Procurement Contracts

3 Key Types of Procurement Contracts You Need to Know 

Even with a solid procurement plan, are your deals getting stuck? Are suppliers not meeting commitments or reneging on promised quantity discounts?

Common roadblocks like these can undermine all the effort you put into streamlining procurement. Even with hours spent on managing quotes, cost comparisons, and purchase orders, we often overlook a crucial detail: the Procurement Contract—arguably the most vital part of the process.

Suppliers can easily go back on spoken promises, but with a purchasing contract, they must stick to their commitments.

Let’s walk you through purchasing contract details, benefits, and types to enhance your deal-making and maximize benefits! Also, meet the ClickUp platform—it streamlines contract management with auto-renewals for a hassle-free experience.

What Is a Procurement Contract?

A procurement contract is a legally binding agreement between a buyer and a seller, outlining the terms and conditions for acquiring goods, services, or works. This contractual arrangement serves as a framework to govern the entire procurement process, detailing product specifications, quantity, pricing, delivery schedules, payment terms, and any other relevant terms agreed upon by both parties. 

Think of it as a blank sheet where you write down the key points of your agreement with the seller—covering material quality, delivery dates, costs, and more. Once both parties sign the contract, sellers are legally bound to deliver on their promises. 

The purchasing contract works both ways—it also legally ties you, the buyer, to receiving the delivery and settling the bill for the supplies or project costs. 

The procurement contract cuts out the guesswork, clears up doubts on both sides, and fosters a solid customer-vendor relationship. It also makes life easier for the procurement team by preventing last-minute hassles or commitment failures.

Benefits of Using Procurement Contracts

Procurement contracts bring you long-term benefits. Here’s why we strongly recommend you use them:

1. Clarity and certainty

In a world of geo-political shifts, policy changes, and market dynamics, businesses should capitalize on anything that helps reduce uncertainty.

Procurement contracts can help steer your business operations with clarity. A solid contract provides clear terms, avoids misunderstandings, and saves time and money for everyone involved.

2. Protection from potential risks

A procurement contract can protect you from market uncertainties, such as rate fluctuations, by granting goods supply at a pre-determined price. 

Contracts allow buyers and sellers to collaborate from a position of trust. They protect the interests of both and help them work together confidently. By clearly spelling out all the terms and conditions of the deal, they help businesses avoid any unnecessary risk.

3. Provides business information 

By listing all the agreed-upon details—pricing, material quality, service parameters, dates, etc., procurement or purchase contracts create transparency and aid in making informed decisions.

Consider long-term contracts with suppliers as an example. They assure future procurement pricing. This allows you to forecast future expenses, build out more accurate pricing,  and assess if you’re getting sufficient value for your money from the supplier. 

3 Types of Procurement Contracts

There are different supplier agreements to match how much risk you are ready to take, your company’s goals, etc. 

Procurement contracts can essentially be categorized into three types. Let’s take a look at each in some detail 

1. Fixed price contract

As the name suggests, fixed price contracts determine a fixed price for the contracted goods or services. 

Such a contract is also called a lumpsum contract. It fixes the buyer’s price for the procured material or services, irrespective of market fluctuations or other factors. It might be the ideal contract type for essential supplies necessary for your business functioning. These contracts are beneficial in two ways:

  • First, it reduces all chances of cost overruns as you know the exact price you will pay for a specific quantity 
  • Second, it helps the seller estimate their earning accurately, as long as they can provide the contracted products in the expected quantity

The only thing to remember is that you must regularly assess quality, especially during market price fluctuations. Fixed price contracts can be further divided into three categories. These include:

Firm fixed price

This most basic contract ensures the supplier follows the pre-decided rate and terms. To understand it better, think of how government contracts work. 

They set the price for the final project in advance.

Fixed price and incentive fee (FPIF)

This arrangement is a form of leveling up where you give the seller an incentive when they surpass the usual expectations. 

It is a reward-based system with a fixed price set for the services provided but a predefined incentive whenever the supplier outperforms. This form of contract works in favor of the supplier and is usually utilized in cases where the goods in question are scarce. 

