PMBOK® Guide, 4th Edition
Chapter 12 Procurement Management
In general, companies provide services or products based on the requirements set forth in invitations for competitive bids issued by the client or the results of direct contract negotiations with the client. One of the most important factors in preparing a proposal and estimating the cost and profit of a project is the type of contract expected. The confidence by which a bid is prepared is usually dependent on how much of a risk the contractor will incur through the contract. Certain types of contracts provide relief for the contractor since onerous risks2 exist. The cost must therefore consider how well the contract type covers certain high- and low-risk areas.
Prospective clients are always concerned when, during a competitive bidding process, one bid is much lower than the others. The client may question the validity of the bid and whether the contract can be achieved for the low bid. In cases such as this, the client usually imposes incentive and penalty clauses in the contract for self-protection.
Because of the risk factor, competitors must negotiate not only for the target cost figures but also for the type of contract involved since risk protection is the predominant influential ...