Procurement Contracts — Types + Examples

What is a Procurement Contract?

A procurement contract is a contract to procure the needed services or products. It is an agreement or a valid legal document where the buyer and supplier bind themselves to a common obligation or duty to manage a certain project or to procure certain goods. Once both parties agree to a procurement contract, they are now bound by the said document, which means that the failure to comply with the contract can lead to legal consequences. 

An example of this is when a project team of a company communicates with a supplier. Their communication will turn into negotiations to ask for or procure the materials or services they need for the project. 

Using a procurement contract will obligate the supplier to provide the needed materials and services. The agreement will be the evidence that they have agreed on the price of the materials or services the company will procure. 

The 9 Types of Procurement Contracts

1. Firm Fixed Price (FFP)

The buyer and supplier agree on an exact amount and deadline, so any cost overrun risk rests entirely with the supplier, giving the buyer excellent budget predictability.

This model is common in construction, equipment installation, or serial production, where the job can be thoroughly specified before signing.

Contract managers must, however, police change-order requests rigorously, because any scope additions open the door to surcharges or delays that wipe out the original price certainty.

Example:

In June 2024, the U.S. Army Corps of Engineers’ Transatlantic Middle East District awarded Alghanim International a $39.9 million firm-fixed-price contract to build five multifunctional warehouses for the 35th Brigade in Kuwait.

The contractor must deliver the entire facility for the agreed lump sum, absorbing any cost overruns or productivity losses—textbook FFP risk transfer to the supplier. 

2. Fixed Price Incentive Fee (FPIF)

Price and schedule are locked, but the contract also defines a formula for sharing savings or paying a bonus (e.g., 80/20 in the buyer’s favor) if the supplier finishes below budget or ahead of schedule.

Budget control is preserved while the supplier gains a financial motive to innovate and accelerate work.

A clear definition of the “target cost,” sharing ratios, and a ceiling price is essential because a poorly designed formula can turn the results against the buyer.

Example:

On 28 April 2023, the Pentagon issued a $194 million hybrid contract to Lockheed Martin to recapitalize M270A2 rocket-launcher systems; the hardware portion is FPIF, with profit adjusted by a formula comparing actual versus target cost.

If Lockheed beats the target, it shares the underrun; if it overspends, its fee is reduced, aligning contractor incentives with Army affordability goals. 

3. Fixed Price with Economic Price Adjustment (FP-EPA)

For multi-year projects (oil & gas, defense programs), an index clause lets the price adjust in line with CPI, PPI, or raw-material benchmarks.

This protects the supplier’s margin and supply continuity while sparing the buyer constant renegotiation. The contract must spell out the reference indexes, adjustment intervals, and maximum variance allowed to prevent abuse.

Example:

Municipal road agencies in Canada commonly include an asphalt-cement price-adjustment clause: monthly payments move up or down with the Ministry of Transportation’s asphalt index, unless the contractor opts out in writing.

This EPA mechanism stabilises bids on multi-year paving contracts by shielding suppliers from bitumen price spikes while capping upward adjustments for the owner.

4. Cost Plus Fixed Fee (CPFF)

The buyer covers all verified costs plus a pre-agreed fee, so the supplier feels no financial squeeze if the scope grows.

The model attracts contractors for high-risk R&D projects or prototypes, yet the buyer must impose rigorous cost tracking (timesheets, audit trail) to curb escalation.

Ceiling-cost caps and the buyer’s right to terminate if future costs look unsustainable are common safeguards.

Example:

NASA’s IT services contract NNG15WA53C reimburses allowable costs and adds a fixed fee set at award; the vendor earns the same profit whether costs rise or fall.

NASA uses CPFF here because task volumes vary, but it caps total outlays and retains termination rights if spending trends become unsustainable.

5. Cost Plus Incentive Fee (CPIF)

The supplier’s costs are reimbursed, and extra profit depends on a formula that shares savings or penalizes overruns (e.g., 70 % of savings to the buyer, 30 % to the supplier).

It suits situations where the target cost can be estimated but technical uncertainties remain. Success hinges on a realistic target cost and transparent data; otherwise, negotiations over savings splits quickly become contentious.

Example:

The U.S. Department of Energy’s Central Plateau Cleanup IDIQ at Hanford authorizes CPIF task orders: each order states a target cost and fee range, and a sharing formula increases or decreases the contractor’s profit as it beats or exceeds that target.

The scheme has driven contractors to find innovative decontamination methods that cut both schedule and cost. 

6. Cost Plus Award Fee (CPAF)

In addition to reimbursement, the supplier can earn a discretionary award fee (e.g., up to 8 % of value) granted by the buyer’s evaluation board at quarterly performance reviews.

This flexibility rewards quality, innovation, and safety that are hard to capture in a strict formula. To keep the model fair, evaluation criteria, metrics, and an appeal process must be documented clearly in the contract.

Example:

DOE’s nine-year contract for decommissioning the East Tennessee Technology Park pays a base fee plus an award fee of up to 8 % decided by a government board each quarter.

