Contract Type and Risk

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kniraj
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Contract Type and Risk

Postby kniraj Thu Dec 25, 2014 5:27 am

Which of the following contracts has the MOST risk for the buyer?
A Cost plus fixed fee (CPFF)
B Time and Materials (T&M)
C Cost plus award fee (CPAF)
D Fixed price (FP)

It would be option A right ?
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pank_pmp
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Re: Contract Type and Risk

Postby pank_pmp Thu Dec 25, 2014 7:25 am

Yes it should be A! Where is the confusion?
sundara.damaraju
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Re: Contract Type and Risk

Postby sundara.damaraju Thu Dec 25, 2014 9:23 am

Between A&C, A is more risk, because the buyer has to pay the predetermined fee.
Award fee is discretionary.
kniraj
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Re: Contract Type and Risk

Postby kniraj Thu Dec 25, 2014 9:58 am

The question is from HeadFirst (200 free) and it says T&M while I marked it as option A i.e. CPFF

Thanks ...
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pank_pmp
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Re: Contract Type and Risk

Postby pank_pmp Thu Dec 25, 2014 12:00 pm

Lets go option by option to conclude this:

A Cost plus fixed fee (CPFF)
Customer can have risk if the costs quoted by seller in various duration are high and + a fixed is paid! A high risk is involved in this case and customer has to watch the progress very closely.


B Time and Materials (T&M)
T&M contract can be more risky and costly if the duration goes too much. Secondly, customer has to watch closely the project since seller will be charging fee on daily and material required. T&M contracts are generally concluded when the duration of project is not that big for instance. product promotion, election campaign, surveys etc.


C Cost plus award fee (CPAF)
It is similar to option A but award is very subjective and mostly favored the customer. So it is not very risky.

D Fixed price (FP)
Customer is most secured in such time of contract since he has to pay a fixed amount irrespective of what seller may have incurred!
kniraj
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Re: Contract Type and Risk

Postby kniraj Thu Dec 25, 2014 1:33 pm

Thanks .. this is also very nicely shown in Rita's 8th ed. Pg 479 .. Its a graph good one
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pank_pmp
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Re: Contract Type and Risk

Postby pank_pmp Fri Dec 26, 2014 3:59 am

Yes I know that graph but I try to reason the explanation to remember it for myself rather remembering the graph! :D
raghu
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Re: Contract Type and Risk

Postby raghu Fri Dec 26, 2014 2:00 pm

Saket,

What is your view on this question (taken from Head First) ?

Similar discussion in pmzilla.com had gone into lot of debate. Some feel this is very disputable question, while many others feel CPFF is the answer and quite direct.

Earlier discussion, http://pmzilla.com/q-which-following-co ... risk-buyer
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saket
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Re: Contract Type and Risk

Postby saket Sat Dec 27, 2014 5:25 am

Better to read the question in this way...... :)

In which of the following contract type the buyer has maximum risk of cost overrun

In general this is what the interpretation Rita and other books also do when they just talk about where is the maximum risk, in this context option A make most sense
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Housam Bassal
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Re: Contract Type and Risk

Postby Housam Bassal Sun Dec 11, 2016 8:29 pm

So from RITA interpretation : The risk from buyer point of view will be (from Maximum to minimum):
CPPC – CPFF- CPAF - CPIF – T & M – FPEPA – FPIF- FP
But from discussion on your forum I can see T & m could go to maximum risk for buyer!
So what is the correct order, please help to clarify?
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manishpn
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Re: Contract Type and Risk

Postby manishpn Mon Dec 12, 2016 8:04 am

Housam Bassal wrote:So from RITA interpretation : The risk from buyer point of view will be (from Maximum to minimum):
CPPC – CPFF- CPAF - CPIF – T & M – FPEPA – FPIF- FP
But from discussion on your forum I can see T & m could go to maximum risk for buyer!
So what is the correct order, please help to clarify?


Now I am wearing a bit of vendor management cap.
Risk in any contract is not just about cost. however as Saket mentioned that the question should be viewed as risk of cost over run.
Now cost over run risk will also depend on nature of work.

If a project involved procuring too many raw materials where seller procures such items then of course there is risk of cost over run us high for cost reimbursable contract (exception is if you have provision in contract that buyer has to approve all purchases in advance then risk of cost over run is mitigated)

For pure service related type of work the cost of overrun is high in T and M contract type. as in case of T and M contract it is very difficult to control hours of services spent in contract. the way to control such cost over run is to Cap contract value, so if seller exceeds X hours in contract buyer does not pay beyond that, but the risk will be that work may not be completed, .

So Although I disagree to generalize risk and contract type as there nature of work is different in different contract type, I would still go with T and M.
Br,
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leon
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Re: Contract Type and Risk

Postby leon Thu Jun 28, 2018 4:12 pm

Hello Everyone!

Let me post a question from PMtraining under this topic relating to contract type. Please check below.
I thought the answer is B but the provided answer is A. I can't figure out what's the main reason to choose answer A in this question.

Please help to clear my understanding. Thank you.


19. A seller entered into a contract with a buyer. At the end of the project, the seller was reimbursed for the cost of the project but received a low fee based on certain subjective criteria that were specified in the contract. What type of contract is this likely to be?

A. Cost Plus Award Fee
B. Cost Plus Incentive Fee
C. Cost Plus Fixed Fee (CPFF) contract
D. Fixed Price Incentive Fee (FPIF) contract

Answer is A.

Regards,
leon
manishpn
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Re: Contract Type and Risk

Postby manishpn Thu Jun 28, 2018 8:38 pm

if its a new question post in separate thread,
Br,
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