As a PMP you will be expected to have knowledge of different contract types and what

contracts should be used when. Remember PMPs are expected to maintain relationships
with ALL stakeholders, and a vendor (or seller) is a VERY important stakeholder.

You will likely have support from a Procurement Office within your organization, but if
not, you need to understand that contracts are your responsibility as a PMP. As you Plan
Procurement Management (hopefully you caught the reference to the PMP Process Chart)
you, with the support of your project team, will decide what contract type you should
use for your project.
In this post let’s discuss the types of contracts you should know for the PMP exam and
an example of when to use them.

PMP Contract Types

Fixed-Price Contracts
A Fixed-Price contract is a contract that has a predetermined-set price for a specific
product or service. This means that if the vendor completes the product or service as
defined in the contract, they will receive the agreed to price.

Scope for the service or product cannot change without a price change; however, fixed-
price contracts can build in some flexibility for payment such as incentives or
adjustments based on environmental factors.

Fixed-Price contracts are good to use for products or services that a seller creates
repeatedly. A fixed-price contract should only be used when the seller is confident in the
process it takes to complete a product or service, because fixed-price contracts put the
most risk on the seller.

Firm Fixed Price (FFP)

A FFP is the most common type of fixed-price contract. In an FFP contract that scope of
the product or service should be exact. The price will be set on the buyer’s request.

A FFP should be used for a product or service that is a repeated process. As an example,
a car manufacturer would enter into a FFP contract for a standard model car. The
manufacturer knows what it takes to complete the car and the associated cost. The
manufacturer is confident that they will be able to deliver on the predetermined firm-
fixed price.

Fixed Price Incentive Fee (FPIF)

A FPIF is similar to the FFP; however, a FPIF also offers an incentive if the product or
service exceeds an expectation. For example, a buyer might give the seller an incentive
fee if the seller completes the product early.

Using the example above of our car manufacturer, a buyer might provide an incentive
when the manufacturer delivers the car early. This early delivery allows the buyer an
additional week of use, which puts the entire project ahead of schedule. Thus, the buyer
wants to show appreciation with an incentive.

Fixed Price with Economic Price Adjustment (FP-EPA)

A FP-EPA is like a FFP, with one exception, if the product or service is largely reliant on
an input with a price that is governed by supply and demand, a seller could increase the
price of the overall contract accordingly.

Okay, what does that mean? Let’s use our car example again, but add a different piece
to the discussion, if the buyer wanted a standard model car with a supply of gas for one
year, the seller could adjust the overall price of the contract based on the cost of
petroleum.

Since the seller has no control over how much gas will cost when the car is ready for
delivery, the overall contract cost might increase if the gas price increases. However, the
only portion of the contract that would increase is the portion tied to petroleum costs.

Cost-reimbursement Contracts
Cost-reimbursement contracts are different from fixed-price contracts as the buyer takes
on more risk. In all the cost-reimbursement contracts the seller can charge for all
legitimate expenses related to completing the product or service, as well as charge a
fixed fee as profit for their work.

In a cost-reimbursement contract the seller has more flexibility to complete the scope of
work. However, the buyer runs risk if the scope costs more than anticipated.

You would use a cost-reimbursement contract when the seller is not confident in the
process it takes to complete a product or service. For example, completing the code for a
new app. Although many apps have been created before, there is not an absolute
template on how long the it takes to create the correct code.

Cost Plus Fixed Fee (CPFF)

In a CPFF the seller can charge the buyer for all legitimate expenses related to
completing the product or service. However, the seller can also charge a fixed-fee that is
a percentage of the overall contract price. Remember this fixed-fee is set at the
beginning of the contract, and even if legitimate expenses increase this fixed-fee
remains the same.

Using our example above, you could use this type of contract to secure a seller to build
an app. The seller would provide all legitimate cost, like expense for a coder’s time, in
the initial estimate. Based on this initial estimate the seller would include a fixed-fee that
is a percentage of the legitimate costs they calculated. At the end of this contract, as the
buyer, you would be responsible for all legitimate costs incurred and the fixed-fee.

Cost Plus Incentive Fee (CPIF)

In a CPIF both the seller and the buyer assume risk. Let me explain. In A CPIF contract
the buyer is responsible for legitimate costs of the project work, but if the seller does not
accurately project estimates, the seller and the buyer split the responsibility of costs that
are greater or less than the estimate.

Additionally, if the seller completes the work in a manner that exceeds an expectation
write in the contract, the buyer will provide an incentive fee.

If we use our example of creating an app again, we would use the CPIF contract type if
this was the first time ever that an app of it’s kind was developed. Since there are no
benchmarks there are risks on both the side of the seller and the buyer. However, if the
seller completes the app a month ahead of schedule the buyer will want to reward the
effort.

As I noted the CPIF puts risk on both sides, but it also provide motivation for the seller
to complete quality work that exceeds expectations.

Cost Plus Award Fee (CPAF)

A CPAF is very similar to the CPIF we just discussed. However, the main difference here
is the award fee is at the sole discretion of the buyer. The buyer would set
predetermined expectations for the seller in the contract. If the seller meets those items,
to the satisfaction of the buyer, than an award is provided.
Let’s use our app example again. If you entered into this agreement with a CPAF
contract, as the buyer, you would set checkpoints within the project work to check on
quality, percent complete, etc. to determine if award fees were worthwhile. It is
important to remember that these award fees are solely at your discretion as the buyer.

Time and Material Contracts (T&M)

T&M can be more like cost-reimbursable when the buyer agrees to pay for all legitimate
expenses.

However, T&M can be more like fixed-price when the buyer sets firm parameters on
expenses upfront. For example, this product or service can not cost more than 100,000
to complete.

A T&M is likely the easiest to remember as the buyer will pay the seller for all time and
material it takes to complete the product or service, within reason.

Let’s go all the way back to our car example. As a buyer let’s say you want a seller to
make a new kind of energy efficient car, unlike any other on the market. You cannot
easily define scope as you are not sure what type of energy will be used, etc. As the
buyer you could enter into a T&M contract that states you will pay for all time and
material up to 5 million dollars. If the project exceeds the limit it will not be reimbursed,
unless a new agreement is made.