Free PMI Project Management Professional (PMP) Practice Question

The correct answer is Firm Fixed Price (FFP) contract. This type of contract places the maximum risk on the seller because the price is set at the beginning and does not change regardless of the seller's costs. The seller bears all cost risk and must absorb any cost overruns.

In contrast:

• Cost Plus Fixed Fee (CPFF) contracts shift most of the risk to the buyer, as the buyer pays for all allowable costs plus a fixed fee.
• Time and Materials (T&M) contracts share the risk between buyer and seller, with the buyer taking on more risk for the duration of the work.
• Fixed Price Incentive Fee (FPIF) contracts share the risk between buyer and seller, with the seller taking on more risk than in cost-reimbursable contracts but less than in a pure FFP contract.

Understanding contract types and their associated risk allocation is crucial for project managers when making procurement decisions.