In which of the following contract types is a price ceiling set and any additional costs above the price ceiling becomes the responsibility of the performing organization?

Question

Options

• AFirm-Fixed-Price Contracts (FFP)
• BFixed-Price-Incentive-Fee Contracts (FPIF)
• CCost-Reimbursable Contracts
• DTime and Materials Contracts (T&M)

• A
  4% (2)
• B
  70% (35)
• C
  18% (9)
• D
  8% (4)

Explanation

B is correct because Fixed-Price-Incentive-Fee (FPIF) contracts explicitly define a price ceiling (also called the "ceiling price"), and any costs incurred above that ceiling become the sole responsibility of the performing organization (seller). This is tied to the concept of the Point of Total Assumption (PTA) - the cost point beyond which the seller bears 100% of overruns.

Why the distractors are wrong:

• A (FFP): There is no separate "ceiling" concept - the entire price is fixed from the start. The seller absorbs all overruns, but it's one fixed number, not a ceiling above a shared range.
• C (Cost-Reimbursable): The buyer pays all allowable costs plus a fee, so the buyer bears the cost risk - no ceiling shifts responsibility to the seller.
• D (T&M): A hybrid contract that pays for labor at fixed rates and materials at cost, but has no price ceiling mechanism.

Memory tip: Think of FPIF as having a "fuse" - costs are shared between buyer and seller up to a point, but once you hit the ceiling (the fuse blows), the seller absorbs everything. The word "incentive" is the clue: the seller is incentivized not to exceed the ceiling price because they own every dollar above it.

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