Fixed-Price vs Cost-Reimbursable Contracts: PMP Guide

Contract Types on the PMP Exam: A Comprehensive Comparison

Procurement contract types appear on almost every PMP exam. PMI expects you to know the major contract categories, their subtypes, where risk falls in each, and which situations call for which type. This guide covers the full spectrum from fixed-price to cost-reimbursable to time-and-materials contracts.

Fixed-Price Contracts

In fixed-price contracts, the seller agrees to deliver a defined scope for a set price. The buyer knows their maximum financial exposure upfront, and the seller bears the risk of cost overruns.

Firm Fixed-Price (FFP)

The price is set and does not change regardless of the seller's actual costs. This is the simplest and most common contract type. The seller absorbs all cost risk.

Best for: Well-defined scope with little expected change. The buyer can clearly articulate what they need and the seller can accurately estimate cost.

Fixed-Price Incentive Fee (FPIF)

A fixed price with an incentive mechanism. If the seller delivers under a target cost, they share the savings with the buyer according to a pre-agreed sharing ratio. A ceiling price caps the buyer's maximum exposure.

Best for: Projects where the buyer wants to motivate seller efficiency. Both parties benefit when costs come in below target.

Fixed-Price with Economic Price Adjustment (FPEPA)

A fixed price that includes provisions for adjustments based on predefined economic conditions — inflation, commodity price changes, or exchange rate fluctuations. Used for multi-year contracts where market conditions may shift significantly.

Best for: Long-duration contracts where inflation or market volatility would make a firm fixed price unreasonable for the seller.

Cost-Reimbursable Contracts

In cost-reimbursable contracts, the buyer pays the seller's allowable costs plus a fee representing the seller's profit. The buyer bears the cost risk because the final price depends on actual costs incurred.

Cost Plus Fixed Fee (CPFF)

The buyer reimburses all allowable costs and pays a fixed fee calculated as a percentage of the estimated costs. The fee does not change even if actual costs differ from estimates. The seller has no incentive to control costs beyond contractual obligations.

Cost Plus Incentive Fee (CPIF)

Similar to CPFF, but with an incentive: if costs come in below target, the seller receives a larger fee. A sharing ratio divides savings (or overruns) between buyer and seller. This motivates cost control while keeping the buyer exposed to cost risk.

Cost Plus Award Fee (CPAF)

The buyer reimburses costs and pays a base fee plus an award fee based on subjective evaluation of the seller's performance. An award fee committee determines how much of the available award pool the seller earns. This contract type gives the buyer the most subjective control over the fee.

Time and Materials (T&M) Contracts

T&M contracts are a hybrid. The buyer pays a fixed rate per hour or per unit, but the total cost is unknown because the total quantity of hours or units is undefined. T&M contracts carry risk elements of both fixed-price (fixed rates) and cost-reimbursable (open-ended quantity).

Best for: Staff augmentation, consulting engagements, or projects where scope cannot be defined upfront. To limit buyer risk, T&M contracts should include a not-to-exceed clause or ceiling.

Risk Distribution Summary

The PMP exam tests risk distribution across contract types:

• FFP: Maximum risk to seller, minimum risk to buyer.
• CPAF: Maximum risk to buyer, minimum risk to seller.
• The spectrum: FFP → FPIF → FPEPA → T&M → CPIF → CPFF → CPAF (from most seller risk to most buyer risk).

Choosing the Right Contract Type

Match the contract type to the level of scope definition:

1. Scope is completely defined: Use FFP. The seller can price accurately and both parties know the cost.
2. Scope is mostly defined but some uncertainty exists: Use FPIF to share risk while maintaining price predictability.
3. Scope is poorly defined or research-oriented: Use cost-reimbursable. The buyer cannot expect a firm price when they cannot define what they want.
4. Scope will emerge over time: Use T&M with a ceiling to control exposure.

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