Procurement and closure - Contract types and management

Learning Outcomes

After reading this article, you will be able to identify the main types of project contracts, describe the key stages of procurement and contract management, and explain how project and phase closure is managed—including closure of contracts, acceptance of deliverables, and lessons learned. You'll be ready to answer PMP questions on contract selection, procurement processes, and closure documentation.

PMP Syllabus

For PMP, you are required to understand contract types, procurement processes, and closure activities as they apply to projects. When revising this subtopic, focus on:

• The three main contract types (fixed-price, cost-reimbursable, and time and materials), including their risk allocation and use cases.
• The stages of procurement management: planning, conducting, controlling, and closure.
• The project manager’s and procurement specialist’s responsibilities in procurement.
• Developing and using statements of work (SOWs) and other procurement documentation.
• Managing contract changes, disputes, and closure processes.
• The requirements for project and phase closure, including knowledge capture, lessons learned, and final acceptance.
• Differences in procurement and closure between predictive and agile projects.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which contract type shifts most cost risk to the seller?
   1. Cost-reimbursable
   2. Fixed-price
   3. Time and materials
   4. Cost plus award fee
2. A vendor's work is incomplete and does not meet contract acceptance criteria. What step should the project manager take?
   1. Accept the work and pay
   2. Reject the deliverable as a defect
   3. Change the contract requirements
   4. Make a final payment to close the contract
3. What is the main goal of formal project or phase closure?
   1. Issue a vendor payment
   2. Capture knowledge and gain formal acceptance
   3. Start a new contract
   4. Develop team performance reviews

Introduction

Procurement involves acquiring goods and services from outside suppliers to deliver project objectives. Effective contract management is critical for controlling risk, managing costs, and ensuring project deliverables meet requirements. At project or phase closure, all contractual, technical, and administrative requirements must be fulfilled, final knowledge must be documented, and deliverables must be formally accepted. Both procurement and closure are central to project success and are tested extensively in the PMP exam.

Contract Types and Risk Allocation

Choosing the correct contract type is fundamental to balancing risk, cost, and control in procurement. There are three primary contract types used in projects:

Key Term: Fixed-Price Contract
A contract with a set total price for a clearly defined product or service. The seller is responsible for cost overruns.

Key Term: Cost-Reimbursable Contract
A contract where the buyer pays the seller's allowable costs plus a fee or incentive. The buyer bears most risk if actual costs exceed estimates.

Key Term: Time and Materials Contract
A hybrid agreement that pays the seller based on time spent and materials used at agreed rates. Risk is shared, suitable for work with uncertain scope or volume.

The choice of contract type depends on the project's complexity, definition of requirements, and the willingness of each party to accept risk:

• Use fixed-price contracts when requirements are fully specified and stable. Example: Procurement for office construction.
• Use cost-reimbursable contracts when scope is undefined or innovative work is required. Example: Research and development projects.
• Use time and materials contracts for rapid procurement, staff augmentation, or incremental tasking with unclear duration.

Planning and Conducting Procurement

Procurement management begins with defining needs, preparing documentation, and planning vendor engagement:

Key Term: Procurement Management Plan
A subsidiary plan of the project management plan that describes how procurement will be organized, conducted, and controlled.

A detailed Statement of Work (SOW) is developed to specify deliverables, standards, and acceptance criteria.

Key Term: Statement of Work (SOW)
A document that defines exactly what the seller must provide—scope, standards, timelines, acceptance methods, and contract-specific requirements.

Buyers solicit bids or proposals from vendors—often using RFPs (requests for proposal), RFQs (requests for quote), or RFIs (requests for information). To select the seller, buyers may apply weighting systems, perform proposal evaluations, conduct presentations, and negotiate contract terms.

Contract Administration and Change Management

Once a contract is in place, the project manager and procurement professionals monitor vendor performance, confirm deliverables meet SOW requirements, approve payments, and manage changes:

Key Term: Change Control System
A documented process for evaluating, approving, and tracking changes to contract or procurement documentation.

If issues arise, remedies are governed by the contract terms. Disputes and claims are typically resolved through negotiation, escalation, or—as a last resort—formal/legal proceedings.

