Procurement Management
Contract type determines who bears the risk — know which is which
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Overview
Procurement Management governs the acquisition of goods, services, or results from outside the project team. The central question in procurement planning is always make-or-buy: is it more advantageous to build internally or to procure externally? Once the decision to procure is made, the key choices are contract type and procurement documentation — and contract type is the most tested element on the exam because it directly determines risk allocation between buyer and seller.
The three broad contract families map to who bears cost risk. Fixed Price (FP) contracts put cost risk on the seller: they must deliver the defined scope for the agreed price regardless of actual costs. If scope is well-defined, fixed price protects the buyer. Cost Reimbursable (CR) contracts put cost risk on the buyer: the buyer reimburses the seller's actual costs plus a fee. These are appropriate when scope is uncertain. Time and Material (T&M) contracts are hybrids often used for staff augmentation or when scope is neither fully defined nor completely open-ended.
The procurement lifecycle runs from planning through closure. The PM must understand that active contract administration — monitoring seller performance, managing changes through integrated change control, and maintaining documentation — is as important as the initial contracting. Disputes should be resolved through negotiation first, then mediation or arbitration, then litigation as a last resort.
Must Know at a Glance
| Term / Concept | Definition |
|---|---|
| FFP (Firm Fixed Price) | Seller bears all cost risk. Best when scope is well-defined. Most common contract type. |
| FPIF (Fixed Price Incentive Fee) | Fixed price with bonus/penalty based on performance. Point of Total Assumption (PTA) is a key formula. |
| FP-EPA | Fixed Price with Economic Price Adjustment. Allows price adjustments for inflation over long contracts. |
| CPFF (Cost Plus Fixed Fee) | Buyer reimburses costs plus a fixed fee. Buyer bears cost risk. |
| CPIF (Cost Plus Incentive Fee) | Buyer reimburses costs plus incentive fee based on performance targets. |
| CPAF (Cost Plus Award Fee) | Buyer reimburses costs plus a subjective award fee based on satisfaction. |
| T&M (Time and Material) | Hybrid contract. Good for staff augmentation and undefined scope. Buyer bears risk if not capped. |
| SOW (Statement of Work) | Describes what the seller must provide. Included in bid documents. |
| RFP | Request for Proposal — asks seller for approach and price for complex work. |
| Point of Total Assumption (PTA) | In FPIF contracts: PTA = (Ceiling Price − Target Price) / Buyer Share Ratio + Target Cost. |
Process Sequence
These processes run in order — each one builds on the outputs of the previous.
- 1
Plan Procurement Management
Documenting procurement decisions, approach, and identifying potential sellers.
- 2
Conduct Procurements
Obtaining seller responses, selecting a seller, and awarding a contract.
- 3
Control Procurements
Managing procurement relationships, monitoring contract performance, and making changes as needed.
Key Formulas
Point of Total Assumption (FPIF)
PTA = [(Ceiling Price − Target Price) / Buyer's Share Ratio] + Target Cost
Above PTA, the seller absorbs 100% of cost overruns. Incentivizes seller to control costs below PTA.
Exam Strategy
How to approach these questions
Contract type selection follows one rule: more scope uncertainty = more cost reimbursable (buyer bears risk); less scope uncertainty = more fixed price (seller bears risk). T&M is appropriate for short-term, well-defined labor needs where scope cannot be fully specified. Never use CPPC (Cost Plus Percentage of Cost) — it creates incentive for the seller to inflate costs and is illegal in US government contracting. When a procurement dispute arises, negotiation is always the first step before escalating to arbitration or litigation.
Common Mistakes
- ✕Thinking fixed price always protects the buyer — sellers add risk premiums to FP contracts for uncertain scope.
- ✕Using T&M for long-term work without a not-to-exceed clause — the buyer bears unlimited cost risk.
- ✕Forgetting that CPPC is illegal in US government procurement.
- ✕Assuming the contract closes automatically when work is delivered — formal contract closure requires administrative steps.
All 25 Topics in This Domain
Click any topic for the full explanation, key points, exam tips, and FAQs.
Plan Procurement Management
Plan Procurement Management is the process of documenting project procurement decisions, specifying the approach, and identifying potential sellers.
Procurement Management Plan
The procurement management plan is a component of the project management plan that describes how a project team will acquire goods and services from outside the performing organization.
