Procurement Question

Submitted by dalpmo on Thu, 07/15/2010 - 20:00

 Hi guys, quick Procurement question I need help on.

Question: Of the following contract types, which exposes the seller to the highest risk?

A. T&M

B. FFP

C. FP-EPA

D. CPAF

 

I chose FFP, but the answer apparently is D (CPAF).  CPAF is Cost plus award fee.  How can this be the riskiest to the seller when all costs are being reimbursed by the buyer?  (they may not get a fee if they don't perform, but their costs also won't explode?)  

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ChandraR

Thu, 07/15/2010 - 20:15

Buyer & seller enter into FFP contract when scope is well defined and costs are well estimated.  At that time, if the seller executes the project well, he is guaranteed to make a reasonable profit out of that contract


In CPAF, award fee comes with lot of strings attached and the seller may or may not get any profit and the project scope/tasks/costs are not that well defined as in FFP and the uncertainity poses more risks and the seller may end up with services reimbursed for the costs incurred and may not make a penny profit at the end of it.


Chandra

dalpmo

Thu, 07/15/2010 - 21:27

 Thanks Chandra.  That does make sense, but it also contradicts the relative contract risk diagram shown in Page 437 of Rita's PMP Exam Prep (6th edition).  It shows the order from LEAST to MOST seller risk:

CPPC

CPFF

CPAF

T&M

FPEPA

FPIP

FP

 

So which one is correct?   If the project is not well managed in a FP contract, the seller could not only make 0 profit, but also lose money if costs exceed price, whereas in CPAF at least they will get reimbursed for costs, and worst case they make no profit.

 

 

 

admin's picture

admin

Fri, 07/16/2010 - 04:04

Based on the question - FFP is the right choice. Firm fixed price contract will have highest risk for the seller. The question does not mention about any additional overheads. So based on information given FFP is the most riskiest.


Regards


Admin

pkukilla

Thu, 07/15/2010 - 21:41

 Hi,

Please can you tell the source of question. If possible can you post the full question

dalpmo

Thu, 07/15/2010 - 22:19

The full question was posted.  Source is an exam bank.