Answer to Question #181689 in Management for keda

Question

As a seller, which of these contracts would you prefer? Which contract would ensure that you can maximize your profits and keep your costs as low as possible?

Answer 1

First, giving you a brief about each types of contract. The two broad categories are fixed price and cost plus contracts, as the name suggests, fixed price is one in which seller delivers the items at a pre-determined fixed price as mentioned in the contract. Any type of cost contract is a cost reimbursable contract.

1. Firm fixed price contract – In this type, the seller is obliged to supply the parts at pre-defined time, place and price as mentioned in the contract. Example application: Commercial supplies for an automobile manufacturer.
2. Fixed price incentive fee contract – This contract is similar to previous one except that the parts can be supplied at or below the ceiling price as defined in the contract. Example application: Prototyping of a new product
3. Cost plus incentive fee contract – In this contract, the buyer and seller can negotiate a target cost and a variable incentive fee that is likely to motivate the contractor to manage effectively. Example application: Development and testing programs of military.
4. Cost plus award fee contract – In general, award-fee contract does not include predetermined targets fee adjustments. And this one is a commonly used award-fee contract which has special provisions as this type of contract is not susceptible to finite performance / quality measures necessary for structuring incentive contracts. Here, there are two parts to the fees,

Any type of incentive contracts is beneficial to the seller, as he can yield higher returns by completing the work at a lower cost while meeting other objective performance targets.