Contract types

The type of contract determines the invoicing method of the contract. You can define three types of contracts:

• 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.
• 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 unit 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 and labor, 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 or 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. For example, a fixed amount could be determined for labor cost, depending on the rate of the employee, department, or job category the employee belongs to. The rates and prices can be contract specific. For time and material contracts, a ceiling limit can be applicable. The billing process of indirect cost is similar to cost-reimbursement contracts.

Invoicing types applicable for each type of contract:

Contract Type/Invoicing Type	Installment	Cost Plus	Unit Rate	Progress Invoice	Delivery Based
Fixed Price	Yes	No	Yes	Yes	Yes
Cost Reimbursement	No	Yes	Yes	No	No
Time & Materials	No	Yes	Yes	No	No