Q .Which of the following Contracts has the MOST risk for Buyer

Q. Which of the following Contracts has the MOST risk for Buyer

a. Cost Plus Fixed Fee (CPFF)
b. Time and Materia (T&M)
c. Cost Plus Award Fee (CPAF)
d. Fixed Price

Thoughts Please ?

 A. Cost plus fixed fee contract has the highest risk for the buyer, because this provides a payment to the seller of seller of actual costs plus a fixed fee which is determined in the contract. So, the seller doesn't have any incentive or award even if he meets certain deadlines or not.

 IMO

b should be answer -- refer older discussion --

http://www.pmzilla.com/disagreement-model-answers-questions-and-model-an...

I also see this question a complicated , I dont think exam asks such disputed category of questions.

 Thanks for the link, as i do had same confusions while answering Head First Test.

 Based on the options listed, I'd pick time and material

 But pros everywhere say it is CPFF as per PMBOK, although not directly mentioned but derived.

Can you specify how /in what words it is derived?


 See T&M contract is equal as cppc how?


in T&M seller add his/her profit (fee) wrt unit amount of material /effort/work, it is nothing but cppc. Whereas in cpff , he can increase amount of commodites and thus respective cost but he could not gain profit at percent increase of cost. it is fixed. Also seller will not icrease cost (investment) for the same profit.


see example


cppc ---- a work estimated cost 1000, @20% of cost


suppose it becomes 1500 then payment will be 1500+300 in place of 1000+200, so here buyer is paying 1800.


in T&M  ----- seller and buyer agree on rate inclusive of fee over cost so work rate per package say 1000+200 =1200 ,  now work goes to 1.5 package, (unit)  then buyer has to pay 1200 *1.5 = 1800 


now cpff  - work cost estimated 1000 and fee 20% = 200 fixed , now cost goes to 1500 but seller will receive = 1500+200 = 1700.  Sencond thing here seller will not be interested to increase the amount of work /cost, because his profit percent will be less in other words B/C ratio.


now listen what pmbok says --  T&M is hybrid because you can fix a limit (cap), a condition.


but in cpff - cap is already here of fix fee always.


so the order of risk of more payment from buyer to seller  IMO will be


CPPC > T&M > CPAF > CPIF=FPIF >CPFF >FF ( I will LATER discuss why CPIF = FPIF)


see what pmbok says :


 T&M contracts can increase in contract value as if they were cost-reimbursable contracts. Many organizations require not-to-exceed values and time limits placed in all T&M contracts to prevent unlimited cost growth. Conversely, T&M contracts can also resemble fixed unit price arrangements when certain parameters are specified in the contract. Unit labor or material rates can be preset by the buyer and seller; including seller profit, when both parties agree on the values for specific resource categories, such as senior engineers at specified rates per hour, or categories of materials at specified rates per unit.

Hi

 

helo whats the right answer? I would choose CPFF as per PMBOk . PLease give more info


 

As per the various books and PMBOK, the correct answer is - A. Cost Plus Fixed Fee (CPFF) 

A - Cost Plus Fixed Fee is the correct Answer. I am not supposed to answer this, but due to some confusion caused by some replies with due respect.

Please be aware and understand these points:

1. PMP Exam is plainly based on PMBOK, which means 'whatever PMBOK says, that is correct and unquestionnable, otherwise you question and you fail.

2. We all know that PMBOK says CPFF to be that type of contract that brings more risk of cost overruns to the 'buyer' -hence without any further argument, the right answer to the question must be 'A' and not 'b' - Time & Materials

Now, is there something confusing? Ok, i understand since T&M also brings risk to the buyer. However, the question is about the 'most'.

Let us see the difference of the two contract types in aspect of how much the buyer will reimburse to the seller as cost of overruns.

1. CPFF - the buyer will reimburse 'ALL THE COST' for the project PLUS A FIXED FEE, whereas-

2. T&M - the buyer will reimburse for 'ALL TIME AND MATERIALS' applied to the project.

What is the difference then? in CPFF - all the COST, this does not only include time and materials, but other costs that may have been applied by the seller PLUS fixed fee.

