Fixed price or lump sum contracts—this category of contract involves a fixed total price for a well-defined product. To the extent that the product is notwell-defined, both the buyer and seller are at risk—the buyer may not receivethe desired product or the seller may need to incur additional costs in order to provide it. Fixed price contracts may also include incentives for meeting or ex-ceeding selected project objectives such as schedule targets
.• Cost reimbursable contracts—this category of contract involves payment (reim-bursement) to the seller for its actual costs. Costs are usually classified as directcosts or indirectcosts. Direct costs are costs incurred for the exclusive benefit of the project (e.g., salaries of full-time project staff). Indirect costs, also called overhead costs, are costs allocated to the project by the performing organiza-tion as a cost of doing business (e.g., salaries of corporate executives). Indirect costs are usually calculated as a percentage of direct costs. Cost reimbursable contracts often include incentives for meeting or exceeding selected project ob-jectives such as schedule targets or total cost.
• Unit price contracts—the seller is paid a preset amount per unit of service
(e.g., $70 per hour for professional services or $1.08 per cubic yard of earthremoved), and the total value of the contract is a function of the quantities needed to complete the work.
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