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

The correct answer is B. Cost plus percentage of costs. Cost Plus Percentage of Costs (CPPC) is the most dangerous contract type for the buyer because it gives the seller a direct financial incentive to increase costs. The seller's fee is calculated as a percentage of actual costs - the higher the costs, the larger the fee. This elimi

Program Life Cycle Management

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
BCost plus percentage of costs
CTime and materials
DFixed fee

How the community answered

(17 responses)

A
6% (1)
B
88% (15)
C
6% (1)

Explanation

Cost Plus Percentage of Costs (CPPC) is the most dangerous contract type for the buyer because it gives the seller a direct financial incentive to increase costs. The seller's fee is calculated as a percentage of actual costs - the higher the costs, the larger the fee. This eliminates any motivation for the seller to control spending. By contrast, Cost Plus Incentive Fee (CPIF) rewards the seller for staying under budget. Time and Materials exposes the buyer to cost escalation but is more transparent. Fixed Price (Firm Fixed Fee) is the safest for the buyer because the seller bears all cost risk. CPPC is so risky that it is generally prohibited in U.S. federal government contracting.

Topics

#Procurement Management#Contract Types#Risk Management#Buyer Risk

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