Conduct Procurements
Conduct Procurements is the process of obtaining seller responses, selecting a seller, and awarding a contract.
Control Procurements
Control Procurements is the process of managing procurement relationships, monitoring contract performance, making changes and corrections as appropriate, and closing out contracts.
Make-or-Buy Analysis
Make-or-buy analysis is a technique used to determine whether a particular product or service should be produced internally by the project team or purchased from an external source.
Procurement Strategy
Procurement strategy defines the project delivery method, the type of legally binding agreement, and the approach for managing procurements throughout the project lifecycle.
Procurement Statement of Work (SOW)
A procurement statement of work (SOW) is a narrative description of the products, services, or results to be supplied by a seller under a contract.
Source Selection Criteria
Source selection criteria are the standards and factors used to evaluate and rank seller proposals during the procurement process.
Bid Documents
Bid documents are formal documents issued by the buyer to prospective sellers to solicit proposals, bids, or quotations for the goods or services needed by the project.
Request for Proposal (RFP)
A Request for Proposal (RFP) is a bid document used to solicit detailed proposals from sellers when the procurement requires a comprehensive evaluation of the seller's approach, methodology, and capabilities in addition to price.
Request for Quotation (RFQ)
A Request for Quotation (RFQ) is a bid document used to solicit price quotes from sellers when the product or service requirements are well-defined and price is the primary selection factor.
Request for Information (RFI)
A Request for Information (RFI) is a procurement document used to gather information from potential sellers about their capabilities, products, or services before issuing a formal solicitation.
Invitation for Bid (IFB)
An Invitation for Bid (IFB) is a procurement document used to solicit sealed competitive bids from sellers when the requirements are precisely defined and the contract will be awarded primarily on the basis of price.
Fixed-Price Contracts
Fixed-price contracts are a category of agreements where the seller is paid a set price for delivering a defined product or service, regardless of the seller's actual costs.
Firm Fixed-Price (FFP)
A Firm Fixed-Price (FFP) contract sets a fixed total price for a defined product or service, and the price does not change regardless of the seller's actual costs.
Fixed-Price Incentive Fee (FPIF)
A Fixed-Price Incentive Fee (FPIF) contract sets a target cost, target profit, ceiling price, and a share ratio that adjusts the seller's fee based on actual performance against the target cost.
Fixed-Price Economic Price Adjustment (FPEPA)
A Fixed-Price with Economic Price Adjustment (FPEPA) contract is a fixed-price agreement that includes a provision for predefined price adjustments tied to specific economic conditions such as inflation or commodity price changes.
Cost-Reimbursable Contracts
Cost-reimbursable contracts are agreements where the buyer reimburses the seller for all legitimate actual costs incurred in performing the work, plus a fee representing the seller's profit.
Cost Plus Fixed Fee (CPFF)
A Cost Plus Fixed Fee (CPFF) contract reimburses the seller for all allowable costs and pays a fixed fee (profit) that does not change regardless of actual costs.
Cost Plus Incentive Fee (CPIF)
A Cost Plus Incentive Fee (CPIF) contract reimburses the seller for allowable costs and includes an incentive fee that adjusts based on the seller's performance against agreed-upon cost targets.
Cost Plus Award Fee (CPAF)
A Cost Plus Award Fee (CPAF) contract reimburses the seller for allowable costs plus an award fee based on the buyer's subjective evaluation of the seller's performance.
Time and Materials (T&M) Contracts
A Time and Materials (T&M) contract is a hybrid agreement that combines elements of both fixed-price and cost-reimbursable contracts, paying the seller fixed rates per unit of time or materials with the total cost determined by actual quantities used.
Procurement Negotiations
Procurement negotiations are discussions between the buyer and seller aimed at reaching a mutually acceptable agreement on all terms and conditions of the contract before signing.
Claims Administration
Claims administration is the process of documenting, processing, monitoring, and resolving contested changes, disputes, or requests for compensation between the buyer and seller during contract performance.
Independent Estimates
Independent estimates are cost or price benchmarks developed by the buyer or a third party to serve as a check against seller-proposed pricing during procurement.
Related Domains
Risk Management
Identifying, analyzing, and responding to project risks — risk register, response strategies, and monitoring.
Scope Management
Defining and controlling what is (and isn't) included in the project — WBS, requirements, scope creep.
Integration Management
Coordinating all project elements — charter, change control, lessons learned, and project closure.
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