5 Differences Between Project Charter and Contract

project charter

Project Charter Definition, Meaning and Purpose

A few years ago, I got an assignment to setup PMO for a small software services company. After understanding their business and organization structure, I advised them to start creating Project Charter (PC) for every project. I provided a brief overview of PC to the main stakeholders and gave them a Project Charter template to kick-start the process. But, it took me some time to convince them about its utility. They were skeptical about Project Charter purpose and thought that its creation would be a futile exercise.

That was not surprising. Many people do not understand the importance of a PC. They believe that PC does not serve any specific purpose. They claim that it just provides the overall summary of the whole project. They also say that creating PC is just a waste of time, especially if a signed Contract exists. They do not realize Project Charter and Contract serve different purposes.

Let me categorically state that a PC is an extremely important document. It is very different from a Contract. Both are required for different reasons. A PC recognizes & authorizes the project within an Organization whereas a Contract is a legally binding agreement between two different Organizations (the Buyer and the Seller). The PC is issued by the Project Sponsor whereas the Contract is negotiated & signed by the the Buyer and the Seller.

Before we look into the difference between these two documents, let us take a look at some basic definitions.

Basics Definitions

Please note that all the following terms are defined in the context of a Project. These terms might have a different definition(s) for Operations.

Customer

A person, a department or an organization that is the recipient of the end result of a project. A customer could be external or internal to the Performing Organization. Sometimes it is also called the Client.

Sponsor

A person, a department or an organization that arranges and provides funds to the project.

Performing Organization

An organization that is responsible for delivering the end result of a project (to the Customer). Usually the Sponsor is a part of performing organization.

Project Charter

A document issued by the Project Sponsor to the Project Manager that formally authorizes the existence of a project and provides the authority to the Project Manager to use organizational resources for the completing the project.

Contract

A legally binding agreement between the Buyer and the Seller.

Buyer

An organization that pays money to acquire or procure product or services from an external agency (Seller). Sometimes it is also called a procuring organization, a client or a customer.

Seller

An organization that provides services to the Buyer against the consideration of funds. Sometimes it is also called a performing organization, a vendor or a supplier.

PMBOK Guide’s Definitions

Contract

A contract is a mutually binding agreement that obligates the seller to provide the specified product or service or result and obligates the buyer to pay for it.

Project Charter

A document issued by the project initiator or sponsor that formally authorizes the existence of a project and provides the project manager with the authority to apply organizational resources to project activities.

You can also refer to Max Wideman Glossary of PMBOK® Guide to read some other definitions of these terms. Now we are ready to understand the difference between a Contract and a PC.

Difference Between Contract And Project Charter

Contract Project Charter
It is a formal document signed between two independent organizations – the Buyer and the Seller. It is usually prepared internally within the Performing Organization.
It is a mutually agreed document between the Buyer and the Seller. It is issued by the Project Sponsor to the Project Manager. Sponsor gives the commitment to provide funds and resources while PM gives the commitment to complete the project.
It is a legally binding agreement. Usually it is not a legally binding document.
It can be signed either for a project or for operational work. It is prepared for a project only.
Projects that are done internally without any third party direction, support, or governance do not need a contract. As a good practice, a charter should always be prepared.

Conclusion

A PC is essential to formally start a project. It authorizes the PM to use the organizational resources for completing the project. It also commits the Sponsor and other stakeholders to provide support to the project team.

I hope you found this article useful and were able to understand the topic. Please leave a comment or ask a question. I would love to interact with you.

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Praveen Malik, PMP

​Praveen Malik ​is a certified Project Management Professional (PMP®) with a rich 23+ years of experience. He is a leading Project Management Instructor, Coach and ​Advisor. He ​has successfully trained thousands of aspirants for the PM certification exams.

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Fares Reply

Very useful to distinguish, much appreciate your contribution Mr Malek.

    Praveen Malik, PMP Reply

    Thanks Fares

Hameed Reply

please would you clarify this point for me, which comes first, the project charter or project contract as according to PMBOK and Rita book the agreements including contract are included in project charter process inputs, So according to this we can say the contract as they said proceed the charter, How come and there is a general say saying there is no project before project charter and It’s the document which authorize the existance of the project. If the contract signed off before the creating the project charter It’s legally existed.

    Praveen Malik, PMP Reply

    Hi Hameed.

    For external projects, contract would come first. For internal projects, there would be no contract. Try to understand the purpose of both documents – contract does not authorize the PM, a charter does.

    You can also read
    Project Sponsor vs Customer – Role & Definition http://www.pmbypm.com/project-sponsor-role-definition-customer/

    Good luck.

Bill Reply

This really doesn’t address why the charter is necessary for an external customer project or what value it provides.

In today’s environment, if I have a contract, I have a project. Authorization comes with the assignment of the PM which is documented in an electronic system or email. No further formal documentation is needed.

Without adding value, the charter becomes a cost with no real benefit.

The contract is a direct feed into the planning processes (e.g. collect requirements).

The charter seems to me to be antiquated except for initiation and high-level project definition for internally funded projects.

    Praveen Malik, PMP Reply

    Hi Bill, Thanks for your comment. Please note that PC is authorization for project as well as authorization for the PM to use organizational resources to complete the project.
    Many organizations get bogged down by the long & extremely detailed (may I add worthless) 50 page templates of PC and start thinking PC is a useless document. The purpose of PC is not defined by the template. The purpose of PC can be be met by a simple email (as you mentioned). Only thing is that email should be preserved as a proper project record.
    Try to answer this Q – If an organization has 100 PMs and it has jut got a contract to do a new project, who among the 100 PMs will manage the project?
    The contract does not serve many purposes. It cannot tell many things like:
    1. Who is the PM?
    2. Authorization of the PM to use organizational resources.
    3. What is the project budget (not the revenue mentioned in the contract)?
    BR.

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