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12 - PROJECT PROCUREMENT MANAGEMENT

○ Firm Fixed Price Contracts (FFP). The most commonly used contract type is the FFP. It is
favored by most buying organizations because the price for goods is set at the outset and
not subject to change unless the scope of work changes. Any cost increase due to adverse
performance is the responsibility of the seller, who is obligated to complete the effort. Under
the FFP contract, the buyer should precisely specify the product or services to be procured,
and any changes to the procurement specification can increase the costs to the buyer.

○ Fixed Price Incentive Fee Contracts (FPIF). This fixed-price arrangement gives the buyer and
seller some flexibility in that it allows for deviation from performance, with financial incentives
tied to achieving agreed upon metrics. Typically such financial incentives are related to cost,
schedule, or technical performance of the seller. Performance targets are established at the
outset, and the final contract price is determined after completion of all work based on the
seller’s performance. Under FPIF contracts, a price ceiling is set, and all costs above the price
ceiling are the responsibility of the seller, who is obligated to complete the work.
○ Fixed Price with Economic Price Adjustment Contracts (FP-EPA). This contract type is used
whenever the seller’s performance period spans a considerable period of years, as is desired
with many long-term relationships. It is a fixed-price contract, but with a special provision
allowing for pre defined final adjustments to the contract price due to changed conditions, such
as inflation changes, or cost increases (or decreases) for specific commodities. The EPA clause 12
needs to relate to some reliable financial index, which is used to precisely adjust the final price.
The FP-EPA contract is intended to protect both buyer and seller from external conditions beyond
their control.
• cost-reimbursable contracts. This category of contract involves payments (cost reimbursements) to
the seller for all legitimate actual costs incurred for completed work, plus a fee representing seller profit.
Cost-reimbursable contracts may also include financial incentive clauses whenever the seller exceeds,
or falls below, defined objectives such as costs, schedule, or technical performance targets. Three of
the more common types of cost-reimbursable contracts in use are Cost Plus Fixed Fee (CPFF), Cost Plus
Incentive Fee (CPIF), and Cost Plus Award Fee (CPAF).
A cost-reimbursable contract provides the project flexibility to redirect a seller whenever the scope of
work cannot be precisely defined at the start and needs to be altered, or when high risks may exist in
the effort.

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