PMP lesson · Procurement · Procurement · lesson 1 of 2 · about 8 minutes

Contract types and who carries the risk

Predictive · agile contracts (fixed budget, variable scope) in hybridFree preview

Goal: After this lesson you can choose a contract type from the level of scope certainty, say who carries the cost risk, and calculate an incentive-fee contract.

1The situation

Two purchases, two contracts

The robot cell needs two outside services. First, 12 standard guard panels: the drawings are complete and nothing will change. Second, a new AI vision system that nobody has built for this part before: nobody knows exactly how much work it will take.

Should both suppliers get the same kind of contract? No. A fixed price for the vision system would make the supplier add a huge safety margin, or refuse the job. A cost-based contract for the guard panels would give the supplier no reason to be efficient.

The contract type decides who pays when costs change.

2The basic rule

Contract types sit on a scale. On one end the seller carries the cost risk, on the other the buyer does.

Fixed price

Seller's risk

Seller gets an agreed price. If costs rise, the seller pays.

Use when scope is clear

Cost-reimbursable

Buyer's risk

Buyer pays actual costs plus a fee. If costs rise, the buyer pays.

Use when scope is uncertain

T&M

Shared / in between

Paid per hour plus materials. Flexible but open-ended.

Small, urgent or unclear work; add a cap

Clear scope → fixed price. Uncertain scope → cost-reimbursable. Small, urgent or staff support → T&M with a not-to-exceed cap.

3See it in one picture

Left: the seller carries the risk of cost increases. Right: the buyer does.

4How it looks on the exam

Exam-style question 1. A buyer needs a supplier to develop a novel inspection algorithm. The scope is highly uncertain, and the buyer wants to motivate the supplier to control costs. Which contract type is MOST appropriate?

A. Firm fixed price

B. Cost plus incentive fee

C. Cost plus percentage of cost

D. Fixed price with economic price adjustment

Show the answer and the decode

Answer: B.

In simple English

Uncertain scope, and the buyer wants cost control.

What is the question really asking?

The right contract type.

Key words / trigger

“highly uncertain … motivate … to control costs”

PMP logic

Uncertain scope → cost-reimbursable. The incentive (share ratio) motivates savings → CPIF.

Why the wrong answer looks attractive

Firm fixed price seems safest for the buyer, but with uncertain scope it creates huge margins or claims.

5Remember this

Your memory card

Clear scope → fixed price (seller's risk) · uncertain → cost-reimbursable (buyer's risk)
T&M for small, urgent or support work, with a not-to-exceed cap
Incentive fee = target fee ± seller share of the saving or overrun (ratio = buyer/seller)
Agile: fix time and budget, keep scope variable

The full lesson in the PMCLEAR app also has:

the rest of the lesson (Incentive contracts: the share ratio, Agile contracts)
a worked example
the common traps (wrong vs right)
2 exam-style questions with the decode
a 3-question quick check
an interactive calculator

Open the full lesson → Create a free account

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