What are the two primary categories of contract types?

The categorization of contracts into two primary types—Fixed Price and Cost Reimbursement—provides a fundamental framework for understanding how contracts function within procurement and project management.

Fixed Price contracts specify a set price for the goods or services provided, minimizing the buyer's risk since the contractor bears the financial risks associated with cost overruns. These contracts are advantageous when project costs can be accurately estimated, as they provide certainty about the expected expenditure.

Cost Reimbursement contracts, on the other hand, allow for the reimbursement of the contractor's allowable costs incurred in the performance of the contract, plus a fee or profit. These are generally used when the scope of the work is uncertain, making it difficult to estimate costs accurately upfront. This type of contract shifts the risk to the buyer, as they take on the responsibility of covering the costs incurred by the contractor.

Together, these two categories represent the primary methods for structuring agreements between parties in a way that aligns with project needs, risk management, and resource allocation. Understanding these fundamental contract types is crucial for effective contract management and negotiation.