Conclusion therefore is - should scenarios be worst, the buyer has to reimburse the most in CPFF than T&M, meaning CPFF bears the most risk to the buyer.  See further explanation.

pmcoe's picture

Well, that sounds all logic and right ... unfortnatly, it isn't.
There is nothing said in the PMBoK about who of the parties bears the most risk in which contract type. At least i found none and i searched several times by now. Otherwise please mention the pg. reference in PMBoK where this is written.
And the comparison between CPFF and T&M refers on who has to pay most when. But the question isn't about this at all.
While in a CPFF the byer know at least roughly how much he has to pay in the end and he has some options to control the contract and avoid unexpected cost overruns, this is not the case with a T&M contract.
T&M's are mostly done when there is less or no knowledge about the specific work what has to be done. Therfore the buyer does not know how much work will it be and how long will the contract run and so there is a high risk of cost overruns. Additionally cause every hour will be paid the project time has low motivation to speed up with the project work.
And while the question is about, which contract type bears MOST RISK (and risk comes out of uncertainty and less knowledge) T&M is here the right answer.

The answer is a) and the exam will ask exactly questions like this. I had about 5 of those on my exam.

It is always based on the PMBOK. Find that graph and look where the CR contracts are concerning the buyers risk.

pmcoe's picture

@cssk; you wrote:
" ...It is always based on the PMBOK. Find that graph and look where the CR contracts are concerning the buyers risk ..."

Well, there is no such graph in the PMBoK and there is nothing written about who will bear the most risk in which type of contract.
So, what are your references?

I really would like to understand and clarify this (this question was also discussed in other boards and even the reputated experts are not committed about this).

As long as you can't provide any references i will believe that T&M is the right answer.
Thx for your effort.

Ans is A. Risk is high for the Buyer while low for the Seller in all CP Type of Contracts.
Cost Plus Fixed Fee (CPFF)
Buyer does not know how much payment will be made to the Seller. Buyer has unlimited liability in a pure CP Type of Contracts. Hence Buyer has very high Cost Uncertainty.The Buyer will reimburse all the costs to the Seller in pure CP Type of Contracts. In addition the Buyer will also give agreed Fees to the Seller. The Seller will always make profit in a pure CP Type of Contracts. Seller has low Profit Uncertainty.
Time & Material (T&M)
T&M is middling Type of Contract. It is hybrid of FP and CP. T&M Type of Contracts are based on a Fixed Rate. This Fixed rate is applicable for both the Buyer and the Seller. The Buyer and the Seller share the uncertainty in T&M Type of Contracts.Buyer does not know for how long will the Contract run or how much material/resources will be required to complete the Contract. The Buyer’s cost might escalate due to these unknowns. This leads to some Cost Uncertainty for the Buyer.
On the other hand, the Seller does not know the Cost of labor or material. The Cost of labor or material for the Seller may increase over the period of Contract. This might decrease the profit margin of the Seller. The Seller may even lose money if the Costs go up substantially.

pmcoe's picture

Hi Sandeep,

Thx for your response.
Could you please refer to te source of this explanation?
That would be great.

The risk is distributed between the buyer and seller. The buyer accepts greater risk when using a 'cost plus something'-type contract. This eliminates answer D fixed price as that type indicates the risk is greater for the seller. Answer B, time and material, indicates that while there is risk to the buyer, there is also control by the buyer.

So let's look at answers A and C. C, CPAF, gives full control to the buyer about the fee to be paid though it doesn't control the costs well. A, CPFF, controls the fee; however again it doesn't control the costs as well. So of these two, cost plus fixed fee is a little riskier to the buyer than cost-plus award fee. You will find is covered in the chapter on procurement management in the PMBOK.

The CPFF is the highest risk here as the CPAF contract is only paying out the higher percentage of the fee if they "Like the Quality" but the CPFF pays out if he meets the minimal requirements.