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A. Cost plus fixed fee (CPFF) B. Fixed price (FP) C. Time and Materials (T&M) D. Cost plus percentage of costs (CPPC)
Fixed Price (FP) Contracts has the most risk for the Seller.
Which of the following Contracts has the MOST risk for Buyer? a. Cost Plus Fixed Fee (CPFF) b. Time and Materia (T&M) c. Cost Plus Award Fee (CPAF) d. Fixed Price
Fixed Price is obviously the least risk to the buyer.
Cost Plus Fixed Fee (CPFF) Vs Cost Plus Award Fee (CPAF)
I totally agree about the comparison between FP and Cost plus contracts.
Cost Plus Fixed Fee (CPFF) presents the most risk for the buyer. There is less incentive for the seller to keep control of costs than with a fixed-price contract and the buyer would need to provide resources to oversee the costs to make sure they are reasonable. In the case of the Cost Plus Award Fee (CPAF), a board is generally assigned to review the quality of the work done and bases the award on those findings
what is about Time &Material contracts?Like we know do risks resulting out of uncertainty.And from my point of view is the uncertainty about the overall costs in the end for a project highest with a T&M contract.
Fixed price contract is the most riskier to the seller. Upon signing of contract seller has no choice except supplying the goods/serves as per agreed rate.
fixed price of course especially if the seller is a distributor he must accept all price rises from the manufacturer and can't deliver the same to the customer. In case the seller is an OEM himself he may have more control over the price but he remains a victim of market changes such as oil prices, recession, etc.
I go with the optiob B - Fixed price. I have had experiences where the vendor had refused to deliver the orders in the FA and excalated that the prices of those items are already increased by a 100%.
Answer: BExplanation: A Fixed price (FP) contract means that the buyer pays one amount regardless of how much it costs the seller to do the work. A fixed price contract only makes sense in cases where the scope is very well known. If there are any changes to the amount of work to be done, the seller doesn't get paid any more to do it.
Fixed-Price contracts are good to use for products or services that a seller creates repeatedly. A fixed-price contract should only be used when the seller is confident in the process it takes to complete a product or service, because fixed-price contracts put the most risk on the seller
A. Cost plus fixed fee contract has the highest risk for the buyer, because this provides a payment to the seller of seller of actual costs plus a fixed fee which is determined in the contract. So, the seller doesn't have any incentive or award even if he meets certain deadlines or not.
See T&M contract is equal as cppc how;in T&M seller add his/her profit (fee) wrt unit amount of material /effort/work, it is nothing but cppc. Whereas in cpff , he can increase amount of commodites and thus respective cost but he could not gain profit at percent increase of cost. it is fixed. Also seller will not icrease cost (investment) for the same profit.
see example
cppc ---- a work estimated cost 1000, @20% of cost
suppose it becomes 1500 then payment will be 1500+300 in place of 1000+200, so here buyer is paying 1800.
in T&M ----- seller and buyer agree on rate inclusive of fee over cost so work rate per package say 1000+200 =1200 , now work goes to 1.5 package, (unit) then buyer has to pay 1200 *1.5 = 1800(link sends e-mail)
now cpff - work cost estimated 1000 and fee 20% = 200 fixed , now cost goes to 1500 but seller will receive = 1500+200 = 1700. Sencond thing here seller will not be interested to increase the amount of work /cost, because his profit percent will be less in other words B/C ratio.
now listen what pmbok says -- T&M is hybrid because you can fix a limit (cap), a condition.
but in cpff - cap is already here of fix fee always.
so the order of risk of more payment from buyer to seller IMO will be
CPPC > T&M > CPAF > CPIF=FPIF >CPFF >FF ( I will LATER discuss why CPIF = FPIF)
see what pmbok says :
T&M contracts can increase in contract value as if they were cost-reimbursable contracts. Many organizations require not-to-exceed values and time limits placed in all T&M contracts to prevent unlimited cost growth. Conversely, T&M contracts can also resemble fixed unit price arrangements when certain parameters are specified in the contract. Unit labor or material rates can be preset by the buyer and seller; including seller profit, when both parties agree on the values for specific resource categories, such as senior engineers at specified rates per hour, or categories of materials at specified rates per unit.
Definitely B. Fixed price (FP) is the Risky One.
