A Brief Overview of Classic Contracts

There is a spectrum of contract types dealing with ambiguity in the “Iron Triangle” of project management (Scope, Schedule, Budget):

• Fixed Price (100% locked Scope, Schedule, & Budget)
  • When you can define exactly what you need, and vendors can tell you down to the minute and penny what that will require.
  • Failures/overages are paid for by the vendor out of profits, who will try to get Change Orders/Requests approved for the defect or to garner additional work to recover profits.
  • Typically includes detailed technical and functional specifications written in a manner that arbitration or a jury can settle disputes.
• Guaranteed Maximum Price (routine work with limited customization, requires better than 85% locked Scope, Schedule, AND Budget)
  • Same as Fixed Price, however, typically includes a “Not to Exceed” (NTE) clause to limit runaway customization cost risks for the customer.
• Service Level Agreement (used for support and uptime guarantees, resembles Fixed Price for known services with unknown issues)
  • These types of contracts are not yet recognized as standard contracts, however most modern companies need them.
  • These contracts must include escape clauses for customer site/infrastructure/hosting failure, lack of redundancy or business continuity preparedness and/or any other potential liabilities that the vendor cannot control, that may result in breach of SLA (forfeiture of payment).
  • Often these escape clauses result in future fixed price contracts for mitigation by the vendor who has gained the experience needed to efficiently execute enhancements for the customer.
  • Failure modes can be caused by loosely-defined resolution definitions/acceptance process, and/or highly-customized internal app support (high training requirements in a high-turnover support environment)
  • Example: “Vendor will close all application/service Incidents in 1 [hour/day/week] on a [monthly/yearly] average basis for [a fixed monthly price renegotiated annually].”
  • Example: “Vendor will maintain 99.9% uptime of [the application/service] measured on a 1-minute basis, averaged [daily/weekly/monthly/annually]. for [a fixed monthly price renegotiated annually].”
  • One vendor might be responsible for both examples; this gets very complicated when multiple upstream components provide aggregated downstream services, based on cumulative SLA chains spread across one or more upstream vendors.
• Time and Materials (somewhat defined Scope, unknown Schedule and/or Budget)
  • You can define the problem but not the solution, you hire a vendor to solve it (or maybe you just don’t want to solve it yourself, like changing your car oil, or doing drywall work. You could technically do it yourself, but life is often better paying someone else).
  • Vendor provides customer with rate card of talent, vendor would also do well to show proof of procurement agreements and good standing with relevant suppliers. A good vendor will do enough business with a supplier to get better pricing than what you can get.
  • Typically includes a “Not to Exceed” (NTE) clause to limit runaway cost risks for the customer, customer must be willing to spend 100% of this amount and receive virtually nothing usable in return.
• Cost Reimbursable (Unknown Scope, Schedule and/or Budget, should include a “Not to Exceed” clause)
  • Same as T&M, same risks, you’re just hoping the vendor can correctly define both the root cause and solution.
  • Should only be used with large, proven, heavily licensed/insured/bonded vendors.