In a Cost-Plus-Fixed-Fee (CPFF) contract, who bears the greatest financial risk?

In a Cost-Plus-Fixed-Fee (CPFF) contract, who bears the greatest financial risk?

• A. The contractor
• B. The acquiring organization
• C. The government agency
• D. The project manager

Answer: (B)

In a Cost-Plus-Fixed-Fee contract, the contractor is reimbursed for allowable costs plus a fixed fee. Because the fee is fixed, the contractor’s compensation doesn’t increase if the project costs more, and the government or client reimburses all allowable costs incurred. That setup shifts the financial risk of cost overruns onto the acquiring organization (the buyer). The buyer may end up paying much more than planned if costs rise, while the contractor still receives the fixed fee regardless of total costs. The project manager is a role, not the party bearing the contract’s financial risk. So the acquiring organization carries the greatest financial risk in this arrangement.

In a Cost-Plus-Fixed-Fee contract, the contractor is reimbursed for allowable costs plus a fixed fee. Because the fee is fixed, the contractor’s compensation doesn’t increase if the project costs more, and the government or client reimburses all allowable costs incurred. That setup shifts the financial risk of cost overruns onto the acquiring organization (the buyer). The buyer may end up paying much more than planned if costs rise, while the contractor still receives the fixed fee regardless of total costs. The project manager is a role, not the party bearing the contract’s financial risk. So the acquiring organization carries the greatest financial risk in this arrangement.