Lehmann question clarification.

Following question from Lehmann sample test states #4 as the answer. #1 is what i thought as the answer. Can someone explain how? thanks!!

A prime contractor in a customer project under CPFF contract has run into unexpected technical problems. Fixing them will require a lot of additional work to be done.

The company made a decision to book more staff and equipment from their subcontractors in order to adhere to the agreed timeline. The customer agreed to this decision.

What will most likely happen?

  1. The contractor‘s indirect costs will increase and the customer‘s payment for them will increase, too.
  2. The contractor‘s indirect costs will increase but the customer‘s payment for them will not increase.
  3. The contractor‘s indirect costs will not increase but the customer‘s payment for them will.
  4. Neither the contractor's indirect costs nor the customer‘s payment for them will increase.
admin's picture

Very good question Chan. The catch here is the word "Indirect cost"

 Indirect costs are costs that are not directly accountable to a cost object (such as a particular function or product). Indirect costs may be either fixed or variable. Indirect costs include taxes, administration, personnel and security costs, and are also known as overhead.

 Here the increase is in the direct cost as the contractor has to put in more effort, hence the option 4 is the correct one here. Since indirect cost did not increase client will not have to pay for it.

Thank you.

Hi admin,

I'm confused, in PMBOK 4th edtion, it only states that, in CPFF contract, buyer will pay seller an allowable fee, but it does not state about direct/indirect fee.

How can we know that client will not pay for indirect fee in this case?

Kindly advise. Thanks

admin's picture

Do you mean direct / indirect costs or fees ?.  When you do cost estimate you include both direct and indirect costs and come up with the final cost estimate. So both direct and indirect cost would be covered plus there is a fixed agreed upon fee which the client will pay.

Sorry, i mean the cost. Actually, I don't understand your explanation in this sentence "Since indirect cost did not increase client will not have to pay for it."

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