Three families, one spectrum of risk
Contract type decides who bears the cost risk. It runs on a spectrum: fixed-price loads risk on the seller; cost-reimbursable loads it on the buyer; time & materials sits in between.
The seven types compared
| Type | What it means | Cost risk on… |
|---|---|---|
| Fixed price (seller carries risk) | ||
| FFP | Firm Fixed Price — one set price, no matter the seller's cost. | Seller (maximum) |
| FPIF | Fixed Price Incentive Fee — fixed price + incentive for hitting targets. | Mostly seller |
| FP-EPA | Fixed Price with Economic Price Adjustment — price adjusts for inflation/FX over long terms. | Seller, inflation-hedged |
| Cost reimbursable (buyer carries risk) | ||
| CPFF | Cost Plus Fixed Fee — costs reimbursed + a fixed fee. | Buyer |
| CPIF | Cost Plus Incentive Fee — costs + fee that varies with performance (shared savings/overruns). | Shared, mostly buyer |
| CPAF | Cost Plus Award Fee — costs + award fee at the buyer's subjective judgement. | Buyer |
| Hybrid | ||
| T&M | Time & Materials — pay per hour/unit; no fixed total. Good for staff augmentation. | Shared |
FPIF and the Point of Total Assumption (PTA)
In an FPIF contract the PTA is the cost level above which the seller bears 100% of any further overrun (it hits the ceiling price).
PTA = ((Ceiling Price − Target Price) ÷ Buyer's share ratio) + Target Cost
Mistakes examiners test
- Thinking the buyer always carries risk. In fixed-price the seller does.
- Using T&M for large, well-defined scope. It suits small or unclear scope; it has no cost ceiling by default.
- Confusing CPIF and CPAF. CPIF fee is formula-based; CPAF fee is the buyer's subjective award.
Test yourself
4 quick questions — tap an answer to check it instantly. Nothing is sent anywhere.
1. Which contract type places the MOST cost risk on the seller?
2. Under which family does the buyer bear the most cost risk?
3. The Point of Total Assumption (PTA) applies to which contract?
4. CPAF differs from CPIF mainly because its fee is…
Sources
- Project Management Institute — pmi.org.
- PMI, PMBOK® Guide — procurement management.
Study summary only. "PMP" and "PMBOK" are marks of the Project Management Institute, which does not endorse this material.