PMP guideProcess domain
PMP Procurement: Contract Types and Who Carries the Risk
Fixed-price, cost-reimbursable, and time-and-materials contracts compared by who carries cost risk, with an original fit table, a worked incentive example, and vendor closure.
Short answer
PMP procurement questions usually turn on how well the work is defined and who should carry the cost risk. Fixed-price contracts put most cost risk on the seller and suit well-defined work. Cost-reimbursable contracts pay the seller's allowable costs plus a fee, so the buyer carries more risk, which suits uncertain work. Time-and-materials contracts pay agreed hourly rates plus materials, suit short or hard-to-estimate work, and normally carry a ceiling price.
What the 2026 PMP outline asks about procurement
Procurement is Process task 5 in PMI's 2026 Exam Content Outline (revised August 11, 2026, as checked on October 27, 2026). In plain terms, it runs from deciding what to buy and under which kind of contract, through negotiation and day-to-day supplier management, to checking that the agreement delivered what it promised. Task 10, project closure, adds closing out procurements when a project or phase ends.
The ECO does not define contract types. This page uses Part 16 of the U.S. Federal Acquisition Regulation (FAR) as a neutral public reference for the definitions. The PMP is not a FAR exam, and private contracts vary, but the risk logic is the same: FAR 16.101 describes a range running from firm-fixed-price, where the contractor has full responsibility for performance costs, to cost-plus-fixed-fee, where it has minimal responsibility.
The three PMP contract families and who carries the cost risk
| Contract type | How the seller is paid | Who carries most cost risk | Fits when |
|---|---|---|---|
| Firm-fixed-price (FFP) | One agreed price, not adjusted for the seller's actual costs | Seller | Scope is well defined and a fair price can be set up front |
| Fixed-price with economic price adjustment (FPEPA) | Fixed price that moves up or down when named conditions occur, such as a cost index change | Seller, with defined market swings shared | Long contracts exposed to price changes outside the seller's control |
| Fixed-price incentive (FPIF) | Target cost and profit, a formula that adjusts profit, and a ceiling price | Shared up to the ceiling, then the seller | Defined work where the buyer wants to reward cost control |
| Cost-plus-fixed-fee (CPFF) | Allowable costs plus a fee that does not change with actual cost | Buyer | Requirements too uncertain to price |
| Cost-plus-incentive-fee (CPIF) | Allowable costs plus a fee adjusted by a formula against target cost | Buyer, with some shared through the fee | Uncertain work where the buyer still wants a cost incentive |
| Cost-plus-award-fee (CPAF) | Allowable costs plus a base fee and an award judged by the buyer | Buyer | Performance that is hard to measure with a formula |
| Time and materials (T&M) | Fixed hourly rates that include overhead and profit, plus materials at cost | Buyer, up to the ceiling price | Short or urgent work whose extent cannot be estimated |
A few FAR lines state the exam logic in the regulation's own words. FAR 16.202-1 says a firm-fixed-price contract places maximum risk on the contractor. FAR 16.306 says cost-plus-fixed-fee gives the contractor only a minimum incentive to control costs. FAR 16.601 says T&M gives no positive profit incentive for cost control or labor efficiency, which is why it requires buyer surveillance, and it also requires a ceiling price the contractor exceeds at its own risk. FAR 16.102 also bars cost-plus-a-percentage-of-cost in federal contracting, the arrangement in which the seller's fee grows as costs grow.
Seven names and their abbreviations are easy to blur. Write one card per contract type with who carries the cost risk on the back, or use the 460 flashcards planned for full PMP prep once it launches.
