TOPIC: Contract types: FPIF vs FPAF: subtle difference, need help understanding

Hello,

I was just studying contract types and I find the FPIF and FPAF types confusing.
I have the following questions I was ondering someone knowledgeable could answer:

They look the same to me. A fixed fee + a fee depending on performance. What's the difference ?
Can these contracts work both ways ? I.e. incentive/award for exceeding some set criterion and a penalty for not performing up to that criterion ?

Thanks,
Tom

Hi Tom,
This is a good question, however, going into too much detail may sidetrack you a little from what is necessary on the actual exam. Having a good knowledge of contract types, especially the difference between fixed price and cost plus contracts, is critical. Understanding where the risk lies in all contract types is also very important.
Also, the PMBOK guide only discusses FPIF, and not FPAF. That does not mean it won't be referenced on the exam, but I don't think it would be likely that you would need to distinguish between the two.
All that being said, and without going into too many specifics, incentives on a FP contract may have a negative effect on the "normal profit" of the seller. Awards are usually only positive. In other words, I may want to use an incentive to motivate the seller to complete within a scheduled time and that's the only way they can get the profit they really desire, even though the buyer is only committed to the fixed price (low risk on buyer, but a slightly minimized risk to the seller, if they perform exceptionally well). The incentive is usually expressed in a profit sharing split (80/20, as used in the PMBOK). An award is just icing on the cake if they exceed the fixed price expectations and is much more rare (in my experience).
Hope that helps,
Eric Bartlett, PMP
Community Moderator

Thanks for such a nice explanation.

I was wondering , in which type FPIF OR FPAF buyer has the more risk?

Thanks.

Incentive fee is something measurable and usually the formula and criteria to calculate it is part of the contract (ex: the average response time of the website homepage is less than 3 seconds)
Award fee is more generic and subjectively evaluated by the buyer (ex: quality of the deliverable meets end user expectations).

Since the award is subjectively evaluated by the buyer, it minimizes the risk from the buyer's perspective.