Agile Procurement Considerations

Procurement in agile or adaptive projects places greater value on collaboration, flexibility, and joint problem solving:

• Contracts may allow for milestone payments, early cancellation, or renegotiation at set intervals.
• Requirements and backlog items can change, so contracts need to accommodate scope changes.
• Vendor relationships focus on partnership, rapid feedback, and shared risk.

Buyers and vendors often work together to reprioritize work packages as the team learns more during the project.

Project and Phase Closure

Closure marks the official end of a project or phase, ensuring all agreed work and contract terms have been fulfilled:

Key Term: Project Closure
The formal process of finalizing all activities—ensuring all deliverables and contracts are closed, knowledge is archived, and resources are released.

Key Term: Lessons Learned Register
A compiled record of successes, challenges, and recommendations from the project, updated throughout and finalized at closure.

In predictive projects, closure includes verifying deliverables for each contract, confirming payments, capturing lessons learned, issuing closure reports, and archiving records. In agile projects, closure often means confirming incremental handover of value and updating documentation throughout frequent reviews.

Contract Selection and Management

Selecting the right contract requires understanding how risk is distributed. Fixed-price contracts shift cost risk to the seller, while cost-reimbursable contracts expose the buyer to risk if costs exceed estimates. Time and materials share risk—often used when speed or flexibility is required.

Procurement Documents and Seller Evaluation

Clear procurement documents help ensure effective vendor selection and contract administration. SOWs must be detailed. Seller evaluation may use scoring, weighting, or other objective criteria. The project manager contributes to developing requirements, participating in evaluations, and vendor negotiations.

Managing Claims and Disputes

If deliverables are non-compliant, the project manager rejects the work, issues a defect notice, and tracks remediation via the change control system. Claims and disputes are handled as the contract prescribes—first by negotiation, then by escalation or formal means if unresolved.

Project and Contract Closure Steps

Project closure includes confirming all work and contracts are complete, formal acceptance of deliverables, delivery of documentation, release of resources, capturing final lessons learned, and archiving records.

Procurement closure involves reviewing the contract for fulfillment, closing all remaining claims, confirming all payments and assets, updating procurement files, and storing documents for audit or future use.

Worked Example 1.1

Your project requires external expert help for system consolidation. The scope is ambiguous, and requirements may change. Which contract type is optimal?

Answer: Use a cost-reimbursable contract. Since the scope and requirements are uncertain, cost-reimbursable contracts give flexibility to define work as the project progresses, even though the buyer carries greater risk for overruns.

Worked Example 1.2

The project phase is concluding. The seller has delivered the final hardware shipment and submitted the last invoice. What steps should the project manager take for contract closure?

Answer: Verify all contract deliverables are accepted, confirm all payments are processed, conduct a procurement audit if required, resolve outstanding claims, archive procurement records, and formally release the seller.

Exam Warning

Do not choose fixed-price contracts if the scope is poorly defined or volatile. This can increase conflict, change orders, and litigation risk. The PMP exam often tests your ability to match contract type to the scenario.

Revision Tip

Create a quick-reference table of contract types (fixed-price, cost-reimbursable, time and materials) with risk owner, best use case, and typical examples.

Summary

Contract types determine risk allocation in procurement. The project manager contributes to contract strategy, selection, vendor engagement, performance monitoring, and change control. Successful closure requires verifying all work, formal acceptance of deliverables, completing all contract administration, and capturing knowledge for future projects. Agile procurement emphasizes collaboration and flexibility in contracts and closure.

Key Point Checklist

This article has covered the following key knowledge points:

• The three main types of contracts are fixed-price, cost-reimbursable, and time and materials; each has specific risk profiles and uses.
• The project manager is involved in procurement planning, preparing SOWs, selecting vendors, negotiating and managing contracts, and handling changes or claims.
• Procurement documents—SOWs, RFPs, RFQs—must be clear and detailed.
• Agile procurement adapts contracts for incremental delivery and collaboration.
• Project and phase closure ensure all contractual and project requirements are complete, lessons learned are finalized, and records are archived.
• Contract closure is a stepwise process: verify completion, confirm acceptance, resolve claims, finalize payments, and file documentation.

Key Terms and Concepts

• Fixed-Price Contract
• Cost-Reimbursable Contract
• Time and Materials Contract
• Procurement Management Plan
• Statement of Work (SOW)
• Change Control System
• Project Closure
• Lessons Learned Register