Types of procurement contracts and when to use them
- What is a procurement contract?
- Why are procurement contracts important?
- What should a procurement contract include?
- Main types of procurement contracts
- How to choose the right type of procurement contract
- Procurement contract examples
- Using technology for procurement and contracts management
- How Ramp streamlines your procurement process
A procurement contract sets expectations around deliverables, timelines, pricing, and quality standards, making them the backbone of business relationships.
Choosing the right type of procurement contract can mean the difference between a smooth, profitable partnership and costly disputes. The right framework aligns with your project’s risk, budget, and operational needs while protecting both parties’ interests.
What is a procurement contract?
A procurement contract is a legally binding agreement between a buyer and a vendor that outlines the terms, conditions, and expectations for purchasing goods or services. These contracts govern supplier relationships in corporate supply chains, government acquisitions, and complex projects. They provide legal protection, establish accountability, and set clear expectations that help organizations manage vendor performance and budgets effectively.
You’ll see procurement contracts in action when companies outsource manufacturing, hire consultants, purchase raw materials, or acquire technology solutions. Government agencies rely on them for everything from office supplies to infrastructure projects, while construction firms use them to engage subcontractors and secure building materials. Procurement contracts are also central to manufacturing, where long-term supplier agreements help stabilize supply chains and protect against price volatility.
The type of contract used often depends on the purchase’s complexity and risk. Simple transactions might use standard purchase orders, while multimillion-dollar projects require detailed agreements with performance metrics, payment schedules, and dispute resolution clauses.
Why are procurement contracts important?
When procurement contracts are executed with precision and foresight, they help cultivate trust and foster long-term partnerships. These agreements are cornerstones that encourage strong collaboration, reliable delivery, and the alignment of shared goals because they:
- Provide legal protection: Spell out each party’s rights and responsibilities in case of disputes or breaches
- Define the scope of work: Document deliverables, timelines, and quality standards so both sides stay aligned
- Mitigate risks: Address payment terms, warranties, indemnification, and liability limits
- Control costs: Set clear pricing structures, payment schedules, and penalties for non-performance
- Ensure compliance: Require adherence to laws, regulations, and industry standards to reduce liability
- Facilitate dispute resolution: Include processes like mediation or arbitration to avoid costly litigation
- Protect sensitive information: Use confidentiality clauses to safeguard intellectual property and data
- Foster trust and transparency: Strengthen collaboration by setting expectations and reducing ambiguity
Procurement contracts set consistent rules for vendors, which encourages fair competition and helps buyers secure the best mix of price and quality.
What should a procurement contract include?
The building blocks of a procurement contract protect your business and set clear expectations for suppliers. These elements form the foundation of effective agreements:
- Identify the parties: Clearly name the buyer and supplier
- Define goods or services: Specify exactly what will be delivered
- Detail pricing and payment terms: Outline structure, schedules, and invoicing procedures
- Set performance metrics: Establish KPIs and standards for delivery
- Specify duration and termination: Include renewal options and exit conditions
- List warranties and guarantees: Document any assurances provided by the supplier
- Protect sensitive information: Add confidentiality and data protection provisions
- Limit liability: Define indemnification obligations and dispute responsibilities
- Clarify governing law: State jurisdiction and conflict resolution methods
- Outline change procedures: Explain how modifications are approved
Most contracts will include all of these components, though additional terms may be added depending on the type of agreement.
Main types of procurement contracts
Selecting the right type of procurement agreement can significantly affect project outcomes, cost management, and risk allocation between parties. Familiarity with the various procurement contract types empowers you to choose structures that align with your business needs and objectives.
Fixed-price contracts
A fixed-price contract sets a predetermined amount the buyer will pay the supplier for the full scope of work, regardless of actual costs. This structure puts most of the financial risk on the supplier, who must deliver within the agreed budget.
Fixed-price contracts work best when project requirements are stable and well-defined. They give buyers budget certainty but limit flexibility if scope changes arise.
