Procurement and Contract Types
3
Contract Families
Fixed Price, Cost Reimbursable, Time and Materials
FFP
Seller Risk Max
Firm fixed price puts all cost risk on the seller
CPAF
Buyer Risk Max
Cost plus award fee puts most risk on the buyer
the further right, the more risk the buyer carries
Contract Risk Spectrum
seller bears risk
buyer bears risk
FFP
Firm Fixed Price
FPIF
Fixed Price + Incentive
FP-EPA
FP + Economic Adj.
T&M
Time & Materials
CPIF
Cost + Incentive
CPFF
Cost + Fixed Fee
CPAF
Cost + Award Fee
clear scope
fix the price · seller swallows overruns
unclear scope
time & materials · both share risk
undefined scope
cost reimbursable · buyer pays variance
Exam Traps
FFP protects the buyer, CPAF protects the seller
Firm fixed price transfers cost risk entirely to the seller. Cost plus award fee reimburses the seller and rewards them with a subjective bonus. Know who bears the risk for every contract type.
T&M is for undefined scope
When the scope cannot be fixed upfront, time and materials is appropriate. It is a hybrid with shared risk.
Cost reimbursable has ceilings
Cost reimbursable does not mean blank check. There are cost targets, ceilings, and incentive structures. The exam tests this nuance.
CPAF fee is subjective, CPIF is objective
Award fee depends on buyer satisfaction. Incentive fee is based on objective cost or schedule targets. The exam swaps these in traps.
Match contract to scope clarity
Clear scope → fixed price. Unclear scope → cost reimbursable. In between → T&M.
Fixed price is not always best
If the scope is vague, a fixed-price contract forces the seller to pad or cut corners. Wrong tool for the job.
You and the contractor agree on a fixed $40,000 for the remodel. If materials jump, the contractor eats it. Seller bears the cost risk.
The contractor bills you for materials plus their hourly rate. If prices rise, you pay. Buyer bears the risk.
Hourly rate for labor, cost plus markup on materials. You both share risk.
Cost plus a bonus if you are thrilled with the work. The bonus is subjective. You hold the quality judgment.
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