Which contract fits: original PMP scenarios
The situations below are invented for practice. Read the first column, decide, then check.
| Situation | Better fit | Why |
|---|---|---|
| A training team needs 5,000 printed manuals to a finished specification | Firm-fixed-price | The work is fully defined, so the seller can price it and carry the cost risk |
| A three-year order for steel brackets while steel prices swing widely | Fixed-price with economic price adjustment | The price can track a published index instead of the seller padding the bid |
| A first-of-its-kind sensor prototype with requirements still being discovered | Cost-reimbursable, often with an incentive fee | Nobody can price unknown work, so the buyer pays actual costs and tracks them closely |
| A two-week emergency cleanup after a data-center flood, extent unknown | Time and materials with a ceiling | Work must start now, and the ceiling caps the buyer's exposure |
| A defined building fit-out where the owner wants to reward finishing under budget | Fixed-price incentive | The work is priceable and the formula shares savings with the seller |
| Forty hours of expert review of a security architecture | Time and materials (labor-hour, since no materials) | Small, hard-to-scope effort where a fixed bid would be mostly guesswork |
The pattern to carry into the exam: the clearer the scope, the more risk the seller can reasonably accept, and the more fixed the price can be. One of the 20 free PMP practice questions applies it to a fully designed clinic fit-out with stable material prices.
A worked fixed-price incentive example
The numbers are invented. A buyer and seller agree on a fixed-price incentive contract with a target cost of $400,000, a target profit of $40,000 (a target price of $440,000), a sharing formula in which the seller absorbs 30% of any overrun and keeps 30% of any underrun, and a ceiling price of $480,000. FAR 16.403-1 describes this structure: a target cost, a target profit, a price ceiling, and a profit adjustment formula, with any cost above the ceiling absorbed by the contractor as a loss.
| Actual cost | Profit adjustment | Profit by formula | Price by formula | Buyer pays | Seller's result |
|---|---|---|---|---|---|
| $380,000 | Underrun $20,000 × 30% = +$6,000 | $46,000 | $426,000 | $426,000 | Profit $46,000 |
| $450,000 | Overrun $50,000 × 30% = −$15,000 | $25,000 | $475,000 | $475,000 | Profit $25,000 |
| $490,000 | Overrun $90,000 × 30% = −$27,000 | $13,000 | $503,000 | $480,000 (ceiling) | Loss $10,000 |
In this example the formula price equals 0.7 × actual cost + $160,000, so it reaches the $480,000 ceiling at an actual cost of about $457,143. Above that point every extra dollar of cost comes out of the seller's pocket. Many PMP courses call this the point of total assumption.
Compare a cost-plus-fixed-fee deal with an estimated cost of $300,000 and a fee of $24,000. If actual cost is $280,000, the buyer pays $304,000. If it is $330,000, the buyer pays $354,000. The fee stays at $24,000 either way, which is exactly why FAR describes the incentive to control cost as minimal.
Once you can rebuild that incentive table from the four contract terms, try it with a different sharing ratio and ceiling. Full PMP prep on Passy is not open yet; its page describes Process scenarios planned with an explanation of why the other options fall short.
Managing vendor performance and closing the contract
Choosing the contract is only the start of task 5. During delivery, the project manager compares the seller's work with what the agreement says: acceptance criteria, reporting duties, and payment terms. Suppose a fictional software vendor's monthly test reports show the defect rate climbing for three releases in a row. A reasonable sequence is to review the results against the agreed quality terms, document the trend, raise it with the vendor in the review the contract provides for, and agree a corrective plan. Withholding payment on your own, or threatening to cancel, skips the agreement's own process and usually reads as a distractor.
Closure means confirming that the agreement's objectives were met, settling open claims and final payments, recording the vendor's performance for future selection, and filing the procurement records. In the ECO, closing procurement sits alongside final lessons learned, financials and resources in task 10. Unresolved claims belong in negotiation or the dispute process the contract defines, not in a project manager's private settlement.
Procurement links straight to risk: transferring a risk to a seller through a fixed price does not remove it, and the seller may price that risk into its bid. The PMP risk management guide covers transfer as a response, and the PMP Process domain overview shows where procurement fits among the other nine tasks. To see how much of the bank each domain gets once full prep launches, check the domain-by-domain question totals in planned PMP prep.
Trust the source
Official sources
Exam policies can change. Use these primary sources for the most current details.