Sales contract automation for Procurement

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in today's video guys we would be learning about the different types of procurement contracts such as firm fixed price cost reimbursable and time and material contracts so if you are struggling to understand the different types of contracts such as fpif cpif cpaf in terms of what do they mean where are they used what are the key characteristics of such type of contracts then do watch this video till the end so in this video guys we will be solving some pmp style questions as well so this will form an important part of your pmp exam preparation okay so let's get started okay so when we talk of contract guys there are primarily three types of contracts right firm fixed price time and material and cost reimbursable now it is very important to understand the definition of these types of contracts in context of two things initial clarity of project scope and the risk impact of project cost on the buyer by initial clarity of project scope which we have in the x axis it means how clear or defined is the scope of the project at the initiation phase of a project and this is irrespective of the project being agile hybrid or predictive okay and when we talk of the risk impact guys it is the risk impact we are evaluating for the buyer or the project itself as a whole okay in your pmp exam whenever we talk of procurement management always evaluate the question as you are the project manager on the buyer's side okay unless stated otherwise now with that let's understand what each of these three types of contracts mean so first is firm fixed price in this type of contract guys the vendor agrees to supply a product or service for a fixed price and if there is any extra cost that is incurred it has to be paid by the seller this way in firm fixed price contracts the buyer's risk is very low and as a result consequently the seller's risk is very high the advantages of such type of contracts are firstly they provide a high clarity of scope up front so the seller and the buyer both needs to be very clear of the end state of the project and the success criteria and secondly as we discussed the buyer bears a very low risk of getting a cost hurt further downstream in the project now talking about the disadvantages of firm fixed price contract due to the fear of unknown it is often noticed that the seller builds a lot of cost buffer up front in such type of contract this may result your overall project cost look inflated at the onset so you need to build a solid assumptions log as well at the beginning of the project while dealing with such type of contracts secondly another major drawback of firm fixed price contracts are if the project gets delayed or the supplier suffers a cost hurt in some other way let's say some issues in their organization such as labour strike or downsizing he may start to sacrifice the safety quality or the level of execution for your project to keep his profit margins which is normal human nature right so as a pm you also need to be very careful of this a typical example where firm fixed price contracts can be used is let's say installing an end-of-line case packing machine in a manufacturing plant the scope is simple case packers are generally off-the-shelf items and installing them is pretty much straightforward hence a ffp contract will make perfect sense in this scenario if you are looking to solve some high quality pmp style questions guys check out my mock exam simulator on udemy which is updated as per the new format of the pmp exam of 2021 and has questions from the pmbok seventh edition as well the course already has over a thousand five star reviews on udemy and many pmp aspirants have used this course to pass the exam on their very first attempt there is a discount coupon which i'll be providing on this course for a limited period of time so check out the description section of this video to avail the offer so now back to the different types of contracts next we move on to cost reimbursable contracts in this type of contract guys the scope is not very clear at the onset this is typically found in agile or scrum projects the scope in these type of projects keeps on modifying at the end of each iteration right so in cr contracts which is the cost reimbursable contracts the buyer pays the seller for the actual cost of the work performed including the cost of materials equipment and salaries plus an additional fee on top which represents the seller's profit talking of the advantage of cr contracts a very big advantage of such type of contracts is it prevents dummy billing that means the seller cannot build the buyer something that is not done because the buyer verifies each and every hour and invoice before releasing the payment it is also a strong audit point for such type of contracts as a project manager you should keep strong stewardship and control while signing off invoices for a cost reimbursable contracts secondly as i mentioned earlier there is plenty of opportunity for agile with such type of contracts due to its inherent flexible nature and thirdly cost reimbursable contracts are very good from a seller standpoint because it protects the seller from any cost risk further downstream of the project conversely if we talk of the disadvantages cr contracts keep on having very low clarity of scope all along the project and hence carries risks of misinterpretation of actual work completion for example the seller may say that he has completed a specific module and bill you for the same but when you check you may find that the module is not completed as per your expectations hence you may need to reject the invoice this may result in delays right so this is a disadvantage also cr contracts poses high risk for the buyer from a cost standpoint for the obvious reasons as we talked earlier an example where you can use a cr contract as a project manager is let's say while developing a new application for android or ios where the initial scope is very vague and the functionalities of the application will require a lot of user testing or user story analysis etc next time and material contracts or tnm contracts this one is like let's say a midway between ffp and cr contracts where the buyer and the seller risks are equally shared in time and material contracts the buyer pays for the materials plus a per day or a per hour rate for all staff the seller provides to complete the work such type of contracts are often seen in an example where you have hired a few developers to write a program for you and they charge you a fixed cost per month for their office rentals and maybe a variable cost on a per hour basis for the number of hours spent in coding okay if you need to increase or decrease the number of developers working for you such type of contracts provide you the option to do that very easily the risks as i mentioned are equally shared between the buyer and the seller right as a buyer you always set an upper limit on the time and material part of the contract another example of such type of contract can be when you hire an external accounting company