International Project Management Association (IPMA) Practice Exam

In a fixed-price contract, how is the seller's proposed price primarily determined?

1. Essentially the same as their cost estimate

2. Equal to their estimated direct costs plus a percentage allowance for profit

3. A business decision that uses their cost estimate as a key input

4. Approximately twice their cost estimate to allow for corporate overhead

The correct answer is: A business decision that uses their cost estimate as a key input

In a fixed-price contract, the seller's proposed price is fundamentally a business decision that incorporates various factors, where the cost estimate plays a crucial role. This approach emphasizes that while sellers do calculate their costs, the final proposed price is not solely dictated by these costs. Instead, it reflects a strategic evaluation that takes into account market conditions, competitive pricing, perceived value, risk factors, and profit margins. By considering these elements, the seller can arrive at a price that is both competitive in the marketplace and financially viable for their business. While the other options touch on aspects of how pricing can be formulated—such as being based on cost estimates or profit percentages—they fail to capture the broader strategic nature of pricing in a competitive environment that fixed-price contracts necessitate. Therefore, the focus on a business decision grounded in cost estimates aligns with the complex considerations involved in pricing for fixed-price contracts.