What type of contract provides the buyer with the most risk and seller the least risk?

The correct answer is D. Cost-plus-percentage of cost. In a Cost-Plus-Percentage of Cost (CPPC) contract, the buyer pays all actual project costs PLUS a fee that is a percentage of those costs. This is the riskiest contract for the buyer because the seller has zero incentive to control costs - in fact, the seller benefits from cost…

Program Procurement Management

Question

Options

AFixed-price
BTime and material
CCost-plus-fixed-fee
DCost-plus-percentage of cost

How the community answered

(42 responses)

A
5% (2)
B
2% (1)
C
2% (1)
D
90% (38)

Explanation

In a Cost-Plus-Percentage of Cost (CPPC) contract, the buyer pays all actual project costs PLUS a fee that is a percentage of those costs. This is the riskiest contract for the buyer because the seller has zero incentive to control costs - in fact, the seller benefits from cost overruns since a higher cost means a higher fee. The seller bears virtually no financial risk. By contrast, Fixed-Price contracts shift maximum risk to the seller (who must absorb overruns), making them the safest for buyers. CPPC contracts are widely considered the worst contract type for buyers and are even prohibited in U.S. federal government procurement for this reason.

Topics

#Contract types#Procurement risk#Buyer risk#Seller risk

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