TOPIC: Where bears the buyer the MOST risk?

Hello Folks,

actually there is an intensive discussion about a sample question on several lovcations over the net and i am interested to hear your thoughts about it.

The question goes like this:

Q. Which of the following Contracts has the MOST risk for Buyer?

a. Cost Plus Fixed Fee (CPFF)
b. Time and Materia (T&M)
c. Cost Plus Award Fee (CPAF)
d. Fixed Price

What is the right answer? Please with explanation and references! Hint: Rita's and Head First stated diference solutions therefore. And further more the PrepCast stated another difference answer ... i am confused?!

Thx in advance for your contributions!

Hello Markus,
My contribution...I would say item a. Cost Plus Fixed Fee (CPFF) presents the most risk for the buyer. There is less incentive for the seller to keep control of costs than with a fixed-price contract and the buyer would need to provide resources to oversee the costs to make sure they are reasonable. In the case of the Cost Plus Award Fee (CPAF), a board is generally assigned to review the quality of the work done and bases the award on those findings. According to PMBOK 5th edition bottom of page 344, “In many cases, use of a cost-plus contract may transfer the cost risk to the buyer, while a fixed- price contract may transfer risk to the seller.” Hope this helps.

Hi Dawn,

thx for contribution.
I totally agree about the comparison between FP and Cost plus contracts.
But what is about T&M contracts?
Like we know do risks resulting out of uncertainty.
And from my point of view is the uncertainty about the overall costs in the end for a project highest with a T&M contract.

What do you guys think?

Fixed Price is obviously the least risk to the buyer.
I also agree with Dawn's reasoning comparing CPFF vs. CPAF.
Based on the information in the question (there really isn't any to describe a situation), I believe that Time and Materials (T&M) presents the largest opportunity for open ended costs and risks to the Buyer.

While there are certainly situations where any of CPFF, CPAF could end up being more expensive than T&M, the question only provides enough information to consider ONLY the RISK to cost. As such we need to consider that each of CPFF and CPAF both contain either an incentive or fixed fee portion which offsets risk to the buyer to a degree. Time and Materials is the only option that is completely open ended, and therefore presents the largest RISK.

I couldn't have desrcibed it better!

Thx a lot Jeremy.

Usually Cost Reimbursable contracts are riskier to buyer.
But in this question, the context is not clear, i think.
T&M can be a high risk for buyer also if contract does not include a "total not-to-exceed" (NTE).
Comeback the options listed up in the question, I don't see NTE mentioned with T&M.
So I think option B would be also reasonable.

What about FPEPA (Economic price adjustment Type).. So, here too the buyers have a large risk. if the project deals with lot of EEFs.. like market values etc. So, if the choice has FPEPA as a choice.. now what.. is CPPC still riskier.