Contract Types

Reference data and engineering information about contract types for economics applications.

contracttypes

Overview

Engineering reference data for Contract Types in economics.

$PV = \frac{FV}{(1+r)^n}$

Discount a future value to present.

$NPV = \sum_{t=0}^{n} \frac{C_t}{(1+r)^t}$

Sum of discounted cash flows.

$FV = PV(1+r)^n$

Future value with compound interest.

Lump Sum Contract (Fixed Fee Contract): The engineer or contractor agrees to complete a specified project for a fixed price. This is suitable when the project's scope and schedule are well-defined.
Unit Price Contract: The contract is based on estimated quantities of items and their unit prices. The final price depends on the quantities needed. It's suitable when the types of items are known, but their exact numbers are not.
Cost Plus Contract: The purchaser agrees to pay for all labor and materials, plus an amount for the contractor's overhead and profit. This is used when the project scope is uncertain.
Incentive Contracts: Compensation is tied to performance against agreed targets (e.g., budget, schedule, quality).
Percentage of Construction Fee Contract: Compensation is a percentage of the construction costs. Common for engineering contracts.

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Summary of common engineering and construction contract types.
Contract Type	Compensation Basis	Best Suited For
Lump Sum (Fixed Fee)	A single, fixed price for the entire project.	Well-defined scope & schedule.
Unit Price	Estimated quantities multiplied by agreed unit prices.	Known item types, but uncertain quantities.
Cost Plus	Actual costs + a fee (percentage or fixed).	Highly uncertain scope & requirements.
Percentage of Construction Fee	A percentage of the total construction cost.	Engineering services contracts.
Incentive	Adjusted fee based on performance vs. targets.	Projects with clear cost/schedule goals.

Source: engineeringtoolbox.com

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Detailed variants of Cost Plus Contracts.
Variant Name	Compensation Structure	Key Characteristic
Cost + Fixed Percentage	Cost + a fixed percentage of costs.	Contractor's fee increases with project cost.
Cost + Fixed Fee	Cost + a fixed, negotiated fee.	Contractor's fee is independent of final cost.
Cost + Fixed Fee with Guaranteed Maximum Price (GMP)	Cost + fixed fee, capped at an agreed maximum.	Limits buyer's maximum financial exposure.
Cost + Fixed Fee with Bonus	Cost + fixed fee + a bonus for early/budget completion.	Incentivizes contractor to beat targets.
Cost + Fixed Fee with GMP & Bonus	Cost + fixed fee (capped) + a bonus.	Combines cost cap with incentive bonus.
Cost + Fixed Fee with Cost Savings Sharing	Cost + fixed fee + a share of any cost savings.	Aligns contractor's interest in reducing costs.

Source: engineeringtoolbox.com