Intro to Project Management: Project Procurement Management - Contract Types, Fixed-Price, FPIF, FFP, Cost-Reimbursable, CPFF, CPIF, CPPC, Time-and-Material

What This Is

Contract types are essential for project managers to understand, as they determine how costs, risks, and rewards are allocated between the project team and stakeholders. A well-chosen contract type can ensure successful project delivery, while a poorly chosen one can lead to disputes, cost overruns, or scope creep. For example, consider a software development project where the client wants a new mobile app. The project manager must choose between a fixed-price contract, where the developer is paid a fixed amount regardless of the time taken, and a cost-reimbursable contract, where the client reimburses the developer for actual costs incurred.

Key Terms & Formulas

• Fixed Price (FPIF, FFP): A contract where the project cost is fixed, and the contractor is responsible for any cost overruns.
• Cost Reimbursable (CPFF, CPIF, CPPC): A contract where the project cost is reimbursed by the client, and the contractor is responsible for managing costs.
• CPFF (Cost Plus Fixed Fee): A contract where the client reimburses the contractor for actual costs plus a fixed fee.
• CPIF (Cost Plus Incentive Fee): A contract where the client reimburses the contractor for actual costs plus an incentive fee based on performance.
• CPPC (Cost Plus Percentage of Cost): A contract where the client reimburses the contractor for actual costs plus a percentage of the total cost.
• Time and Material (T&M): A contract where the client pays the contractor for actual time and materials used.
• Earned Value (EV) = % complete × BAC (Earned Value = percent complete times Budget at Completion).
• Cost Variance (CV) = EV - AC (Cost Variance = Earned Value minus Actual Cost).
• Schedule Variance (SV) = EV - BCWP (Schedule Variance = Earned Value minus Budgeted Cost of Work Performed).
• Cost Performance Index (CPI) = EV / AC (Cost Performance Index = Earned Value divided by Actual Cost).
• Schedule Performance Index (SPI) = EV / BCWP (Schedule Performance Index = Earned Value divided by Budgeted Cost of Work Performed).

Step-by-Step / Process Flow

1. Identify the project scope and requirements: Determine the project's objectives, deliverables, and stakeholders.
2. Assess the project risks and uncertainties: Identify potential risks and uncertainties that may impact the project.
3. Choose a contract type: Select a contract type that aligns with the project's scope, risks, and uncertainties.
4. Negotiate the contract terms: Agree on the contract terms, including the payment schedule, payment method, and dispute resolution process.
5. Monitor and control the project: Track the project's progress, costs, and schedule, and take corrective action as needed.

Common Mistakes

• Mistake: Assuming that a fixed-price contract is always the best choice.
• Correction: Consider the project's scope, risks, and uncertainties when choosing a contract type.
• Mistake: Failing to negotiate the contract terms.
• Correction: Ensure that the contract terms are clear, concise, and aligned with the project's objectives.
• Mistake: Not monitoring and controlling the project.
• Correction: Regularly track the project's progress, costs, and schedule, and take corrective action as needed.

Exam Tips

• Distinguish between CPFF and CPIF: CPFF is a cost-reimbursable contract with a fixed fee, while CPIF is a cost-reimbursable contract with an incentive fee.
• Understand the difference between EV and AC: EV is the earned value of work completed, while AC is the actual cost incurred.
• Recognize the importance of CPI and SPI: CPI and SPI are metrics used to measure the project's cost and schedule performance.

Quick Practice Questions

1. If the CPI is 0.8, is the project under or over budget? Answer: Under budget. Explanation: A CPI of 0.8 indicates that the project is earning value at a rate of 80% of the actual cost incurred.
2. What is the difference between CPFF and CPPC? Answer: CPFF has a fixed fee, while CPPC has a percentage of the total cost.
3. If the EV is $100,000 and the AC is $120,000, what is the CV? Answer: -$20,000. Explanation: The CV is the difference between the earned value and the actual cost, which is -$20,000.

Last-Minute Cram Sheet

• Fixed Price (FPIF, FFP) contracts are suitable for projects with well-defined scope and low risks.
• Cost Reimbursable (CPFF, CPIF, CPPC) contracts are suitable for projects with high risks and uncertainties.
• Time and Material (T&M) contracts are suitable for projects with variable scope and high risks.
• Earned Value (EV) = % complete × BAC.
• Cost Variance (CV) = EV - AC.
• Schedule Variance (SV) = EV - BCWP.
• Cost Performance Index (CPI) = EV / AC.
• Schedule Performance Index (SPI) = EV / BCWP.
• A fixed-price contract may not be suitable for projects with high risks and uncertainties.
• A cost-reimbursable contract may not be suitable for projects with well-defined scope and low risks.
• A T&M contract may not be suitable for projects with fixed scope and low risks.