International Project Management Association (IPMA) Practice Exam

Which contract type has the greatest cost risk for the buyer?

1. Cost-Plus-Fixed-Fee (CPFF)

2. Cost-Plus-Incentive-Fee (CPIF)

3. Firm-Fixed-Price (FFP)

4. Fixed-Price-Incentive-Fee (FPIF)

The correct answer is: Cost-Plus-Fixed-Fee (CPFF)

The Cost-Plus-Fixed-Fee (CPFF) contract type places the greatest cost risk on the buyer. In this arrangement, the seller is reimbursed for allowable costs incurred during the project, plus a fixed fee that does not vary with the costs. This means that, regardless of how much the costs escalate, the buyer is responsible for paying the actual costs incurred by the seller. As a result, if the project faces unexpected complications or requires more resources than initially anticipated, these additional costs fall on the buyer, leading to significant financial risk. In contrast, other contract types have mechanisms to limit the buyer's exposure to cost increases. For instance, Cost-Plus-Incentive-Fee (CPIF) contracts share some risk between the buyer and seller, as the seller is incentivized to control costs to increase their profit. Firm-Fixed-Price (FFP) contracts set a fixed price for the entire project, meaning that the seller absorbs any cost overruns, thereby substantially reducing the buyer’s risk. Fixed-Price-Incentive-Fee (FPIF) contracts also share risk through incentives, as they allow for some adjustments in price based on performance while still providing the seller an incentive to keep costs down. Ultimately, while various