Procurement is part of the Process domain, which is 41% of the July 2026 PMP exam. The exam content outline lists "select preferred contract types" as one of the things a project manager must be able to do, so expect scenario questions that describe a purchase and ask which contract fits.
The good news: almost every contract question comes down to one idea. Who carries the cost risk if the work costs more than expected?
The three families
| Family | Who carries most of the cost risk | Use it when |
|---|---|---|
| Fixed price | The seller | The scope is clear and stable |
| Cost reimbursable | The buyer | The scope is unclear or likely to change |
| Time and materials | Shared | You need to start fast, or the work is small or open ended |
If you remember only this table, you can already answer most "which contract should you use" questions. The rest of this guide covers the variants inside each family.
Fixed price contracts
The buyer pays an agreed price for a defined scope. If the seller's costs go up, the seller absorbs the difference. That is why sellers only accept fixed price when the scope is well defined.
Firm fixed price (FFP). One price, no adjustments. The most common contract type, and the one with the most risk for the seller. Changes to scope still go through the contract change control process, and they can change the price.
Fixed price incentive fee (FPIF). A target cost, a target profit, a share ratio and a ceiling price. If the seller finishes under the target cost, both sides share the saving. If the seller goes over, both share the overrun, until the price reaches the ceiling. Above that, the seller pays everything. The worked example below shows how this works.
Fixed price with economic price adjustment (FP-EPA). A fixed price that can move with an agreed index, such as inflation or the price of steel. It is used on contracts that run for several years, where neither side can predict costs that far ahead.
Cost reimbursable contracts
The buyer pays the seller's allowable costs, plus a fee. If costs go up, the buyer pays more. Buyers accept this when the scope cannot be defined up front, for example in research or early stage design work.
Cost plus fixed fee (CPFF). The buyer pays all allowable costs plus a fee fixed at the start, usually a percentage of the estimated cost. The fee does not change if actual costs change. The buyer carries the most risk in this contract, and the seller has little reason to control costs.
Cost plus incentive fee (CPIF). The buyer pays costs plus a fee that goes up or down with performance against a target cost, using a share ratio. Savings and overruns are shared.
Cost plus award fee (CPAF). The buyer pays costs plus an award fee based on criteria set out in the contract, such as quality or responsiveness. The buyer decides how much of the award is earned, and that decision is usually not open to dispute. Use it when performance is easier to judge than to measure.
Time and materials (T&M)
The buyer pays an agreed rate per hour or day, plus materials. It is simple and fast to set up, which makes it a good fit for staff augmentation, small jobs or work that has to start before the scope is clear.
The risk is that the bill has no natural limit. The exam's preferred fix is a not to exceed amount, a cap that the seller cannot bill beyond without approval.
Worked example: FPIF and the point of total assumption
A buyer signs a fixed price incentive fee contract with these terms:
- Target cost: $100,000
- Target profit: $10,000
- Target price: $110,000
- Share ratio: 80/20 (the buyer takes 80% of any overrun or saving, the seller 20%)
- Ceiling price: $120,000
Scenario 1: the seller finishes under target
Actual cost is $90,000, a saving of $10,000. The seller's share of the saving is 20%, so its profit rises by $2,000 to $12,000.
The buyer pays 90,000 + 12,000 = $102,000.
Scenario 2: the seller goes over, below the ceiling
Actual cost is $105,000, an overrun of $5,000. The seller's share is 20%, so its profit falls by $1,000 to $9,000.
The buyer pays 105,000 + 9,000 = $114,000. That is under the ceiling, so it stands.
The point of total assumption (PTA)
The PTA is the cost at which the price hits the ceiling. Above it, the seller absorbs every extra dollar.
PTA = (Ceiling price − Target price) ÷ Buyer's share + Target cost
PTA = (120,000 − 110,000) ÷ 0.8 + 100,000 = 12,500 + 100,000 = $112,500
Check: at $112,500, the overrun is $12,500, the seller's profit falls by 20% of that ($2,500) to $7,500, and the price is 112,500 + 7,500 = $120,000. Exactly the ceiling.
Scenario 3: the seller goes past the PTA
Actual cost is $115,000. The formula would give a price of 115,000 + 7,000 = $122,000, but the ceiling is $120,000, so the buyer pays $120,000. The seller's profit is only $5,000.
CPIF example
A cost plus incentive fee contract has a target cost of $200,000, a target fee of $15,000 and a share ratio of 70/30. The seller finishes at $180,000.
The saving is $20,000. The seller's 30% share adds $6,000 to the fee, which becomes $21,000. The buyer pays 180,000 + 21,000 = $201,000.
Many CPIF contracts also set a minimum and maximum fee. If the question gives them, apply them last.
How to pick the right contract in a question
Read the scenario for these clues:
- "Scope is well defined", "detailed specifications", "standard product": fixed price.
- "Multi-year", "inflation", "commodity prices": FP-EPA.
- "Research", "unknown scope", "new technology", "requirements will evolve": cost reimbursable.
- "Wants the seller motivated to save money or finish early": an incentive fee contract.
- "Performance is subjective", "customer satisfaction": award fee.
- "Need someone to start Monday", "a few extra developers": T&M, ideally with a not to exceed amount.
On agile projects, the exam may describe contracts that pay for value delivered in small increments, such as fixed price per sprint or release, a not to exceed T&M budget, or an option to stop early once enough value has been delivered. The idea is the same: match the contract to how much is known about the scope.
Five traps on contract questions
- Changing the contract informally. The contract is a legal document. Changes go through contract change control, usually with the procurement or contracts team, even when the project manager agrees with the change.
- Going straight to court. For disputes, the exam prefers negotiation first, then alternative dispute resolution such as mediation or arbitration. Litigation is the last resort.
- Assuming the buyer always pays the target price. In FPIF, the price moves with actual cost until it hits the ceiling.
- Forgetting who carries the risk in CPFF. The fee is fixed, but the buyer pays every allowable cost. That is the riskiest contract for the buyer.
- Leaving T&M open ended. Without a not to exceed amount, the buyer has no cap on the bill.
Practice
Contract questions get much easier once the risk question becomes automatic. For the other calculations on the exam, see the PMP formulas cheat sheet. Contract risk also shows up in risk management questions, and disputes with sellers follow the same logic as conflict resolution.
Then test yourself on scenario questions written this way in the free 30-question PMP quiz.