Study guide
8.7 Procurement & Contracts
Project Management Professional PMP
Track your progress as you read
Finished sections get a check mark.
1 Chapter 1: Introduction & Fundamentals
1.1 About the PMP Exam 1.2 What is a Project? 1.3 Project, Program & Portfolio Management 1.4 The Project Manager Role 1.5 PMBOK 7 Principles Overview 1.6 Performance Domains Overview 1.7 What Changed in the July 2026 PMP Exam
2 Chapter 2: People Domain Part 1
2.1 Managing Conflict 2.2 Leading a Team 2.3 Supporting Team Performance 2.4 Empowering Team Members 2.5 Training & Development 2.6 Building a Team 2.7 Removing Impediments
3 Chapter 3: People Domain Part 2
3.1 Negotiating Project Agreements 3.2 Collaborating with Stakeholders 3.3 Building Shared Understanding 3.4 Engaging Virtual Teams 3.5 Defining Team Ground Rules 3.6 Mentoring Stakeholders 3.7 Emotional Intelligence
4 Chapter 4: Process Domain - Planning
4.1 Determining Project Methodology 4.2 Integrating Project Planning 4.3 Planning & Managing Scope 4.4 Planning & Managing Schedule 4.5 Planning & Managing Budget 4.6 Planning & Managing Quality 4.7 Planning & Managing Resources 4.8 Planning & Managing Procurement
5 Chapter 5: Process Domain - Execution & Control
5.1 Executing with Urgency for Value 5.2 Managing Communications 5.3 Assessing & Managing Risks 5.4 Engaging Stakeholders 5.5 Managing Project Changes 5.6 Establishing Project Governance 5.7 Managing Project Issues 5.8 Managing Project Artifacts 5.9 Knowledge Transfer & Closure
6 Chapter 6: Business Environment Domain
6.1 Planning & Managing Compliance 6.2 Evaluating & Delivering Benefits 6.3 External Environment Changes 6.4 Supporting Organizational Change
7 Chapter 7: Agile & Hybrid Approaches
7.1 Agile Mindset & Values 7.2 Scrum Framework 7.3 Kanban & Lean 7.4 Extreme Programming (XP) 7.5 Hybrid Project Management 7.6 Agile Planning & Estimation 7.7 Agile Metrics & Tools
8 Chapter 8: Predictive (Waterfall) Approaches
8.1 Predictive Lifecycle 8.2 Scope Management 8.3 Schedule Management 8.4 Cost Management 8.5 Quality Management 8.6 Risk Management Process 8.7 Procurement & Contracts 8.8 Change Control
8.7 Procurement & Contracts
Key Takeaways Explain This Topic AI
Fixed-Price contracts place maximum risk on the seller; the buyer knows the total cost upfront if scope is well-defined
Cost-Reimbursable contracts place maximum risk on the buyer; seller is reimbursed for all allowable costs plus a fee
FPIF (Fixed Price Incentive Fee) contracts include a ceiling price; costs above the ceiling are 100% seller responsibility
Point of Total Assumption (PTA) is the cost point where the seller bears all additional costs in an FPIF contract
Time & Materials (T&M) contracts fix unit rates but leave quantity open, creating a hybrid of fixed and cost-reimbursable characteristics
Last updated: January 2026
Procurement management involves acquiring products, services, or results from outside the project team. Understanding contract types and their risk allocation is essential for PMP exam success.
Procurement Management Processes
- Process Purpose Key Output
- Plan Procurement Management Determine what to procure and approach Procurement Management Plan
- Conduct Procurements Obtain seller responses and select sellers Agreements (Contracts)
- Control Procurements Manage relationships and monitor performance Closed Procurements
- Make-or-Buy Analysis
Before procurement, organizations decide whether to produce internally or buy externally:
Factors Favoring Make (Insource)
- Factor Reason
- Core competency Strategic capability to maintain
- Cost advantage Cheaper to produce internally
- Control Need tight control over quality or process
- Capacity Available internal resources
- Intellectual property Protect proprietary knowledge
- Factors Favoring Buy (Outsource)
- Factor Reason
- Specialized expertise Skills not available internally
- Cost advantage Seller has economies of scale
- Flexibility Adjust resources as needed
- Risk transfer Shift risk to seller
- Focus Concentrate on core business
- Contract Types Overview
Contracts are categorized based on how they allocate risk between buyer and seller:
Risk Spectrum
- Contract Type Buyer Risk Seller Risk
- Cost Plus (CPFF, CPIF) Highest Lowest
- Time & Materials (T&M) Moderate Moderate
- Fixed Price (FFP, FPIF) Lowest Highest
- Fixed-Price Contracts
Fixed-Price contracts establish a firm price for a defined scope of work. The seller bears most of the cost risk.
Firm Fixed Price (FFP)
- Aspect Description
- Price Set at contract signing, does not change
- Risk Seller bears all cost risk
- Best Use Well-defined scope, low uncertainty
- Seller Incentive Complete efficiently to maximize profit
Example: Contract for $100,000 to build a website with defined specifications.
