Contract types

• Fixed Price: A contract that is carried out for an agreed fixed price. The price is agreed when the contract is signed. It is often used when the lead-time of a contract is long and the value of the contract is high.
  • The default method of invoicing is installments.
  • Delivery based invoices are sent when items are shipped or when services are delivered. Delivery based invoices can be used as an alternative to installment invoices.
  • In case of installment payments, also called milestone payments, stage payments or performance based payments, a part of the agreed price is paid based on reaching certain milestones.
  • Advance payment requests can also be used in combination with installments and progress invoices. Advance payments requests can be made for all contract types. The advance must be linked to one of the contract lines and you can link an advance to an element or activity.
• Cost Reimbursement: A contract that is carried out based on cost reimbursement and a profit percentage. The billing is done on a periodic basis based on cost. However, sometimes not all costs can be billed. A limit, ceiling or a not-to-exceed amount can be agreed upon with the customer.

  In general ,direct costs, like material, labor, and so on are billed directly to the customer. However there are certain restrictions:

  • Legal:
    Some cost may not be billed to the customer because of legal regulations. For example in some countries it is not allowed to charge several types of cost to the customer such as donations, entertainment cost or cost for bad credit control.
  • Due diligence:
    For example, inventory adjustments. If materials are purchased for the contracts, and parts of the contract are canceled. And, the materials need to be scrapped, the cost incurred can be charged to the customer.
  • Agreements:
    A customer can assign a certain percentage of the material cost to scrap. If the cost of scrap is not more than the agreed level, these costs can be charged to the customer as direct material cost. In case the cost of scrap exceeds this level, the customer pays only the allowed percentage.
• Time & Materials: This contract type is usually used for long term research and development projects. It is a type of contract that is invoiced for the material and the labor at an agreed sales rate. The sales rate can be a fixed amount, a markup percentage or the cost incurred. Example: For labor cost, a fixed amount could be determined dependent on the rate of the employee, department or job category the employee belongs to. The rates and prices can be contract specific. Also, for time and material contracts, a ceiling limit can be applicable. The billing process of indirect cost is similar to cost-reimbursement contracts.

Invoicing methods

Following are the invoicing methods for the above mentioned contract types:

• Using installment invoicing
• Using progress invoicing
• Using cost plus invoicing
• Using unit rate invoicing
• Using delivery-based invoicing

Other invoice types:

• Using advance payment requests
• Using holdback