For example, if you hired a contractor to renovate your office space, a fixed price contract would outline the work to be done, and the contractor would provide a price for the entire project. This price would be locked in and wouldn't change unless certain key components are included, depending on the form of fixed-price contract you're using.
Pros
- Budget certainty: Know total project cost upfront and plan finances accordingly
- Efficiency incentives: Suppliers keep any cost savings, motivating efficient work
- Capped risk: Buyer’s financial exposure is limited to the fixed price
Cons
- Low flexibility: Changes usually require costly amendments or change orders
- Potential quality trade-offs: Suppliers may cut corners if they underestimated costs
- Higher initial pricing: Vendors often build in contingency buffers to protect margins
Common variations
There are several variations of fixed-price contracts, each designed to balance risk and flexibility in different ways. Here's a breakdown:
| Contract type | How it works | Typical use case | Example |
|---|---|---|---|
| Firm-fixed-price (FFP) | Price remains the same regardless of supplier costs | Stable, well-defined projects with low uncertainty | Contractor agrees to renovate an office for $250k, even if material costs rise |
| Fixed-price-incentive-fee (FPIF) | Buyer pays a fixed cost plus a bonus for meeting or exceeding performance targets | Projects where early completion or high performance should be rewarded | Contractor receives a $10k bonus for finishing renovations ahead of schedule |
| Fixed-price with economic price adjustment (FP-EPA) | Price is set but adjusts based on external factors like inflation or material costs | Long-duration projects exposed to market fluctuations | Base renovation cost is fixed, but cubicle price increases mid-project trigger an adjustment |
Cost-reimbursable contracts
A cost-reimbursable contract reimburses the supplier for actual project costs plus an additional fee or profit margin. These contracts are useful for projects with high uncertainty, where estimating costs upfront is difficult.
They give you flexibility to adapt as the project evolves, but they also require more oversight to track expenses and prevent overruns.
Pros
- Flexibility to adapt: Adjust to changing requirements as work progresses
- Shared risk: Buyer and supplier split the financial risks tied to actual costs
- Innovation incentive: Suppliers can propose creative solutions without fearing losses
- Cost transparency: Detailed expense tracking provides visibility into spending
Cons
- Administrative burden: Requires close monitoring and documentation of costs
- Budget uncertainty: Final project costs aren’t known until completion
- Cost inflation risk: Suppliers may have less incentive to control expenses
- Longer timelines: Less pressure to finish quickly can extend project duration
Common variations of cost-reimbursable contracts
There are several variations of cost-reimbursable contracts, each with its own balance of risk and reward. The table below shows how the main subtypes work, when they’re appropriate, and what they look like in practice.
| Contract type | How it works | Typical use case | Example |
|---|---|---|---|
| Cost-plus-fixed-fee (CPFF) | Supplier is reimbursed for allowable costs plus a fixed fee | Projects with uncertain scope where costs can’t be fully estimated upfront | Renovating an older office building where hidden issues may appear; contractor bills costs plus a set management fee |
| Cost-plus-incentive-fee (CPIF) | Supplier is reimbursed for costs plus a performance-based bonus | Projects where you want to encourage cost control or early completion | Contractor is reimbursed for all costs, with a bonus if they finish the renovation under budget |
| Cost-plus-award-fee (CPAF) | Supplier is reimbursed for costs plus a discretionary award fee based on performance quality | Projects where quality or innovation is hard to measure in advance | Contractor’s fee depends on your satisfaction with workmanship and responsiveness |
| Cost-plus-percentage-of-cost (CPPC) | Supplier is reimbursed for costs plus a percentage of those costs as profit | Projects requiring maximum flexibility, though risk of overspending is higher | Contractor bills costs plus 10%—the more they spend, the more they earn, so oversight is crucial |
Time and materials contracts
A time and materials contract pays the supplier based on actual hours worked and the cost of materials used, rather than a fixed total price. This structure is common when the scope of work is unclear or likely to change as the project unfolds.
For example, if your office renovation requires 160 labor hours at $100 per hour, you’d owe $16,000 plus the cost of materials. The contractor submits invoices with detailed records, so you always see how costs are calculated.