Fixed price with economic price adjustment (FPEPA)

A fixed price with an economic price adjustment contract prefixes the scope of work and the price to be paid, but with a provision for market price alterations and inflation. This means that the final price can be adjusted in case the production costs rise due to factors outside of the supplier’s control. 

It is the most used contract for multi-year deals where the supplier needs a cushion for unforeseeable market circumstances. It is also commonly used when buyers wish to secure inventory for a product they expect to have demand for over the years. 

2. Cost-reimbursable contracts

In a cost-reimbursable contract, the seller undertakes to cover the cost of developing, producing, and delivering the product with the understanding that the buyer will reimburse these upon successful contract completion.

While there’s room for changes, the buyer and seller agree on a potential budget and set the maximum admissible price. The different kinds of cost-reimbursement contracts include:

Cost plus fixed price (CPFF)

Are project suppliers hesitant to touch due to perceived risk? Not a problem—just cover all their risks.

In this kind of contract, the seller gets payment for all their costs plus a fixed sum, ensuring they’re safe from any risks or payment uncertainties. The fixed sum could be a percentage of the total price. 

If the seller cannot meet the contract’s conditions, they can also become liable under this contract to bear some costs. 

Cost plus incentive fee (CPIF)

Taking it further from the previous contract, this one involves a fixed cost, covers risks on the buyer’s end, and throws in an incentive system based on the seller’s performance.

The incentive here depends on how much the seller’s performance can save you. It’s all predetermined in the contract, so no need to stress about fluctuating amounts. 

If the seller cannot meet the contract terms, then the cost of the unsuccessful project has to be shared between the buyer and seller. 

Cost plus award fee (CPAF)

With this kind of contract, the buyer reimburses the seller for the cost of production plus an additional award fee. The fee can be as high or low as the buyer decides. 

Cost plus percentage of cost (CPPC)

In this last type of cost-reimbursable contract, the seller gets paid in full—covering the service cost plus a percentage of the cost as profit. 

This encourages the seller to boost their sales to up their profit percentage. Just keep an eye on their service and quality for optimal results.

3. Time and materials contract

If you’re still on the fence about going for a fixed cost or cost reimbursement contract, and you want to enjoy both perks, you might consider the time and materials contract. 

It blends the best of both worlds—fixed-price and cost-reimbursable contracts—to offer you an ideal solution. Under such contracts, the buyer agrees to pay the seller for the time and material invested into a service or product. To keep expenses under control, the contract specifies a fixed rate for materials and labor and sets a ceiling on the amount of time and material that can be spent. This is the best way for projects where you can’t pinpoint the scope or requirements. 

A time and materials contract gives sellers and buyers peace of mind by evenly dividing the risks on both sides. 

When opting for this contract, set an upper limit to protect yourself from potential overruns. 

The Procurement Contract Process: A Detailed Overview

Now that you know about various purchasing contracts, you can confidently make the best choice for your needs. Here is a detailed procurement process overview to help you get started. 

Step 1: Determine the scope of work

The first step is, in fact, not yours. It comes from the project management team that identifies a business requirement and sends you a purchase requisition. 

Before involving the procurement team, the requestor should thoroughly evaluate the scope of work and requirements for goods and services. Upon receiving the request, you will look into the team’s needs and product specifications.

2. Solicit bids from vendors

After you’ve understood the scope of the task,  reach out to potential vendors and gather bids. If the requirements are similar to something previously procured,  you could just reach out to your previous suppliers and request for a quotation

However, for new requirements, ask potential suppliers to suggest a plan of action and put in a request for a proposal instead. 

3. Select a vendor proposal

With all vendor proposals and quotations at your disposal, you can now choose the vendor that best fits your requirements.

When reviewing proposals, watch for those that closely meet your business requirements and offer the most value for your investment. Look for a balance between meeting your needs effectively and providing cost-effective solutions. This ensures that you fulfill your business goals and make the most out of your financial resources. 

4. Draft a procurement contract

Now that you’ve chosen your seller let’s dive into the crucial step we’ve been discussing—drafting a contract. 

