MGTS7527 Chap.3 Procurement and Project Contracts
Procurement and Project Contracts
Buying in capability is a planned activity
Week 2 shows that procurement is woven through every phase.
In initiation the team asks whether outside capability is needed; in planning it completes a make-or-buy analysis, defines requirements, builds a procurement strategy, sets selection criteria and chooses a contract model; during delivery it manages supplier performance; and at closure it confirms the work, accepts deliverables, settles obligations and closes the contract.
Contract types allocate risk
Four types anchor the topic.
Fixed-price contracts move cost risk to the seller and suit clearly defined work. Cost-reimbursable contracts pay actual costs plus a fee and suit uncertain work. Time and materials contracts combine features of both for smaller or unclear scopes. Target-cost contracts share savings and overruns.
The chapter reads them on a single risk spectrum and works a decision for a library kiosk upgrade.
Beyond purchasing
Strategic procurement asks what capability and value a purchase should create, who should manage which risk and how performance will be judged.
The chapter also covers agile, smart, outcome-based, sustainable and collaborative contracting, and the six questions to answer before contracted work is accepted.
Reading a contract from both sides
The course asks project managers to approach contract types as both contractor and client.
A clause that protects the buyer's budget, such as a fixed price on a vague scope, can push a supplier to cut quality or claim variations, so a good answer explains the risk each party carries and how the relationship will be managed, not only which type is cheapest.
What this chapter covers
- 01
Why projects cannot simply start buying
- 02
Procurement actions in each phase
- 03
Purchasing and strategic procurement questions
- 04
What a project contract establishes
- 05
Fixed-price, cost-reimbursable, time and materials, target-cost
- 06
Emerging trends in contract management
- 07
Accepting and closing contracted work
Worked example · free
Place four contract types on the cost-risk spectrum
- 1Fixed-price first: a set fee for a defined scope, so an overrun falls on the seller.
- 1Target-cost next: savings and overruns are shared between buyer and seller.
- 1Time and materials third: rates are agreed, but the buyer pays for the time and materials actually used.
- 1Cost-reimbursable last: the seller is paid actual costs plus a fee, so the buyer absorbs the overrun.
Key terms
- Procurement Management
- How a project obtains goods, services or results from outside suppliers to meet its objectives.
- Make-or-Buy Analysis
- The planning decision on whether work is done inside the organisation or sourced externally.
- Fixed-Price Contract
- An agreement setting a predetermined fee for a clearly defined scope, moving cost risk to the seller.
- Target-Cost Contract
- An agreement that sets a target cost and shares savings or overruns between buyer and seller.
Procurement and Project Contracts FAQ
When should procurement planning begin?
In initiation, when the team identifies whether external capability may be needed, looks at the supplier market and estimates initial costs. Detailed procurement planning follows in the planning phase, before suppliers are selected and engaged.
Which contract type suits work with an uncertain scope?
Cost-reimbursable or time and materials. Both pay for actual effort rather than a fixed fee, which gives flexibility when the scope cannot be defined at the start, but they leave more of the cost risk with the buyer.
What should be checked before closing a contract?
That requirements are met, quality is verified, defects are resolved, documentation is provided, knowledge is transferred, and payments, claims and obligations are settled. Closing before all six are answered hands open problems to the organisation.
What are the emerging trends in contract management?
The course lists agile contracting, which applies flexibility and iterative delivery; smart contracts, which use blockchain to execute contract items automatically; outcome-based contracts, which move away from paying for inputs; sustainable contracting, which embeds environmental, social and governance outcomes; and collaborative contracting, which shares risk or reward to encourage joint problem-solving.
Assessment move
Draw the cost-risk spectrum from memory and place the four contract types on it. Then invent two packages of work, one with a clear scope and one without, choose a contract for each, and write one sentence on the risk each choice leaves with the buyer. Finish by writing the six closure questions for contracted work and answering them for one package.
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