- If seller's costs are $80,000 → Seller profit = $20,000
- If seller's costs are $120,000 → Seller loss = $20,000
- Fixed Price Incentive Fee (FPIF)
- Element Description
- Target Cost Expected cost to complete work
- Target Profit Expected seller profit
- Target Price Target Cost + Target Profit
- Ceiling Price Maximum buyer will pay
- Share Ratio How over/under runs are split (e.g., 70/30)
FPIF Example:
- Target Cost: $100,000
- Target Profit: $15,000
- Target Price: $115,000
- Ceiling Price: $125,000
- Share Ratio: 70% Buyer / 30% Seller
If Actual Cost = $90,000 (Under Target):
- Savings = $100,000 - $90,000 = $10,000
- Seller Share = 30% x $10,000 = $3,000
- Final Price = $90,000 + $15,000 + $3,000 = $108,000
If Actual Cost = $110,000 (Over Target):
- Overrun = $110,000 - $100,000 = $10,000
- Seller Share = 30% x $10,000 = $3,000
- Final Price = $110,000 + $15,000 - $3,000 = $122,000
- Point of Total Assumption (PTA)
The PTA is the cost point in an FPIF contract where the seller bears ALL additional costs:
PTA = [(Ceiling Price - Target Price) / Buyer Share Ratio] + Target Cost
Example:
- Ceiling Price: $125,000
- Target Price: $115,000
- Target Cost: $100,000
- Buyer Share: 70%
- PTA = [($125,000 - $115,000) / 0.70] + $100,000 = $14,286 + $100,000 = $114,286
Above $114,286 in costs, the seller pays 100% of overruns.
Fixed Price with Economic Price Adjustment (FP-EPA)
- Aspect Description
- Use Long-term contracts with inflation risk
- Adjustment Price adjusted based on economic indices
- Protection Seller protected from uncontrollable cost increases
- Cost-Reimbursable Contracts
Cost-Reimbursable contracts reimburse the seller for allowable costs plus a fee. The buyer bears most of the cost risk.
Cost Plus Fixed Fee (CPFF)
- Aspect Description
- Reimbursement All allowable costs
- Fee Fixed amount (does not change with costs)
- Best Use Undefined scope, high uncertainty
- Seller Incentive Limited (fee is fixed)
Example: Reimbursable costs plus $10,000 fixed fee.
- If costs = $100,000 → Buyer pays $110,000
- If costs = $150,000 → Buyer pays $160,000
- Cost Plus Incentive Fee (CPIF)
- Element Description
- Cost Reimbursement All allowable costs
- Base Fee Minimum fee seller receives
- Incentive Fee Additional fee based on performance
- Share Ratio How savings/overruns affect fee
CPIF Example:
- Target Cost: $200,000
- Base Fee: $20,000
- Max Fee: $30,000
- Share Ratio: 80/20 (Buyer/Seller)
If Actual Cost = $180,000:
- Savings = $200,000 - $180,000 = $20,000
- Seller Incentive = 20% x $20,000 = $4,000
- Total Fee = $20,000 + $4,000 = $24,000
- Buyer Pays = $180,000 + $24,000 = $204,000
- Cost Plus Award Fee (CPAF)
- Aspect Description
- Reimbursement All allowable costs
- Base Fee Guaranteed minimum fee
- Award Fee Subjective evaluation by buyer
- Criteria Broad performance criteria
- Time and Materials (T&M) Contracts
T&M contracts are a hybrid of fixed-price and cost-reimbursable:
- Element Fixed or Variable
- Unit Rates Fixed (e.g., $100/hour)
- Quantity Variable (open-ended)
- Materials Cost plus markup
- T&M Characteristics
- Aspect Description
- Best Use Staff augmentation, undefined quantity of work
- Risk Shared; buyer controls quality, seller controls quantity
- Duration Often include "not to exceed" clauses
- Management Requires close oversight by buyer
- Contract Selection Criteria
- Choosing the Right Contract Type
- Situation Recommended Contract
- Well-defined scope, low risk FFP
- Defined scope, incentive needed FPIF
- Undefined scope, R&D CPFF or CPIF
- Need quick start, scope evolving T&M
- Long-term, inflation concern FP-EPA
- Procurement Documents
- Key Documents
- Document Purpose
- RFI (Request for Information) Gather information about seller capabilities
- RFQ (Request for Quote) Request pricing when scope is clear
- RFP (Request for Proposal) Request detailed proposals for complex work
- IFB (Invitation for Bid) Formal competitive bidding (government)
- Source Selection Criteria
Criterion Considerations
Technical Capability Can seller perform the work?
- Price/Cost Total cost of ownership
- Past Performance Track record on similar work
- Management Approach How seller plans to manage work
Financial Stability Will seller remain in business?
- Key Takeaways
- Fixed-Price contracts place maximum risk on seller; use when scope is well-defined
- Cost-Reimbursable contracts place maximum risk on buyer; use when scope is uncertain
- T&M contracts fix unit rates but leave quantity open; use for staff augmentation
- PTA is the point where seller bears 100% of additional costs in FPIF contracts
- FPIF includes ceiling price that caps buyer's maximum payment
- Select contract type based on scope clarity, risk tolerance, and desired incentives