Plan and manage procurement
Plan and manage procurement
What you will learn
- Name the three main contract types (fixed price, cost-reimbursable, time and materials).
- Identify who bears cost-overrun risk in each type.
- Choose the most fitting contract type based on scope clarity and level of uncertainty.
- Connect contract type to how closely the buyer likely needs to monitor execution.
Choosing a contract type isn't a purely legal detail — it's a core decision in who bears cost-overrun risk if an unexpected change or complexity arises. The three main types distribute this risk radically differently between buyer and seller.
The three main contract types
| Fixed Price (FP) | A price fixed in advance — the seller bears the full risk of cost overrun. Fits when scope is clear and precisely defined. |
|---|---|
| Cost-Reimbursable (CR) | The buyer reimburses the seller's actual costs plus a profit margin — the buyer bears the cost-overrun risk. Fits vague scope or research-type projects. |
| Time & Materials (T&M) | A hybrid of both — a fixed hourly/unit rate, but the total quantity isn't fixed in advance. Fits short work or work whose exact size is uncertain. |
What matters on the exam
- "Who bears the risk" is the most common deciding factor in contract-type questions — not legal wording details.
- Vague scope usually rules out fixed price — a seller won't accept full risk on imprecisely defined work.
Fixed price isn't always "cheapest" or "best"
A common mistake is assuming fixed price is always superior because it's "defined and guaranteed". But forcing it onto vague scope pushes sellers to price in a large safety margin upfront to cover their risk — it can end up actually costlier than a well-monitored cost-reimbursable contract.
Quick check
Answer in your head first, then reveal.
In a fixed-price contract, who bears the risk of cost overrun?Reveal the answer
The seller.
Which contract type fits a research project with unclear scope?Reveal the answer
Cost-Reimbursable.
What contract type combines a fixed unit price with an undetermined total quantity?Reveal the answer
Time & Materials.
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Sources
Used to verify the facts. The writing is original to Passuit.