International Project Management Association (IPMA) Practice Exam

What type of contract involves the buyer accepting most of the risk associated with underestimates?

1. Fixed-price contract

2. Cost-reimbursable contract

3. Time and materials contract

4. Unit price contract

The correct answer is: Cost-reimbursable contract

A cost-reimbursable contract is a type of agreement in which the buyer agrees to pay the seller for allowable costs incurred during the performance of the work, plus an additional amount for profit. This structure means that the buyer bears less risk compared to fixed-price contracts, as they are reimbursed for the actual costs, even if these exceed initial estimates. In a cost-reimbursable contract, since the seller is compensated for their actual incurred costs, the financial risk tied to underestimating project expenses primarily lies with the buyer. They are responsible for any unforeseen costs that arise, making this type of contract suitable for projects where the scope may not be well-defined or outcomes unpredictable, effectively placing the financial risk on the buyer. This contrasts sharply with fixed-price contracts where the seller assumes most of the risk because they agree to complete the project for a predetermined price, regardless of the costs incurred. Consequently, the nature of fixed-price contracts is aligned with reducing the buyer's risk, not increasing it. In time and materials contracts, the buyer pays for labor and materials as they are consumed, still placing some risk regarding costs on the buyer but potentially allowing costs to escalate depending on the project execution. Similarly, unit price contracts involve predetermined prices per unit