fancy way of saying how you get the goods and services you need for a project. If you don’t have a steady or at least managed supply of the stuff you need to execute the project you’re going to go off track and threaten the success of the project.

When you need supplies from a third party it’s important that you enter into an agreement to make sure you get what you need and it is delivered when you need it. All these details are defined in what is called a procurement contract. There isn’t a project if there isn’t procurement contracting.

Essentials of Procurement Contracting

There are many types of contracts in procurement, but before getting into that, we need to have a solid understanding of what procurement is and why it’s crucial to project success. Procurement refers to the techniques, structured methods and means an organization uses to get what it needs at a good price and on schedule, while still building strong relationships with suppliers and vendors.

Gantt chart screenshot with contracts phase

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First, you need to identify the goods or services you need. Once you know that, you can start to research a list of suppliers who can deliver your requirements at a price within the constraints of your budget. Then, you go into the negotiation stage to make sure those needs are being met. When they are, both parties finalize a purchase order with price, delivery and payment process defined.

Next, the supplies are delivered on the date agreed upon, and that delivery is audited to make sure it conforms to the agreement. You then keep good records and save the paperwork, as you would with any business transaction. The smoother this process, the happier all involved will be, and the more likely that a bond will be built between both parties to make sure that future procurement goes as well. A solid contract is necessary to deliver a successful project.

What is Procurement Contracting?

Procurement contracting is the process of building legally binding agreements between contractors and suppliers in the course of managing a project. These contracts are needed for projects to obtain needed materials, supplies and services.

Using contracts and procurement helps the buyer and the seller come to an agreement about these materials, goods and services. This agreement includes paying invoices and meeting the terms and conditions of the contract. A procurement contract is a legally binding document between the buyer and the seller that not only defines the relations as it stands in terms of the business, but also protects both of their interests.

The parameters of procurement contracting include selecting the vendor and product, vetting the vendor, deciding on the terms and conditions through negotiations and managing that process through ordering, payment and delivery of the material, supply or service.

Why is Procurement Contracting Important

Procurement contracting is important because it serves to maximize profits and keep businesses soluble in a competitive marketplace. The procurement contract gives both parties the chance to work together with confidence that neither is taking advantage of the other. It also helps the business diversify its resources to work more effectively by outsourcing work to third parties that can do it more cost-effectively.

Types of Procurement Contracts

When it comes to contracts, there is more than one way to make an agreement. These different types of contracts in procurement offer a variety of risks for one party or the other, and are suitable for construction projects where the scope is more or less certain from the start. The main three types of procurement contracts are as follows:

  • Fixed-Price Contract: The fixed-price or lump-sum contract is when the amount paid for the materials, goods or services is set at the time the contract is signed and doesn’t change thereafter regardless of whether there are external or internal impacts that drive up costs or delay the schedule. The advantage of this type of contract is that it clearly outlines the roles and responsibilities of both parties in terms of what is to be delivered and how much that will cost. These are the most common, straightforward and easy to manage the type of contract.
  • Cost-Reimbursement Contract: A cost-reimbursement or cost-control contract is when the buyer agrees to pay for materials and equipment as well as any indirect costs, such as salaries and utilities, which are part of making the product or service. To make this worth it for the buyer, they are awarded a fixed fee or percentage of the profit over the cost price. This puts the majority of the risk on the shoulders of the seller. They will only get reimbursed after expenses are verified. If the scope of the project changes, the seller absorbs any additional costs. To make this worthwhile for the seller, they will build in additional costs that keep adjustments to a minimum and improve their bottom line.
  • Time and Materials Contract: Time and materials contracts reimburse vendors for the materials they use and pay for the time they spend on the project. This makes the vendor act as if they were a third-party employee of the contractor. This contract works best when the scope of the project is harder to define as the contract allows for some flexibility. However, when using one of these contracts, the buyer will have to provide more oversight to make sure that the project stays on schedule and doesn’t go over budget.
  • Key Processes & Best Practices for Procurement Contracts

    Although the contract is signed, that doesn’t the process is complete. There is, of course, the work that has been contracted and following through on the terms and conditions of the contract.

    Emphasize Transparency

    One thing you can do to make sure that things run smoothly is prioritized transparency in your procurement process. Getting greater visibility into supplier performance helps to strengthen those relationships and works towards achieving the best outcomes for all involved.

    Monitor Progress

    You’ll want to closely monitor and manage the terms of the contract, especially expenses associated with the work, to reduce costs. Rather than using spreadsheets that have to be constantly updated and often run the risk of circulating older versions, you’d do better to automate these processes with a digital tool.

    Identity Efficiencies

    Streamlining the procurement process is also key. The collecting and monitoring of suppliers help to ensure the conditions of the contract are being met. Using an online project management tool will reduce costs by avoiding manual errors that can slow down work while working towards contract compliance.

    How ProjectManager Helps With Procurement

    ProjectManager is award-winning software that helps you plan, monitor and report on your project procurement. Monitoring and tracking your procurement makes sure the costs and schedule adhere to the terms and contrition of the contract. There are ways to do this better than using a spreadsheet.

    Use our online Gantt chart to manage your contracts. The visual timeline of the Gantt allows you to see the full life cycle of the contract in one place and track all resources and costs associated with it. Set the start and end dates for the contract. When status updates are added to the tool you can then review your progress to see if the contract terms are being met.

    A screenshot of a Gantt chart with task info

    Add costs and resources to the Gantt and you’ll be able to schedule those materials you need at a specific time in the project. Since our software is cloud-based all project information is in real-time, which allows you to track live data. For example, the real-time dashboard collects information and automatically calculates it to display on easy-to-read graphs and charts for a high-level view of project variance, costs, time and more.

    ProjectManager.com Dashboard view

    ProjectManager.com is cloud-based software that helps you organize and manage procurements more efficiently. Keep track of contracts with unlimited file storage, make procurement plans and monitor and track their progress in real-time to make sure all the terms and conditions of the contract are being met. Try ProjectManager for free today.

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