4.3 Procurement Management & Contract Types
Evaluate contract types (FFP, FPIF, CPFF, CPIF, T&M), allocate cost risk between buyer and seller, execute Make-or-Buy analysis, and administer contested claims.
🎯 Key PMI PMP® Exam Takeaways
- Firm Fixed Price (FFP) places maximum financial risk on the seller and requires completely defined, unambiguous scope.
- Cost-Reimbursable contracts (CPFF, CPIF) place cost risk on the buyer and are used when scope is uncertain or exploratory.
- Time and Materials (T&M) is suited for emergency troubleshooting or staff augmentation, and must always include a Not-To-Exceed (NTE) cap.
- Point of Total Assumption (PTA) in FPIF contracts is the cost point beyond which the seller absorbs 100% of all further cost overruns.
- Direct negotiation between authorized procurement agents is always the primary, preferred method to resolve vendor claims.
Project procurement management encompasses purchasing products, services, or results needed from outside the project team. The cornerstone of procurement planning is selecting the contract type that appropriately balances risk between buyer and seller based on scope clarity.
Firm Fixed Price (FFP) contracts lock in total price; the seller bears the risk of cost overruns, making FFP ideal for clear specifications. Cost-Reimbursable contracts reimburse the seller for legitimate costs plus a fee; the buyer bears the cost risk, making them suitable for R&D. Fixed Price Incentive Fee (FPIF) contracts incentivize cost control, featuring a Point of Total Assumption (PTA) beyond which the seller absorbs all overruns. Time and Materials (T&M) contracts are hybrid hourly agreements requiring Not-To-Exceed financial caps.
During procurement execution, proposals are evaluated using weighted Source Selection Criteria. When disputes or contested changes arise, the project manager engages in claims administration, relying primarily on direct professional negotiation before resorting to mediation, arbitration, or litigation.
⚠️ Common PMI Exam Traps
- Selecting FFP when scope is vague and exploratory; sellers will refuse to bid or build in massive risk premiums.
- Immediately initiating litigation when a vendor submits a contested claim; negotiation and ADR must precede court lawsuits.
Knowledge Checkpoint
An enterprise buys a custom commercial off-the-shelf software package where requirements and specifications are 100% defined and unambiguous. The buyer wants to minimize cost risk and transfer cost overrun exposure to the seller. Which contract type is most appropriate?