Project Management

Can someone please help me in understanding below question ?

ADITI LAHARIA Mumbai, Maharastra, India

A project needs resource support from a supplier because several team members have been transferred to another project. Concerns arise about the cost risk of using a supplier at this stage of the project. The project manager is working with the procurement team to establish specifications and the type of contract that should be used. What type of contract should the project manager recommend?

A) Fixed price incentive fee (FPIF)

B) Time and material (TM)

C) Cost plus incentive fee (CPIF)

D) Firm fixed price (FFP)

As the question states “Concerns arise about the cost risk” this hints towards Fixed price contract. So i can easily eliminate option B and C. According to you which one should be the right option and why ?

Posted: May 21, 2020 12:19 AM

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David Portas London, United Kingdom

My answer: B. The relevant information seems to be that this is resource augmentation rather than product or service delivery. T&M allows the customer to manage the cost whereas FP is normally at a higher price because the supplier takes on some of the risk of delivering a product or service.

Posted: May 21, 2020 2:39 AM (Updated by author: May 21, 2020 2:45 AM)

MD Sarfaraj Alam Advisor, Sales Operations| Dell Technologies India

Cost is the only listed risk in the question. There is no indication constraint on getting it done within a tight schedule, or, a definitive quality constraint either. Hence, there does not seem to be a need to incentivize this for the supplier. PM can draft an FFP contract, knowing exactly the amount of money he needs to spend.

Posted: May 21, 2020 3:02 AM

Thomas Walenta Global Project Economy Expert Hackenheim, Germany

Would go with D.
Agree with Sarfarj on the reason.

...

1 reply by MD Sarfaraj Alam

May 21, 2020 9:45 AM

MD Sarfaraj Alam

...

Thanks Thomas. Incentivizing anything for the supplier would attract additional cost (which is already seen as a risk) for buyer. Generally, FFP has the lowest risk for buyer, it increases as we move towards Cost Re-Imbursable. T&M would typically be involved hiring personnel based on time and specific domain expertise they bring to the table. A good example for T&M would be hiring a research scientist for your project.

Posted: May 21, 2020 7:01 AM

Mohit Joshi Germantown, Tn, United States

I would go with "B". The question points to resource augmentation and T&M is the best choice. There is a cost risk even with Fixed Price contracts if the SOW is not well defined (which is not indicated in this question).

Also, my suggestion would be to read the explanation on the source from where you are practicing these questions. Most of the time the feedback should help you understand the rationale behind the correct answer.

-- Mohit

Posted: May 21, 2020 9:05 AM

MD Sarfaraj Alam Advisor, Sales Operations| Dell Technologies India

May 21, 2020 7:01 AM

Replying to Thomas Walenta

...

Would go with D.
Agree with Sarfarj on the reason.

Posted: May 21, 2020 9:45 AM

Tarun Nair Adoor, Kerala, India

I agree with Sarfaraj here.
There is no indication about other factors/ risk in the question and if we consider the "cost risk" the best way to handle it would be going for FFP as there we know what is the cost and the risk is taken care.
Reason for not considering other options.
FPIF. This can be a better choice if we need to conisder the other factors and cost risk is not the highest priority. We may not be in full cost control due to incentives factor.
TM: Is not suitable as supplier is least bothered about cost and this may not be the best choice to have control over cost.
CPIF again is not the option to control the cost risk.

Hope this will help :)

Posted: May 21, 2020 5:46 PM

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