TOPIC: Free CAPM® Exam Sample Question

In which of the following contract types is a fee paid to the seller based on the satisfaction of the buyer?

A. Fixed-price incentive fee contract
B. Cost plus incentive fee contract
C. Time and material contract
D. Cost plus award fee contract

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HINT: Remember that incentive fee is often paid based on predefined criteria that are set forth in the contract while time and material contract does not mention any fee.

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Answer and Explanation:
The correct answer is D.

In the fixed-price incentive fee contract and cost plus incentive fee contract, an incentive fee is based upon pre-defined metrics in the contract, while the time and material contract generally does not include any such fee. The fee involved in the cost plus award fee contract is paid to the seller based on subjective criteria as determined by the buyer and is generally not subject to appeals.

Details for each option:

A. Fixed-price incentive fee contract
Incorrect. In a fixed-price incentive fee (FPIF) contract, the seller has the opportunity to receive incentive fee for achieving the agreed metrics; the fee is not based on the objective satisfaction of the buyer.

B. Cost plus incentive fee contract
Incorrect. A cost plus incentive fee (CPIF) contract provides the seller opportunities to receive money based on achieving a predefined performance objective.

C. Time and material contract
Incorrect. The time and material (T&M) contract is a contract type wherein the buyer pays the seller an amount based on the time and material used to complete the work.

D. Cost plus award fee contract
Correct. In cost plus award fee (CPAF) contract, the amount of fee is determined by subjective performance criteria or the satisfaction of the buyer and is not subject to appeals.

Reference: A Guide to the Project Management Body of Knowledge, (PMBOK^® Guide) – Sixth Edition, Project Management Institute Inc., 2017, Page(s) 471-472