The discretionary pool lets DOE reward safety records, cleanup quality, and stakeholder engagement—performance dimensions hard to codify in a numeric incentive formula. 

7. Cost Plus Percentage of Cost (CPPC)

The supplier earns a percentage on every approved cost, so profit rises linearly with spending; because of this moral-hazard risk, the type is banned in most U.S. federal procurement and used only for urgent, short-term interventions (e.g., disaster recovery).

When employed, the buyer must add strict ex-post audits and a cap on total value to blunt the incentive to inflate costs.

Example:

After severe storms, some U.S. municipalities have proposed debris-removal agreements where the contractor bills actual cost + 15 % profit.

Federal guidance flags these CPPC deals as prohibited because they motivate suppliers to inflate costs; FEMA reminds grantees to switch to T&M or CPIF structures instead.

8. Time and Materials (T&M)

The parties agree on hourly or daily rates by labor category and pay for materials at “cost + markup,” typically under a not-to-exceed ceiling or time frame. Popular in agile IT development, consulting, and facility maintenance, where requirements evolve incrementally.

The buyer must demand detailed timesheets, periodic cost-to-complete estimates, and approve key specialists to prevent unplanned budget creep.

Example:

A European fintech recently hired a software firm under a T&M agreement that sets €620 per senior-developer day, reimburses cloud services at cost + 5 %, and caps total spend at €1.8 million.

The ceiling keeps budget risk in check while giving the agile team freedom to pivot requirements sprint by sprint.

9. Purchase Order (PO) as a Contract

For repeat or low-value buys, an approved purchase order becomes a binding contract the moment the supplier accepts it. The PO lists items, quantities, unit prices, Incoterms, delivery date, and payment terms, and can include inspection, warranty, or delay-penalty clauses.

Variants include standard, blanket, and planned POs; a blanket PO locks price and rough quantities for an extended period, cutting admin work and enabling demand consolidation.

Example:

The University of Virginia’s sample PO #P2100456 obligates the supplier to deliver 500 vials of laboratory reagent at $84 each, FOB Destination, within 30 days.

Once the supplier acknowledges the PO, it functions as a binding contract covering price, quantity, delivery terms, and invoice instructions—no additional legal paperwork required.

More Examples of Procurement Contracts 

The Procurement Contract Process

A procurement process, such as bidding, will start before the procurement contract is awarded. The buyer or an employee in a company will determine whether the supplier is capable of meeting their needs. The company should be able to establish a strict procurement process. 

Establishing a strict procurement process will determine the most suitable supplier for the project you are working on. Also, it will minimize procurement fraud in your company. 

The procurement process often starts on the part of the buyer. It starts with the buyer due to the selection process that will be implemented in choosing their partner.

It usually starts by asking about the price of the materials and the quality of the supplier’s services that will be provided. Here are the steps for the procurement contract process:

1. Sourcing Methodology

The sourcing methodology is a structured framework for sourcing that requires a lot of analysis to get right. With this, it will be much easier to go on with the procurement process as it is foundational to future steps.

2. Market Research

Doing market research gives you the advantage of knowing what you need, how much you need of it, and the best price to get it. It’s the best way to safeguard yourself from issues that can be prevented and find opportunities to give yourself an advantage when it comes to your business.

3. Request For Information

The RFI is a process wherein you request information from suppliers and department heads or branches that need supplies. This simply keeps you informed in a way that research can’t do. This is because you go to the source, whether that be the supplier, branch managers, sourcing specialists, or others involved. This gives you a better idea of what you’re working with.

4. Request For Quotation

The RFQ phase is where you ask suppliers for initial pricing. This is usually done by letters. Once all RFQs have been answered by each supplier, a discussion on each quote given will ensue. The initial market research before this step should provide procurement professionals with enough knowledge to know if each quotation is fair and worth the chance for a partnership.

5. Negotiation Phase

The negotiation phase is when a lot of back-and-forth happens between the buyer and supplier. Both parties have to face each other and try their best to reach a mutually beneficial agreement.

When it comes to transforming deals into contracts, the collaborative process of negotiation includes drafting a preliminary agreement that outlines the key points discussed. This serves as the foundation for a contract.

Once both parties reach an agreement then the next step is to formalize the deal by turning it into a legally binding contract. This means that you have to ensure that all agreed-upon terms are accurately documented.

6. Contracting Phase

The contracting phase is where both the buyer and seller put together their agreed-upon negotiations into a physical agreement that holds both parties accountable. This is done in writing and requires both parties to review this before finalization and input their terms and conditions. 

7. Supplier Relationship Management

The supplier relationship management is a phase wherein the goal is to build a robust relationship with the supplier where both parties can grow and benefit from each other. This is where active collaboration and regular communication bring in a relationship of trust, transparency, and shared goals. This is also where the rest of the contract management and monitoring take place, which makes it ideal for collaboration with your supplier.