For standard contracts, use contract templates and fill in your details. However, if it’s a unique case, you might need to create a contract from scratch and seek advice from the legal department.

5. Approve the contract

After the contract is prepared, it undergoes another review by the purchasing department before being sent to the seller. 

Any negotiations regarding the contract terms occur at this stage, and once both parties agree, they sign the contract. This ensures everyone is on the same page, and the agreed-upon terms are officially documented in the signed contract. 

6. File the contract

Once both parties have finalized and signed the contract, store it in a dedicated repository. Doing this lets you easily access and refer to the contract if future issues or disputes arise.

Keeping all contracts in one place makes them easy to find and maintains a complete record for future reference, ensuring transparency and accountability.

7. Proceed with the purchasing process

Now that everything is set, it’s time to place an order for the goods using a purchase order.

Once the contracted products or services have been delivered, ensure they match the contract specifications. You might want to match the purchase order, delivery receipt, and supplier invoice.

Once everything checks out, release the payment within the agreed timeframe. This final step ensures that the entire procurement process, from order placement to payment, is completed and follows the terms you agreed to.

8. Contract closure

After meeting all the contract terms, it’s time to consider contract termination.

If the vendor’s services have proven satisfactory, you can keep them in your records, establishing the foundation for a long-term and reliable business relationship.

By doing this, you maintain successful collaborations, adding to the stability and efficiency of your procurement processes in the long run.

Implementing Procurement Contracts

Managing procurement contracts effectively might seem like a task, but with the right procurement management tool, you can breeze through it.

ClickUp equips you with all the tools you need to hit the ground running. Here are a few ways ClickUp can make your procurement processes smoother and more organized.

ClickUp Contract Management

Use ClickUp’s Contract Management Template to streamline purchasing contract management. 

With its help, you can monitor and manage all your procurement contracts through each stage from development through approval and final submission. No need to get yourself additional tools to track the procurement process; it can all happen within ClickUp. 

Seamlessly keep track of all your contracts through each stage, from development, approval, to submission!

ClickUp Procurement Templates 

ClickUp’s Procurement Template is a one-stop solution for all your procurement needs. It helps you standardize processes, ensuring transparency and simpler management. 

Manage your procurement processes easily with custom statuses and custom fields. Track procurement activities using priority labels, tasks, assignees, and tags. Use status updates to keep stakeholders informed of progress automatically. 

Track tasks in the List View; analyze vendor relationships with the Supplier Tier View; create standardized processes with the Procurement Standard Operating Procedures View; monitor timelines with the Calendar View. 

With ClickUp, you can ditch the daily calendar checks as it sends you timely notifications. This feature ensures you stay on top of your tasks and deadlines without needing constant manual monitoring, streamlining your workflow and boosting your procurement process efficiency.

Navigate the entire procurement process effectively through tables, lists, and docs for various purposes using the ClickUp Procurement Template

ClickUp Tasks

Feeling overwhelmed juggling multiple processes and procurement contracts at once? 

ClickUp Tasks lightens your load by making it easier to get things done. With Tasks, you can break down your processes into manageable steps and sub-tasks and assign them to various owners. 

Create Checklists to keep track of all your to-do items and organize tasks by priority.  ClickUp also simplifies collaboration with your team on various tasks with comment threads, shareable screen recordings, and file sharing. This efficiency boost enhances productivity, allowing you to achieve more.

ClickUp Tasks
Plan, organize, and collaborate on any project with task management that can be customized for every need.

ClickUp Automations

ClickUp Automations revolutionizes procurement contract processes by automatically triggering recurring tasks, such as contract renewals.

This feature ensures timely and seamless management of procurement contracts without the need for manual intervention.

ClickUp Custom Automation
Automate repetitive tasks Using ClickUp AI

Simplify Your Procurement Contracts With ClickUp

Now that you’re familiar with the three types of procurement contracts and their distinct features, you can plan your procurement strategy with confidence. 

ClickUp’s procurement templates, contract management, and task management features can help you build efficient and effective procurement workflows.

Sign up with ClickUp today and make procurement contract management a breeze

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