for bookkeeping or accounting purposes the time here can be number of hours spent by their team in doing the accounts for you and the material could be their office rentals stationery and licenses they use to do your bookkeeping in a correct and legal way clear now let's move on to understand a bit more details about each type of these contracts so these three type of contracts guys can be broken down further into subtypes the first category is the types of fixed price contracts which is firm fixed price as we talked earlier fixed price with an incentive fee and fixed price with economic adjustments i have made a study guide for you which can be downloaded from the link in the description box okay study the details of these contracts from this document while you are watching this video but here what is very important is how they are placed along this matrix of scope and risk okay if you see here firm fixed price contract is with the least cost risk for the buyer but needs a very high clarity of initial scope on the other hand guys fpif and fpepa contracts can handle a bit of scope flexibility but increases the buyers cost risk and consequently decreases the seller's cost risk also note that between fpif and fpepa contracts fpepa contracts poses a higher cost risk for the buyer i have explained the exact reason for the same in the study guide so read it very carefully moving on let's see the subcategories of cr contracts so these are some of the most important types of cr contracts okay again refer to the study guide to learn the details for each one of them but what is important is to study the relative distribution across this matrix of scope clarity and cost risk and as you see from a cost standpoint the most risky cr contract is the cppc type a bit better than that is the cpff both can handle low clarity of scope equally the study guide explains why the fixed fee type is better than the percentage cost type the other two types are cpif and cpaf and as you see from this matrix again from a buyer's standpoint the cpaf is a better contract than the cpif the study guide explains that as well finally there is this time and material contract and the indefinite delivery and indefinite quantity contract or id iq contract this id iq contract and time and material contract falls midway between the buyer and the seller risk okay the idiq contract however is a new type of contract which is introduced in pmbok 7th edition hence i suggest you read the details for this type of contract from my study guide which can be downloaded from the link given in the video description below so remember guys for the pmp exam it is very important not only to understand what each type of contract means but also to understand how they are placed in this matrix of buyers cost risk and scope clarity this is what will help you to eliminate the wrong answer when you will get stuck between two close answer choices in the exam we will see this in a moment now when we solve a few pmp style questions but before moving on to the questions some quick takeaways from what we have learnt till now first always interpret procurement management or contracting questions in the pmp exam from a buyer's standpoint so always think that you are a project manager from the buyers side not from the seller's side the question will tell you very specifically if you are a project manager from the seller's side next no project works only on a single type of contract okay it is always hybrid as different scope items call for different contracting types so for example in a construction project the overall project may have a ffb contract or let's say a turnkey contract but the building material and construction sub scope may have a time and material contract another example for a web application development may be the design and development part follow a cr contract but the deployment and rollout part may follow a firm fixed price approach next very important there is nothing called a good contract or a bad contract guys okay there is a common misconception between pmp and capm candidates that ffp contracts are better than cr contracts no remember each type of contract has its own pros and cons and hence suitable for specific project scopes always choose a contract based on the scenario and the context okay finally keep my study guide as a ready reckoner during your exam preparation and always evaluate every contract in the matrix of cost risk and scope clarity as we discussed right now let's solve some pmp style questions so the first question guys pause the video read the question carefully and try to answer it before moving forward okay so we'll start solving this question if you see carefully guys it is mentioned that the project is delayed and you are under a cost pressure that rules out time and material contract and cost reimbursable contracts right because if you see in this matrix these type of contracts does increase the cost risk from a buyer's standpoint hence the only options left are ffp and fpif now since in the question it is mentioned that your project is delayed it would be a very good decision to go for a fpif contract here and incentivize the supplier to complete the project within schedule or maybe ahead of schedule even if it marginally will increase your costs overall you will be in a very advantageous position because you will save cost due to the project delays okay hence the correct answer to this question is fpif or fixed price incentive fee contracts let's move on to the second question guys pause the video here read the question very well and try to answer it before moving forward okay so we'll start solving the question see that there are two important points here to note firstly it's a agile project following progressive elaboration right so there is no scope for having a fixed price contract here so that rules out option number four also it is very important to note here that altus is a long-standing partner and alex should maintain a good business equation with them and for that very reason he has to choose a procurement contract which is a win-win for both the organizations now if you see the matrix as we have discussed and if you study my reference guide you will see the exact reason why a cpif contract is the most optimized contract from the list of the cost reimbursable contracts and for that very reason the cppc and the cpff contracts will not make any sense here because alex needs to maintain a good relationship with altus and also develop a contract which makes perfect business sense hence the correct answer to this question is cost plus incentive fee contract i hope today's video was useful guys and you have learned about the different types of contracts the details of each one of them and you will not have any problems whatsoever in solving questions now in your pmp exam from this topic let me know in the comment section below what other topics of the pmp exam you would like me to cover in this channel i wish you all the best for your pmp exam preparation and i'll see you again soon in another awesome video like this on this channel bye bye and have a nice day