Types+of+Contracts Self+Study+Guide PMPWITHRAY

TYPES OF CONTRACTS – SELF STUDY GUIDE
Firm Fixed Price (FFP): This is the best contract type when someone knows exactly
what the scope of work is. Also known as a lump sum contract, this contract is the best
way to keep costs low when you can predict the scope. For instance, if an organization
needs services from a vendor, and the scope is clearly defined, the contract makes
sure the organization only pays a specified amount for the required work. Here the
seller must complete the job or supply the product or service within an agreed amount
of time and at a set price.
Fixed Price Incentive Fee (FPIF): Identical to a FFP contract except that the seller
may receive an additional monetary incentive if they perform well – for example,
completing the project ahead of schedule. Under FPIF contracts, a price ceiling is set,
and all costs above the price ceiling are the responsibility of the seller.
Fixed Price with Economic Price Adjustments (FPEPA): This contract type is most
often used when the project is expected to take a long time, to protect the seller from
inflation that may occur over the duration. For instance, this type of contract allows for
a clause that gives the contractor a certain percentage increase after a predetermined
amount of time. Generally, organizations based on the percentage on the consumer
price index or the CPI. Note that this type of contract does not come with any ceiling
of price adjustments. So, if the project is delayed for long & rate of inflation is high
during that time, the buyer suffers a huge loss. For this reason, FPEPA contract poses
a higher cost risk than an FPIF contract for the buyer.
Cost Plus Percentage Cost (CPPC): This type of contract pays all of the seller’s costs,
along with a percentage of the costs as profit. However, with this type of contract, there
is an incentive for sellers to increase their actual costs so they get more profit. Hence,
these type of CR contracts offer the most buyer risk.
Cost Plus Fixed Fee (CPFF): Here the buyer pays the seller for all incurred costs plus
a pre-negotiated fee, which is paid regardless of the seller’s performance. This amount
does not change unless the project scope changes. Agile projects often use these types
of contracts due to the very nature of flexibility that cost reimbursable contracts offer.
It’s better than CPPC contracts since the ‘fixed’ nature of the fee reduces the incentive
for the seller to artificially inflate the cost. Moreover, the buyer here has the control on
how much ‘fixed fee’ should be agreed. Hence it’s better than CPPC.
Cost Plus Incentive Fee (CPIF): Here, the seller is reimbursed for all allowable costs
for performing the contract work and receives a predetermined incentive fee based on
achieving certain performance objectives as set forth in the contract (KPIs may include
over-delivering success criteria in schedule, quality etc). In CPIF contracts, if the final
costs are less or greater than the original estimated costs, then both the buyer and
seller share costs from the departures based upon a pre-negotiated cost-sharing
formula, for example, an 80/20 split over/under target costs based on the actual
performance of the seller. Hence, the risk is somewhat shared between the buyer &
the seller. This is the most optimized type of CR contracts.
Cost Plus Award Fee (CPAF): With this type of CR contract, the incentive fee is based
on how well the buyer believes the seller met the performance objectives. Because
this is subjective, it is not open for change, so the language must be clear. Use
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TYPES OF CONTRACTS – SELF STUDY GUIDE
language that states the contractor will receive an award of up to a certain dollar
amount if they either meet or exceed the job requirements that are outlined in the
terms. Hence, this contract is the ‘most buyer safe’ one in the types of CR contracts.
Time & Material Contract (T&M): The time and materials contract (T&M contract) is
most often used when the seller provides labour and material. The risk is fairly even
between both parties (buyer & seller). This contract is used to hire outside vendors and
experts and lists the experience and qualifications desired (Eg. Hiring an external audit
firm or consultancy firm). Sellers submit an hourly rate for their bid. In this type of
contract, it’s crucial to set a limit or you could find the project over budget. T&M
contracts are often used to hire outside support when a precise statement of work
cannot be quickly prescribed.
Indefinite Delivery Indefinite Quantity (IDIQ) Contracts: This type of contract is
introduced for the first time within PMI Standards in PMBOK 7th edition (not to be found
in PMBOK 6th Edition). Indefinite delivery, indefinite quantity contracts provide for an
indefinite quantity of services for a fixed time. They are used when the buyer can’t
determine, above a specified minimum, the precise quantities of supplies or services
that will be required during the contract period. IDIQs help streamline the contract
process and speed service delivery. A classic example of IDIQ contract is the car
breakdown services coverage provided by companies such as AA & RAC in the United
Kingdom. These companies typically cover you for unlimited breakdown callouts for 1
year for a fixed yearly cost for any issue you may face with your car on the roads of UK
during that timeframe.
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