You are the program manager for your project. You are working with the project managers regarding the procurement processes for their projects. You have ruled out one particular contract type…

The correct answer is C. Cost plus percentage of costs. Cost Plus Percentage of Costs (CPPC) is considered the most dangerous contract type for the buyer because the seller's profit is calculated as a percentage of total costs. This creates a perverse incentive: the more the seller spends, the higher their profit. There is no…

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Question

You are the program manager for your project. You are working with the project managers regarding the procurement processes for their projects. You have ruled out one particular contract type because it is considered too risky for the program. Which one of the following contract types is usually considered to be the most dangerous for the buyer?

Options

ACost plus incentive fee
BTime and materials
CCost plus percentage of costs
DFixed fee

How the community answered

(37 responses)

B
3% (1)
C
95% (35)
D
3% (1)

Explanation

Cost Plus Percentage of Costs (CPPC) is considered the most dangerous contract type for the buyer because the seller's profit is calculated as a percentage of total costs. This creates a perverse incentive: the more the seller spends, the higher their profit. There is no motivation for the seller to control or reduce costs. In contrast, Cost Plus Incentive Fee (CPIF) ties profit to performance targets, Time and Materials (T&M) has some control via labor rates, and Fixed Fee/Fixed Price contracts cap the buyer's exposure. CPPC is actually prohibited in U.S. federal procurement for this reason.

Topics

#Contract types#Procurement risk#Program management#Buyer risk

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