Types of Contracts

The client pays for the time spent and the cost of materials used. This type is often used when the scope of work is uncertain or likely to change.

The price is set at a fixed, predetermined amount after a detailed analysis of the project scope. The client has cost certainty, while the contractor assumes the majority of the cost risk.

The client agrees to pay the contractor for the actual costs incurred, plus a predetermined fee or percentage for the successful completion of project ahead of schedule. This can be structured in various ways, such as:

• Cost-Plus-Fixed-Fee: The contractor is reimbursed for costs plus a fixed fee.

• Guaranteed Maximum Price (GMP): A variation where the contractor is reimbursed for costs, but with a cap on the total price

• Integration: External professionals join your internal team and work under your direct management and control.

• Purpose: Businesses use these services to quickly scale teams, meet project deadlines, fill temporary skill gaps, and manage fluctuating workloads.

• Flexibility: Contracts can be flexible, allowing you to scale up or down as needed, and you can often discontinue services once a project is complete.

• Access to expertise: You can hire experts for niche skills or technologies without the overhead of permanent hiring. 

A "not to exceed" (NTE) contract is a type of agreement that sets a maximum price a client will pay for goods or services, protecting the client from cost overruns. This ceiling cost is tied to a specific scope of work, and any costs beyond that amount cannot be billed unless the contract is amended and approved. This type of clause provides financial predictability for budgeting and can be structured as a fixed price contract or a hybrid hourly-rate contract.

"Hourly Not to Exceed" contract bills by the hour, but with a set maximum price cap, meaning the client pays for hours worked up to that limit.

"Fixed" or fixed-price contract charges a single, predetermined amount for the entire project, regardless of how many hours are actually spent. "Hourly Not to Exceed" is a hybrid, while a "Fixed" contract has a locked-in total price. 

Billing Method

• Hourly Not to Exceed: You are billed based on the hourly rate, but the total will not exceed the "not to exceed" amount.

• Fixed: You are billed a single, fixed price for the entire project.

Payment

• Hourly Not to Exceed: The final amount is based on the actual hours worked, up to the contract's maximum cap.

• Fixed: The final amount is the predetermined price agreed upon at the start, regardless of time spent.

Budget Certainty

• Hourly Not to Exceed: Provides some budget certainty for the client, as there is a cap, but less than a fixed price.

• Fixed: Offers the highest level of budget certainty for the client.

Risk

• Hourly Not to Exceed: If the project is completed quickly, the client pays less. If there are delays or unexpected challenges, the client pays more, but never over the cap.

• Fixed: The contractor assumes the risk of cost overruns if they underestimate the hours needed, but they can potentially increase their profit margin if they are very efficient.

Use Case

• Hourly Not to Exceed: Useful when the scope is somewhat unclear and a client is hesitant about a large upfront fixed price.

• Fixed: Ideal for projects with a well-defined scope where you can accurately estimate the total cost.

• Part 16 - Types of Contracts

• Professional Services Contract Structures – Comparing 6 Different Types

• Engineering Contracting Guide: How to Choose the Right Agreement

• 5 Important Types of Contracts for Engineering Firms

• What is the difference between ‘Hourly Not to Exceed’ and ‘Fixed’ contract types?

• 12 Contract Types for Architects and Engineers and When to Use Them