You are the program manager for your project. You are working with the project managers regarding the procurement processes for their projects. You have ruled out one particular contract type because it is considered too risky for the program. Which one of the following contract types is usually considered to be the most dangerous for the buyer?

A.
Cost plus percentage of costs

B.
Cost plus incentive fee

C.
Time and materials

D.
Fixed fee

Explanation:

The cost plus percentage of costs contract is generally considered to be the most risky for the buyer. In this contract type you would pay for the cost of the materials and an additional cost of the materials, such as three percent of what the materials cost. Should the vendor waste materials you’ll have to buy more materials and pay an additional three percent for the new materials.

Answer option D is incorrect. A fixed fee contract is generally very safe for the buyer.

Answer option B is incorrect. A cost plus incentive fee can be somewhat risky for the buyer, but not as risky as the cost plus percentage of costs. The incentive fee can be a bonus for reaching a particular deadline, keep waste low, or other ors that you’d like to reward.

Answer option C is incorrect. Time and materials contracts are generally low risk contracts if the contracts have a not-to-exceed clause.

Reference: The Standard for Program Management and The Guide to the Project Management Body of Knowledge, fourth edition.