Procurement teams spend significant time sourcing suppliers, negotiating terms, and ensuring contracts comply with internal guidelines. After a purchase, time is devoted to ensuring vendors fulfill their agreements. It takes time and skill to manage the procurement process, craft contracts, and work with suppliers to achieve increasingly stringent higher education requirements for contracts and procurement.
The contract is at the heart of it all, providing a written agreement that outlines the responsibilities of both parties. In this article, we will focus on two key questions: what is a procurement contract, and what are the different types.
A procurement contract is a binding agreement between buyers and sellers. It outlines the goods or services that the vendor will supply along with terms and conditions, such as delivery dates and quality guidelines. It also shows payment terms, such as when payments are due and penalties for failing to pay on time.
Contracts and procurement experts know that a well-designed document makes it clear what is expected and creates a foundation for a strong relationship. With the volume of transactions higher education procurement teams manage, you need a formal agreement that keeps things flowing. You cannot afford hiccups.
While the basic form for procurement contracts may look the same, terms and conditions can be vastly different for each negotiation and each academic institution. There are also different types. Most procurement contracts fall into one of three categories: fixed-price contracts, cost-reimbursable contracts, and time and materials contracts.
A fixed-price contract (also known as a lump-sum contract) specifies the exact products or services the supplier will provide and the set price the buyer will pay. These are the most straightforward procurement agreements. Fixed-price procurement is best for straightforward, recurring purchases like office supplies or software subscriptions. They provide consistent costs but less flexibility.
Fixed-price contracts contain standard clauses like:
The main benefit of fixed-price contracts is price consistency. The supplier agrees to fulfill the contract at the agreed-upon rate for the duration of the agreement even if their costs increase.
There are three types of fixed-price contracts:
In a firm fixed-price contract, the buyer simply pays the fixed rate for the goods or services you want. This is the most basic fixed-price agreement.
FPIF contracts include an incentive fee the buyer pays if the supplier exceeds expectations. This helps motivate strong performance and compliance from the vendor by providing an additional incentive.
FPEPA contracts allow vendors to adjust pricing if production costs change significantly. This protects suppliers from major cost increases while maintaining largely fixed rates.
In a cost-reimbursable contract, the buyer repays the seller for allowable expenses needed to complete the project. This can include things like materials, labor, utilities, and other direct costs.
The supplier also receives a payment above these reimbursed costs:
Cost-reimbursable contracts shift more risk onto the vendor, who must absorb costs before being repaid. However, they provide more flexibility for the buyer if project specifications change. These contracts work best for one-time purchases like construction projects or complex consulting engagements. They are less ideal for recurring purchases.
In a time and materials contract, the buyer pays the supplier for the actual time spent on the project based on hourly or daily rates. Materials are also reimbursed at cost.
The contract outlines the vendor’s rates and usually puts caps on time and materials to limit cost overruns.
Time and materials agreements provide flexibility for projects where specifications are likely to change. They are common for services like software development or creative services. The buyer takes on more risk as costs are less predictable. Caps on time and materials help mitigate this risk.
Contracts and procurement are crucial steps in the purchasing process, forming the basis for buying and selling. They structure the supplier relationship and allow procurement teams to evaluate performance. A well-constructed contract is essential for efficient procurement.
E&I Cooperative Services® has a team of procurement experts solely focused on education. We understand the unique needs of higher education and how to create contracts for academic institutions. As the only non-profit, member-owned cooperative, E&I has more than 150 competitively solicited, ready-to-use contracts. There is no cost to become a member and no obligation to use our contracts.
Contact the experts at E&I Cooperative Services today to see how much you can save.