Please explain what are the fundamental differences between fixed-price and cost-plus contracts? Plus, how does affect what kinds of projects you would recommend for a fixed-price contract or cost-plus contract?
Can teams be used for both fixed-price and cost-plus contracts? Is there a difference in how teams work based on the contract being fixed-price or cost-plus contracts?
How can a project manager influence customer expectations and perceptions?
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Fixed Price Contract: This is the type of contract where the contractor or the vendor is paid a fixed amount of money for completing the contract. Under this contract, all risk towards price increase is borne by the contractor. Also all rewards of a better performance accrue to the vendor. For example, if vendor agreed to develop an application for $10,000 then the vendor is paid only a sum of $10,000 for developing that application. If the cost of developing the application is $11,000, the vendor will make a loss of $1000. On the other hand, if vendor is able to develop the application to the satisfaction of client at the cost of $5000, all the profits of $5000 will be taken by vendor only. Thus, fixed price projects are high-risk high gain contracts where the productivity benefits are enjoyed by the vendor and productivity losses are borne by the vendor.
Cost Plus contract: In this type of contract the vendor is paid based on cost incurred by the vendor plus an agreed profit percentage. The ...
This solution explains what the fundamental differences are between fixed-price and cost-plus contracts.