📊 Risk Spectrum
🔴 Highest Buyer Risk
🔵 Highest Seller Risk
CPPC
CPFF
CPIF
T&M
FPIF
FP-EPA
FFP
← Buyer pays all overruns
Seller absorbs all overruns →
💰 Cost-Reimbursable Contracts (Buyer Risk)
🔴 Highest Buyer Risk
CPPC — Cost Plus Percentage of Cost
Buyer: Very HighSeller: Very Low
Buyer pays all costs + a percentage fee on top. The more the seller spends, the more they earn. No incentive to control costs.
Rarely used. Some government contracts. PMI considers this the worst contract type for the buyer.
🔴 High Buyer Risk
CPFF — Cost Plus Fixed Fee
Buyer: HighSeller: Low
Buyer pays all costs + a fixed fee (doesn't change with cost overruns). Seller has some incentive to control costs since fee doesn't grow.
Example: R&D project where scope is unclear. Fee is $50K regardless of final cost.
🟠 Medium-High Buyer Risk
CPIF — Cost Plus Incentive Fee
Buyer: Medium-HighSeller: Medium-Low
Buyer pays costs + fee adjusted by performance. If seller beats target cost, they earn a bonus. If over, fee is reduced. Shared risk via a sharing ratio.
Example: Target cost $100K, sharing ratio 80/20. If actual cost is $90K, seller gets bonus from the $10K savings.
🟠 Medium Buyer Risk
CPAF — Cost Plus Award Fee
Buyer: MediumSeller: Medium
Buyer pays costs + an award fee based on subjective performance evaluation. Fee amount determined by a fee evaluation board.
Key difference from CPIF: Award fee is subjective (quality, timeliness), not formula-based. Buyer has more control.
⚖️ Middle Ground
⚖️ Shared Risk
T&M — Time and Materials
Buyer: MediumSeller: Medium
Buyer pays hourly/daily rates + materials. Open-ended — no fixed total price. Risk is shared but buyer has exposure if work takes longer than expected.
Example: Consulting engagement at $200/hr. Often used when scope can't be defined upfront. Should include a "not to exceed" ceiling.
🔵 Fixed-Price Contracts (Seller Risk)
🔵 Medium-Low Seller Risk
FPIF — Fixed Price Incentive Fee
Buyer: Medium-LowSeller: Medium-High
Fixed price with incentive adjustments. If seller beats target cost, they share the savings. If over, they share the overrun. Has a ceiling price the buyer won't exceed.
This is where PTA applies. Point of Total Assumption = the cost point where seller absorbs 100% of overruns.
🔵 High Seller Risk
FP-EPA — Fixed Price with Economic Price Adjustment
Buyer: LowSeller: High
Fixed price with provisions for inflation or cost-of-living adjustments. Used for multi-year contracts where economic conditions may change.
Example: 3-year construction contract with annual price adjustments tied to CPI (Consumer Price Index).
🔵 Highest Seller Risk
FFP — Firm Fixed Price
Buyer: LowestSeller: Highest
Price is set and doesn't change regardless of seller's costs. Seller absorbs all overruns. Most common contract type.
Example: "Build this website for $50,000." If it costs the seller $60K, they eat the $10K loss. Best when scope is well-defined.
💰 PTA Formula (FPIF Only)
Point of Total Assumption
PTA = ((Ceiling Price − Target Price) / Buyer's Share Ratio) + Target Cost
The cost point above which the seller absorbs 100% of additional costs.
Only applies to Fixed Price Incentive Fee (FPIF) contracts.
💡 Exam Tips
Memory trick: Cost Plus = Buyer risk (buyer pays costs). Fixed Price = Seller risk (seller eats overruns).
FFP is most common and preferred when scope is clear. It's the simplest and lowest risk for the buyer.
T&M should have a ceiling. Without a "not to exceed" clause, T&M is essentially open-ended buyer risk.
CPPC is the worst for buyers — the seller is incentivized to spend MORE. Rarely used in practice.
PTA only applies to FPIF. If the exam asks about PTA, it's always in the context of a fixed-price incentive fee contract.