Pros
- Flexibility: Adapt to changing requirements without renegotiating the entire contract
- Cost visibility: Track hours and materials in real time for transparency
- Straightforward pricing: Payments are tied directly to documented workShared risk: Costs reflect actual effort and resources, not padded estimates
Cons
- Budget unpredictability: Total cost isn’t known until the project ends
- Potential inefficiency: Suppliers may have little incentive to work quickly
- Heavy oversight required: Close monitoring of hours and usage is necessary
- Scope creep risk: Projects can expand beyond original plans without a clear cap
Clearly spelling out the contract terms and conditions will help everyone understand what's expected, what their responsibilities are, and keep everyone's goals aligned throughout the project.
Time and materials contracts are the best choice when you need flexibility and fast project kickoff, but they demand active monitoring to keep costs under control.
How to choose the right type of procurement contract
With so many contract structures, it helps to compare them side by side. The table below summarizes the main types of procurement contracts, how they work, and when they’re most useful:
| Contract type | How it works | When to choose |
|---|---|---|
| Firm-fixed-price (FFP) | Supplier delivers for a set price, regardless of costs | Scope is well-defined, costs are predictable, and you need budget certainty |
| Fixed-price-incentive-fee (FPIF) | Supplier receives a fixed price plus bonus for performance | You want stability but also want to reward efficiency or early delivery |
| Fixed-price with economic price adjustment (FP-EPA) | Fixed price with adjustments tied to economic indicators | Long projects where inflation or material costs may shift |
| Cost-plus-fixed-fee (CPFF) | Supplier reimbursed for costs plus a fixed fee | Scope is uncertain, but you want to cap supplier profit at a set fee |
| Cost-plus-incentive-fee (CPIF) | Supplier reimbursed for costs plus bonus for meeting targets | Requirements are unclear but you want to encourage cost control |
| Cost-plus-award-fee (CPAF) | Supplier reimbursed for costs plus discretionary award fee | Quality or innovation matters, but performance is hard to measure |
| Cost-plus-percentage-of-cost (CPPC) | Supplier reimbursed for costs plus a percentage fee | Maximum flexibility is needed, but strong oversight is required |
| Time and materials (T&M) | Buyer pays hourly rates plus material costs | Scope is evolving or unclear, and you need to start quickly |
The right contract type aligns with your project's unique characteristics while protecting your interests and fostering productive supplier relationships.
Common mistakes to avoid
Avoiding these frequent missteps will help you select contracts that actually work for your specific situation and goals:
- Using one-size-fits-all templates: Each project has unique risks and requirements; reusing the same structure can backfire
- Overlooking change management provisions: Without clear processes for scope changes, disputes and delays are almost guaranteed
- Ignoring supplier input: Pushing a contract structure vendors dislike can drive up bids or limit participation
- Choosing based only on familiarity: Relying on what you’ve always used may not match current project needs
- Underestimating administrative burden: Complex contracts demand staff and systems for monitoring. Without them, compliance issues and overruns creep in.
- Misallocating risk: Forcing all risk on suppliers inflates prices, while accepting all risk yourself can blow budgets
- Focusing only on unit price: Low sticker prices can mask higher costs from change orders, admin, and risk exposure
- Leaving out performance incentives: Skipping bonuses or penalties removes motivation for suppliers to excel
Procurement contract examples
These scenarios show how different contract types work in practice and why they’re chosen.
Construction project: Firm-fixed-price contract
A municipal government awarded a $2.8 million firm-fixed-price contract to build a new community center. Because the architectural plans were complete and detailed, the city had a clear scope. The fixed price protected the budget from rising material and labor costs, while the contractor carried the financial risk.
IT services: Time and materials contract
A healthcare provider hired an IT consulting firm under a time and materials contract for system integration. Legacy systems created unexpected compatibility issues, making scope hard to define upfront. Hourly billing with itemized invoices gave transparency while letting the project adapt to emerging needs.
