PMP Exam CONTRACT Types SIMPLIFIED - FP, CR, T&M (PMBOK Guide)

hello there's our friend Phil project-management train and coach today we're going to be talking about contract types contract types are talked about in the PMBOK guide chapter 12 under procurement management twelve point one point one point six breaks down what exactly these contract types are on page 471 and page 472 so this is a very very quick review of the contract types the third bullet on page 471 starts off by talking about these contract types the three broad categories fixed price where the price for the contract is fixed cost reimbursable where the cost that I incurred and are allowable are reimbursed to the seller and last but not least time and materials which is like a hybrid of fixed price and cost reimbursable so let's talk about these contract types one by one under fixed price the first contract type there is FFP firm fixed price the firm fixed price contract is the most commonly used contract type the buyer loves it because once the price is fixed they know that there will be no change to the price no surprise think about it if you wanted work to be done on your backyard to install a fence or pool or some other fixture what would you prefer would you like a surprise of the seller telling you anything that came into their heads at any point in time or would you prefer a contract where everything was fixed and you didn't need to pay anything else you probably would go for the firm fixed price and the firm fixed price is the most favored contract type by buying organizations people love to buy when there are no surprises as much as possible buyers go for the firm fixed-price because they know there will be no changes now if you decided that in addition to a pool you wanted a fence then you wouldn't be surprised if there was an increase with you and that's the thing about FFP there could be changes if the scope changes but if the scope of work doesn't change then you don't expect to have any surprises that's FFP the next contract type is F PIF fixed price incentive fee there's an incentive to the seller does the seller want to take an awesome vacation on the beach sure well they're gonna have to step up their game the fixed price incentive fee contract gives the buyer and seller some flexibility in that it allows for some deviation from performance with financial incentives tied to achieving agreed-upon metrics if you get this project done early then you will get some additional incentives if you can get this done three weeks earlier than the expected date then you will get some sort of incentive or if you can get this done to this particular quality standard then you will get some particular incentives so typically such financial incentives are related to cost schedule or technical performance of the seller and under the F pif a price ceiling is set and all costs above the ceiling price are the responsibility of the seller in this contract type we typically hear the term the point of total assumption being used but for your exam I wouldn't get carried away with the PTA the PTA at a high level is illustrated in terms of a ceiling price above which the responsibility for the car lie on the side of the cellar if the cellar goes higher than the ceiling price that's their business now there are various components in the F pif contract but those are beyond the scope of the PMP exam in my opinion and I don't think you need to go that far memorizing the formula for the point of total assumption once upon a time we had this on our mock exams but we found this to be a waste of time for the poor student who usually doesn't get a single question on pta so as long as you understand the concept the fixed price incentive fee contract is one in which the seller has a fixed price set for what is being done but there is the possibility of an incentive now if the seller burns through their profit within that fixed price and at the same time burned through any potential to get an incentive then at that point they then assume all of the cost and that's why it's called the point of total assumption but that is beyond the scope of the exam like I said the next contract type is F P - EP a fixed price with economic price adjustment and this contract type allows a clause for inflation if the contract spans across several years then it makes sense for the seller to tell the buy it hey because of the time value of money and the devaluation of money concept we would like to have a clause in here for an economic price adjustment so based on the economy that fixed price could be reviewed also as a result of the price of certain commodities which could vary very widely for example one of my clients had a huge fluctuation in copper and copper was being stolen in the mid-2000s to late 2000 and nine ten and as a result because of the business they did with copper wiring the prices went up quite high that is an example of adjustments in a contract due to certain conditions or increases or decreases for certain commodities the next contract type here is cost reimbursable and in cost reimbursable type contracts the seller is reimbursed for all legitimate costs and that will include travel per diem where it is allowed and for that reason receipts need to be provided in a lot of these contracts so the first one here under cost reimbursable contracts is cos plus fixed fee see PFF the seller is reimbursed for all allowable costs for performing the contract work it's very straightforward there's a fixed fee payment calculated as a percentage of initial estimated project cost so initial estimated project cost is not the same as eventual or at the end or in the middle you see and the reason is there is an illegal type of contract called cost plus percentage of costs this contract is not it costs plus percentage of cost does not have the fixed fee payment calculated as a percentage of the initial estimated cost it is on the other hand a calculation based on what the total outcome is but that's not what this is we need to get this straight before the contract is authorized the next contract type is cos plus incentive fee in the same token as fpi F the seller is reimbursed for all allowable costs but there is an incentive and this incentive is similar in nature to what was discussed under F pif in that based on certain performance levels cost schedule technical whatever the seller will benefit from a cost-sharing formula and this could be an 80/20 split a 60/40 split it really depends on the contract but the bottom line is costs are reimbursed and there's an incentive on top of that the next contract type CPA F cos Plus award fee the seller is reimbursed for all legitimate costs but majority of the fee is earned based on satisfying certain broad and subjective criteria so there's no crying over spilt milk you don't win the award fee too bad the criteria is in the contract but it's very broad and subjective so I usually say seller beware beware of who you do this contract with now one of our clients in the past won a massive massive award fee as they did some business for a government and that award fee was so massive they decided to send a ton of people for training with us of course we were happy about that the last contract type is TNM time and materials contract also called time and means and this is a hybrid of both the cost reimbursable and a fixed price contract they are often used for staff augmentation acquisition of experts and any outside support when a precise statement of work cannot be quickly prescribed the advantage of the time and material contract is you can go ahead and initiate the contract and you can also put a not-to-exceed value per time period I worked on a TNM contract with a well known semiconductor firm and they said fill your project management activities need to stop at this point you cannot go over this value if you go over this value we aren't gonna pay and that is an advantage because they could go ahead very quickly start a contract and they could shut it down or than not to exceed value will kick in at any point that they're not willing to pay so those are your three contract types fix price cost reimbursable and timer materials I hope that helped you this is just the top of the waves to get you straight now on the exam cheap question is which contract type is best for the buyers so if you have FFP fpi f and fixed price with economic price adjustment depending on the question the answer is most likely going to be the FFP now if you're painted a scenario in which the price of a commodity is likely to drop very very low and you have two options between fpi F and F P - EPA of course you should choose FP - EPA so the questions on the exam are going to be based on these ideas is an incentive necessary should we take the risk of an award fee do we need the cost to be reimbursed you see you use a cost reimbursable contract in situations where you are not totally sure of the scope of work there is some ambiguity there are some unknowns but if there are no unknowns as a buyer you want the fixed price also it is ethical to have a cost reimbursable contract if there are known that could affect even the seller because you don't want to negotiate in bad faith so the answer is not always fixed price contrary to what a lot of trainers say out there on social media space sometimes a fixed price contract may not be the most ethical contract type especially when you know there are so many unknowns there's so many factors you know and you don't want the seller to be bitten in a bad way that's called negotiating in good faith and you don't want this service to be bidding period good faith bad faith but anyway that is pretty much the end of the story I will revisit this at some other time and I hope you found some value from my rather quick presentation remember to visit www.carmensognonvi.com/newsletter and don't forget to hit like and subscribe and share the video with your friends take care and bye for now you

Channel: Praizion

Views: 49,527

Rating: 4.8879309 out of 5

Keywords: pmp exam, capm exam, praizion, praizion media, pmp cd, pmp dvd training, pmp coach, pmp certification, pmi, project management, project management institute, time management, risk management, cost management, leadership, training, mentor, pmbok guide, pmbok, guide, sixth, edition

Id: BsIJJs0X_7k

Length: 13min 40sec (820 seconds)

Published: Wed Sep 05 2018