In which of the following contract type will the buyer assume the highest risk for cost overrun and non-performance?

Cost plus fixed fee (CPFF) & Cost plus percentage of cost (CPPC)

Cost-reimbursable contracts assume the highest risk for cost overrun and non-performance because the total costs are uncertain.

Cost Reimbursable Contract

A cost reimbursable contract is one in which the  contractor is reimbursed the actual costs they incur in carrying out the works, plus an additional fee. Contract under which allowable and reasonable costs incurred by a contractor in the performance of a contract are reimbursed in accordance with the terms of the contract. In this type of contract the allowable cost associated with producing the goods or services are charged to the buyer. All the costs the seller takes on during the project are charged back to the buyer; thus, the seller is reimbursed.

The advantage to the buyer with this type of contract is that scope changes are easy to make and can be made as often as he want—but it will cost the buyer.

The four types of cost-reimbursable contract are:

Cost plus fixed fee (CPFF): Cost plus fixed fee (CPFF) contracts charge back all allowable project costs to the seller and include a fixed fee upon completion of the contract. This is how the seller makes money on the deal; the fixed fee portion is the seller’s profit. The fee is always firm in this kind of contract, but the costs are variable.

Cost plus incentive fee (CPIF): This is the type of contract in which the buyer reimburses the seller for the seller’s allowable costs and includes an incentive for meeting or exceeding the performance criteria laid out in the contract. An incentive fee actually encourages better cost performance by the seller, and there is a possibility of shared savings between the seller and buyer if performance criteria are exceeded. The qualification for exceeded performance must be written into the contract and agreed to by both parties.

Cost plus percentage of cost (CPPC): In the cost plus percentage of cost (CPPC), the seller is reimbursed for allowable costs plus a fee that’s calculated as a percentage of the costs.

The percentage is agreed upon beforehand and documented in the contract. Since the fee is based on costs, the fee is variable. The lower the costs, the lower the fee, so the seller doesn’t have a lot of motivation to keep costs low.

Cost plus award fee (CPAF): This is the riskiest of the cost plus contracts for the seller. In this contract, the seller will recoup all the costs expended during the project but the award fee portion is subject to the sole discretion of the buyer. The performance criteria for earning the award is spelled out in the contract, but these criteria can be subjective and the awards are not usually contestable.

A. Fixed fee plus incentive contracts

The most suitable option is

C. CPPC

CPFF is the contract type will the buyer assu,e the highest risk for the cost overrun and non performance