Research project: Cost-plus-fixed-fee contract
A pharmaceutical company partnered with a university lab on early-stage drug development using a cost-plus-fixed-fee contract. The reimbursement model covered all research expenses plus a 12% fee. This gave scientists freedom to pursue promising leads in an uncertain field while providing the company oversight through regular reporting.
Using technology for procurement and contracts management
Digital tools are transforming how organizations manage procurement contracts. According to a 2023 study by World Commerce & Contracting (WCC), 43% of organizations already encourage the use of AI in contract administration, and adoption continues to grow.
Contract management software helps streamline operations, reduce errors, and improve compliance. Here are some ways technology supports procurement teams:
- Automate manual tasks: Use AI and workflow tools to handle data entry, document processing, and approvals, saving time and reducing errors
- Simplify sourcing: E-sourcing and e-procurement platforms speed up bidding and vendor management
- Manage full contract lifecycles: CLM systems track contracts from creation to renewal, ensuring nothing slips through the cracks
- Analyze spend data: Procurement analytics highlight patterns, uncover savings opportunities, and improve supplier performance
Embracing digital procurement tools enables you to work smarter, save resources, build stronger vendor relationships, and improve compliance while staying competitive in an evolving business environment.
How Ramp streamlines your procurement process
Ramp has the potential to transform your procurement and contracts processes, driving efficiency, transparency, and compliance while enabling you to make data-driven decisions and optimize your supply chain management practices.
With Ramp, you can:
- Intake in an instant: Drop a contract into Ramp’s procurement software—its AI will parse the details and automatically complete the request
- Centralize communication: Route approvals, consolidate requests, and share documents in one place to ensure transparency and accountability
- Know your committed spend: Automatically generate purchase orders for clear visibility into upcoming invoices, while flagging discrepancies in units, prices, or totals
- Support risk mitigation: Protect against fraud and errors with automated three-way matching
- Get the best deals: Benchmark quotes against thousands of real, anonymized transactions to negotiate with confidence and secure the best price
- Integrate seamlessly: Connect Ramp with your ERP and finance systems to unify supplier data and eliminate manual work
Ramp's all-in-one procurement solution is an ideal investment if you’re looking to improve efficiency, enhance transparency, and maintain compliance in your procurement and contract processes.
“Ramp is the only vendor that can service all of our employees across the globe in one unified system. They handle multiple currencies seamlessly, integrate with all of our accounting systems, and thanks to their customizable card and policy controls, we're compliant worldwide.” ”
Brandon Zell
Chief Accounting Officer, Notion
“When our teams need something, they usually need it right away. The more time we can save doing all those tedious tasks, the more time we can dedicate to supporting our student-athletes.”
Sarah Harris
Secretary, The University of Tennessee Athletics Foundation, Inc.
“Ramp had everything we were looking for, and even things we weren't looking for. The policy aspects, that's something I never even dreamed of that a purchasing card program could handle.”
Doug Volesky
Director of Finance, City of Mount Vernon
“Switching from Brex to Ramp wasn’t just a platform swap—it was a strategic upgrade that aligned with our mission to be agile, efficient, and financially savvy.”
Lily Liu
CEO, Piñata
“With Ramp, everything lives in one place. You can click into a vendor and see every transaction, invoice, and contract. That didn’t exist in Zip. It’s made approvals much faster because decision-makers aren’t chasing down information—they have it all at their fingertips.”
Ryan Williams
Manager, Contract and Vendor Management, Advisor360°
“The ability to create flexible parameters, such as allowing bookings up to 25% above market rate, has been really good for us. Plus, having all the information within the same platform is really valuable.”
Caroline Hill
Assistant Controller, Sana Benefits
“More vendors are allowing for discounts now, because they’re seeing the quick payment. That started with Ramp—getting everyone paid on time. We’ll get a 1-2% discount for paying early. That doesn’t sound like a lot, but when you’re dealing with hundreds of millions of dollars, it does add up.”
James Hardy
CFO, SAM Construction Group
“We’ve simplified our workflows while improving accuracy, and we are faster in closing with the help of automation. We could not have achieved this without the solutions Ramp brought to the table.”
Kaustubh Khandelwal
VP of Finance, Poshmark
