In the delivery of High-Tech, it is usually difficult to apply the logistical procedures commonly used in the buyer organization to purchase “conventional” goods. Therefore it is not appropriate to consider only fixed-price contracts, which are otherwise the most common ones. The following overview should give You some ideas to select the most appropriate type of contract depending on specifics of the goods or services purchased.
First, it should be noted that there is always a triangle that shows the performance requirements on the supplier. The corners of the triangle are
- objectively measurable output,
- budget and
It is true that pressing on one of the corners of the triangle “overflows” the problems to the other two. Therefore, it is advisable that all three corners of the triangle be well specified, with the obvious emphasis being placed on only some of them.
Another important factor is that there is a risk associated with each contract. Reduction of this risk is never free for the buyer; if the supplier has to bear the risk (eg. in a fixed price contract), then the buyer must pay an “insurance premium” to insure the risk. And, contrary to popular belief, it is valid even if this bonus is not quantified in the contract.
According to this theory, we can create a number of contractual alternatives. Some of them are here:
- FTFP – the fixed price contract always includes an insurance premium for the supplier. In this case, the focus is on the triangle corner with the price. It is necessary to have exactly defined the other two corners therefore. This type of contact is useful if the supplier knows better than You the details of the gadget delivered. Why? because his “insurance premium” may be very low. On the contrary, if You know better what to deliver, than this type of contract is not an advantage, because “insurance premium” is quite high and out of Your control.
- T&M – payment for time and material. In this alternative, the buyer pays no “insurance premium” because he bears the risks himself. So he can get to the lowest price. From the triangle point of view, this is the case with an emphasis on the first corner (output) and it is necessary to treat the other two corners (eg. by setting time and financial limits).
- FTAC – the bonus included to fix price contract places considerable emphasis (usually) on time. It has all advantages and disadvantages of FTFP contract with one exception: it gives You an instrument to manage aspect which is most important for You.
Of course, by combining these extremes, other types can be created.
There are four aspects to consider when specifically considering the appropriate type of supplier contract. The point is,
- how critical is the precise achievement of the desired outcome in general (item 1),
- the specificity of the target product and its comparability to something else (item 2),
- the market position of the supplier in terms of competition (item 3),
- the manager’s contact time in the purchasing organization (item 4).
The following table shows the options and recommended forms of contracts:
|item 1||item 2||item 3||item 4||contract type|
|high||clearly defined||buyer market||good||with premium / penalty|
|middle||product that needs to be customized||moderate competition||only for important matters||fixed price or delivery date|
|low||unclear, will arise from the development||supplier market||bad||time and material|