Understanding the types of contracts is crucial for PMP (Project Management Professional) exam success, as contract management is a key part of project procurement. The PMBOK® Guide outlines three main types of contracts, each suited for different project scenarios:
- Fixed-Price Contracts (Lump Sum): These involve a set total price for a well-defined scope of work. They are ideal when project requirements are clear, as the seller bears most of the risk. Subtypes include Firm Fixed Price (FFP), Fixed Price Incentive Fee (FPIF), and Fixed Price with Economic Price Adjustment (FP-EPA).
- Cost-Reimbursable Contracts: Here, the buyer agrees to pay the seller for all legitimate costs incurred, plus a fee. These contracts are used when the scope isn’t well-defined. Subtypes include Cost Plus Fixed Fee (CPFF), Cost Plus Incentive Fee (CPIF), and Cost Plus Award Fee (CPAF). The buyer bears more risk in this type.
- Time and Materials (T&M) Contracts: These are hybrids of fixed-price and cost-reimbursable contracts, often used for staff augmentation or when work is not clearly scoped. They are flexible but require close oversight.
Knowing when and how to apply each contract type helps PMP candidates manage project risk, budget, and scope more effectively.
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