As a Project manager, you should be aware of the different types of contracts in project management and their legalities. Imagine having to outsource a process or product to third-party subcontractors or vendors in the middle of your project. What type of project management contract would you use for the third-party service provider? Situations like this are why project managers need to have a good understanding of a variety of project management contract types so that they can handle contract negotiations effortlessly.

In this article, we’ll define the three basic contract types and provide examples to help you understand when you’d use each of them.

PMP Certification Training Course

For your next role as a Project ManagerView Course
PMP Certification Training Course

Fixed Price Contracts

These are also known as Lump Sum contracts. The seller and the buyer agree on a fixed price for the project. The seller often accepts a high level of risk in this type of contract. The buyer is in the least risk category since the price the seller agreed to is fixed. Be sure this type of contract has fully detailed specifications, checklists, and project scope statements from the seller's side, which the buyer will use.

With this type of contract, sellers may try to cut the scope to deliver the projects on time and within budget. If the project is finished on time with the desired quality, the project is over for that contract. However, if the project is delayed and there are cost overruns, then the seller will absorb all the extra costs. 

Below are a few types of fixed-price contracts:

  • Fixed Price Incentive Fee (FPIF)

    Although the price is fixed, the seller is offered a performance-based incentive. The incentive can be dependent upon one or more project metrics such as performance, cost, or time.
  • Fixed Price Award Fee (FPAF)

    If the performance of the seller exceeds expectations, an additional amount (i.e., 10% of the total price) will be paid to the seller.
  • Fixed Price Economic Price Adjustment (FPEPA)

    The fixed price can be re-determined depending on the market pricing rate.

contracts in project management

Cost Reimbursable Contracts

What do you do when the scope of the work is not clear? A fixed-price contract is out of the question since you are not sure what the project will require. Here’s where you’d use a cost-reimbursable contract.

A cost-reimbursable contract—also known as a cost disbursable contract—is used when the project scope is uncertain, or the project is high risk. The buyer pays all costs, so the buyer bears all the risk. Under a cost-reimbursable contract, the seller works for a fixed time period and raises the bill after finishing the work—a fee that represents the profits for the contract. The fee may be dependent on selected project performance or other metrics.

A major drawback of this type of contract is that the seller can raise an unlimited or unknown amount which the buyer is compelled to pay. This is why cost reimbursable contracts are rarely used. Below are a few types of cost-reimbursable contracts:

  • Cost Plus Fee (CPF) or Cost Plus Percentage of Costs (CPPC)

    The seller will get the total cost they incurred during the project plus a percentage of the fee over cost; this is always beneficial for the seller.
  • Cost Plus Fixed Fee (CPFF)

    The seller is paid a fixed amount that is agreed upon before work commences. The cost incurred on the project is reimbursed on top of this, regardless of project performance.
  • Cost Plus Incentive Fee (CPIF)

    A performance-based incentive fee will be paid to the seller over and above the actual cost they have incurred on the projects. With this type of contract, the incentive is a motivating factor for the seller to meet or exceed the project’s performance metrics.
  • Cost Plus Award Fee (CPAF)

    The seller will get a bonus amount (the award fee) plus the actual cost incurred on the projects; this type of contract is very similar to a CPIF contract.

Become a Product Leader in 6 Months

UMass PGP Project ManagementExplore Course
Become a Product Leader in 6 Months

Time and Material Contracts or Unit Price Contracts

Unit price contracts are what we usually call hourly rate contracts. This type of contract is a hybrid of a cost-reimbursable and fixed-price contract. For example, if the seller spends 1,200 hours on a project at $100 an hour, the seller will be paid $120,000 by the buyer. This type of contract is common for freelancers, and the main advantage of this contract type is that the seller makes money for every hour spent working on the project.

Find Our PMP Training in Top Cities

India United States Other Countries
PMP Certification in Bangalore PMP Certification in Charlotte PMP Certification in Dubai
PMP Certification in Delhi PMP Certification in Los Angeles PMP Certification in Cairo
PMP Certification in Pune PMP Certification in San Francisco PMP Certification in Manila
Enroll in our PMP Certification Course today and develop a strong foundation in the principles of project management.


As Project Manager, it is your responsibility to enter into the right kinds of contracts with a variety of service providers to reduce risk and deliver the project on time. You should always consider the right type of contract to provide optimum value for the time and money spent on the project while protecting it from as many risks as possible.

If you’re studying for your PMP exam, consider Simplilearn’s online PMP® Certification training. It’s designed to help you pass the exam on your first try, and courses are facilitated by highly experienced, certified professionals with at least ten years of experience in the field.

Are you looking forward to making a mark in the Project Management field? If yes, enroll in the Project Management Certification Program now and get a step closer to your career goal!

PMBOK®, PMP® and PMI® are registered trademarks of the Project Management Institute, Inc.

Check out our video: Introduction to PMP Certification Training.

About the Author


Simplilearn is one of the world’s leading providers of online training for Digital Marketing, Cloud Computing, Project Management, Data Science, IT, Software Development, and many other emerging technologies.

View More

Find PMP® Certification Training in these cities

PMP Certification Training Course in AtlantaPMP Certification Training Course in AustinPMP Certification Training Course in BostonPMP Certification Training Course in CharlottePMP Certification Training Course in ChicagoPMP Certification Training Course in ClevelandPMP Certification Training Course in DallasPMP Certification Training Course in DenverPMP Certification Training Course in DetroitPMP Certification Training Course in FargoPMP Certification Training Course in HoustonPMP Certification Training Course in IrvingPMP Certification Training Course in Jersey cityPMP Certification Training Course in Las VegasPMP Certification Training Course in Los AngelesPMP Certification Training Course in MiamiPMP Certification Training Course in Mountain ViewPMP Certification Training Course in NashvillePMP Certification Training Course in New York CityPMP Certification Training Course in Orange CountyPMP Certification Training Course in OrlandoPMP Certification Training Course in PhiladelphiaPMP Certification Training Course in PhoenixPMP Certification Training Course in PittsburghPMP Certification Training Course in PleasantonPMP Certification Training Course in PortlandPMP Certification Training Course in RaleighPMP Certification Training Course in RochesterPMP Certification Training Course in San DiegoPMP Certification Training Course in San FranciscoPMP Certification Training Course in San JosePMP Certification Training Course in SeattlePMP Certification Training Course in TampaPMP Certification Training Course in Washington
  • Disclaimer
  • PMP, PMI, PMBOK, CAPM, PgMP, PfMP, ACP, PBA, RMP, SP, and OPM3 are registered marks of the Project Management Institute, Inc.
  • *According to Simplilearn survey conducted and subject to terms & conditions with Ernst & Young LLP (EY) as Process Advisors