According to the PMBOK® Guide, specifically within the Plan Procurement Management process, different contract types are used depending on the nature of the project and the level of risk the buyer or seller is willing to assume.
The Firm-Fixed-Price Contract (FFP) is the most common type of contract used by most buying organizations.
Fixed Price at Outset: In an FFP contract, the price for goods or services is set at the beginning and is not subject to change unless the scope of work changes (usually via a formal change order).
Risk Allocation: This contract type places the greatest amount of risk on the seller. If the seller ' s costs increase during the performance of the contract, the buyer is not obligated to pay more. The seller is legally obligated to complete the work at the agreed-upon price.
Administrative Effort: For the buyer, FFP contracts require the least amount of auditing and oversight compared to cost-reimbursable contracts, as the primary focus is on the quality and timeliness of the deliverables rather than the seller ' s internal costs.
Suitability: This is best used when the product or service is well-defined and the specifications are unlikely to change significantly.
Analysis of other choices:
Choice A (Fixed Price with Economic Price Adjustments - FP-EPA): This is a fixed-price contract that allows for pre-defined adjustments to the contract price due to changed conditions, such as inflation or cost increases for specific commodities. It is used for multi-year projects but is not the " most common " general-purpose contract.
Choice B (Cost-Reimbursable - CR): In this type, the buyer pays the seller for actual costs incurred plus a fee (profit). This places the risk on the buyer, as the final cost is not fixed at the outset.
Choice D (Fixed-Price-Incentive-Fee - FPIF): This allows for some flexibility by giving the buyer and seller the ability to share in cost savings or overruns based on a pre-determined formula. While it has a price ceiling, it is more complex than a standard FFP.
