From the course: Supply Chain Foundations: Strategic Contract Management
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Selecting a cost-based contract
From the course: Supply Chain Foundations: Strategic Contract Management
Selecting a cost-based contract
- [Instructor] The second category of contracts is called a cost-based contract. This type of contract depends on determining what costs are included in the calculation of price and very carefully monitoring those costs. There are four basic types of cost-based contracts. First, there is the cost plus fixed fee contract. The supplier is reimbursed for all allowable costs plus a profit, which is normally calculated as a percentage of the total costs. The key here, of course, is to establish a maximum amount of cost allowed in the contract. The US government commonly uses this type of contract for military purposes. The second type of cost-based contract is a little more specific, and it's called a time and materials contract. You see this in use in auto repair shops. The exact amount of time needed cannot be determined until the job begins. So the contract establishes a labor rate and a maximum allowable time for the job. Actual material costs and an overhead percentage are added to…
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