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What is a Firm Fixed Price (FFP) contract?

FFP is a contract where the vendor agrees to deliver the scope for a fixed price. The vendor bears the risk of cost overruns. FFP is best when requirements are well-defined and stable. It provides maximum cost certainty for the buyer.

What is a Cost Plus Fixed Fee (CPFF) contract?

CPFF reimburses the vendor for all allowable costs plus a fixed fee. The buyer bears the cost risk. CPFF is used when scope is uncertain and the vendor needs cost transparency. The vendor has limited incentive to control costs.

When should you use a Time & Materials (T&M) contract?

T&M is best when scope is unclear or evolving and the work cannot be easily estimated. The buyer pays for actual hours worked at an agreed rate. Always include a not-to-exceed ceiling to limit cost risk.

Can you combine multiple contract types on one project?

Yes. A hybrid procurement approach uses different contract types for different work packages. For example, FFP for defined scope and T&M for evolving scope. This balances cost certainty with flexibility.

Predictive · PMP Scenario

Choosing the Right Contract Type: PMP Procurement Decision Scenarios

Scenario

You are procuring a custom software development vendor for a 10-month project. The requirements are 70% defined but 30% is expected to evolve based on user testing. The vendor proposes three options: (A) Firm Fixed Price (FFP) at $500,000, (B) Cost Plus Fixed Fee (CPFF) at estimated $480,000 + $50,000 fee, or (C) Time & Materials (T&M) at $150/hour. The sponsor wants cost certainty. The team wants flexibility. Which contract type should you recommend and why?

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