Which factors influence the selection of contract type?

The selection of contract type is primarily influenced by the nature of the work, risks involved, and the uncertainty of costs associated with the project. When determining the most suitable contract type, it is essential to consider how well the contract can allocate risk between the parties involved.

For instance, if the work involves high levels of uncertainty and risk—such as research and development or projects with undefined scope—then contracts that are more flexible or provide for cost reimbursement may be more appropriate. In contrast, for projects with well-defined requirements and lower risk, fixed-price contracts might be favored because they provide a clear cost structure and encourage efficiency.

Understanding the characteristics of the work ensures that the selected contract type aligns with the project's specific needs and the overall risk management strategy. This allows organizations to better control costs, enhance performance, and maintain accountability, making it the most critical factor in contract type selection.