Rick is the project manager for TTM project.
He is in the process of procuring services from vendors.
He makes a contract with a vendor in which he precisely specify the services to be procured, and any changes to the procurement specification will increase the costs to the buyer.
Which type of contract is this?
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A. B. C. D.A.
The type of contract Rick is using in the procurement process is a Firm Fixed Price Contract (FFP).
FFP contracts are the most commonly used type of contract in procurement processes. They are also known as Fixed Price Contracts. The key feature of FFP contracts is that the price of the goods or services is fixed at the outset of the contract and does not vary, except for any changes agreed to by both parties.
In the case of Rick's contract, any changes to the procurement specification will increase the costs to the buyer. This means that the vendor bears the risk of cost overruns and is incentivized to perform the services as efficiently as possible. FFP contracts are typically used when the scope of work is well-defined, and the buyer wants to transfer the risk of cost overruns to the vendor.
Here are some characteristics of other types of contracts, for comparison:
Fixed Price Incentive Fee (FPIF) contracts have a fixed price, but the buyer and seller can agree to share cost savings or overruns based on a predetermined formula. These types of contracts are often used when the buyer wants to incentivize the seller to complete the work ahead of schedule or under budget.
Cost Plus Fixed Fee (CPFF) contracts reimburse the seller for the actual costs incurred, plus a fixed fee. The fee does not vary, regardless of the actual costs incurred. These types of contracts are often used when the scope of work is not well-defined, and the buyer wants to incentivize the seller to keep costs low.
Fixed Price with Economic Price Adjustment (FP-EPA) contracts have a fixed price, but the price can be adjusted based on changes in the market. These types of contracts are often used when the price of the goods or services is subject to significant fluctuations, such as with commodities.