PM Test Center

Contracts should typically be communicated through:

A. Informal written
B. Informal verbal
C. Formal written
D. Formal verbal

Answer: C. Formal written
Formal written communication should be used for project documents such as project charters, project plans, and contracts. As a general rule, if it needs sign-off, then you should take a formal written method. Most project communication, however, will fall into the other categories. These could include email (informal written), meetings (informal verbal), and presentations (formal verbal).

After deciding to outsource a part of the project, your sponsor tells you that he wants a contract with the least amount of risk. What type of contract will you be seeking?

A. Fixed price
B. Time and materials
C. Cost plus fixed fee
D. Cost plus percentage of cost

Answer: A. Fixed price
Of the contract types listed, fixed price (aka firm fixed price or lump sum) is the safest bet for the buyer. In a fixed price contract for $100,000, the buyer knows exactly what she is getting (assuming the scope is clearly defined) and how much she is paying. If the work actually takes more than $100,000 to deliver, then it rests on the supplier.

An important output of the Close Procurements process is:

A. Ensuring that the seller is satisfied
B. Reporting earned value to the sponsor
C. Negotiating the next contract for the next project
D. Getting formal acceptance of the deliverable

Answer: D. Getting formal acceptance of the deliverable
Deliverable acceptance is a critical piece of organization process assets updates, an output of the Close Procurements process.

Using a Fixed Price with Economic Price Adjustment Contract (FP-EPA) typically protects the:

A. Buyer
B. Seller
C. Buyer and seller
D. Escrow

Answer: C. Buyer and seller
The intention of a Fixed Price with Economic Price Adjustment Contract is to protect both the buyer and the seller from external conditions outside of their influence.

While building a new community park, you hired a contractor to complete a small visitor center that includes restrooms, a snack shop, and bulletin boards. You agreed to a fixed price contract payable upon completion of their deliverable. Midway through the project, they contractor informs you that the economy has affected their bottom line and they could use some funds upfront to pay their subcontractors. Which is the following is the best thing for you to do?

A. Insist that you agreed to pay upon completion and are not willing to violate the contract.
B. Negotiate a change to the payment conditions.
C. Pay the contractor for the work accomplished to date.
D. Start the search for another contractor.

Answer: B. Negotiate a change to the payment conditions.
Although paying the contractor for the work accomplished to date seems fair, you would want that detailed in a new contract or addendum. Therefore, the best approach is the negotiate the change first so the new payment conditions, whatever they may be, are documented and approved by both parties.

When hiring a supplier with a time and material contract, one concern to be aware of is:

A. Supplier is not motivated to reduce cost
B. You must have clear scope
C. There is usually an increase in change orders
D. Work can be incomplete or sloppy if they fall behind

Answer: A. Supplier is not motivated to reduce cost
For a time and material contract, there is little to no incentive for the vendor to reduce cost. In fact, the more work there is and the longer the project takes, the more the vendor could earn. The other choices are disadvantages for fixed price contracts.

When hiring a supplier with a fixed price contract, one concern to be aware of is:

A. Supplier is not motivated to reduce cost
B. Work can be incomplete or sloppy if they fall behind
C. It is only appropriate for small projects
D. Total project cost is unknown

Answer: B. Work can be incomplete or sloppy if they fall behind
When a vendor is working with a fixed price contract, they do their best to keep their cost down. The more they save themselves, the more they profit. Therefore, in the event the vendor falls behind, in efforts to keep their profit margins high, they could reduce the quality of their work.

You are the project manager for a utility company. While determining the type of contract with one of your suppliers, you realize that the scope has not been defined yet. Which of the following contract types is your best choice?

A. Firm Fixed Price (FFP)
B. Time and Material (T&M)
C. Cost Plus Fixed Fee (CPFF)
D. Cost Plus Award Fee (CPAF)

Answer: B. Time and Material (T&M)
This type of contract is used when the scope is not well defined. If a fixed price contract were used, change orders would ensue, which would typically lead to a cost overrun. This pay-as-you-go method allows the buyer and seller to work together to progressively elaborate on the project scope.

You are the project manager for a utility company. While determining the type of contract with one of your suppliers, you want to pay a simple fee but recognize that the project will take nearly a decade to complete. Which of the following contract types is your best choice?

A. Cost Plus Fixed Fee (CPFF)
B. Time and Material (T&M)
C. Firm Fixed Price (FFP)
D. Fixed Price with Economic Price Adjustment (FP-EPA)

Answer: D. Fixed Price with Economic Price Adjustment (FP-EPA)
This type of contract is used when a project is estimated to take many years to complete. It is basically a fixed price contract with pre-defined adjustments due to financial conditions. It is used on long-term relationships and provides good protection for both parties.

You are the project manager for a utility company. While determining the type of contract with one of your suppliers, you determine that you want to reimburse costs and pay a fee based on achieving performance objectives. Which of the following contract types is your best choice?

A. Cost Plus Fixed Fee (CPFF)
B. Cost Plus Incentive Fee (CPIF)
C. Firm Fixed Price (FFP)
D. Fixed Price Incentive Fee (FPIF)

Answer: B. Cost Plus Incentive Fee (CPIF)
This type of contract pays a supplier a certain amount based on meeting metrics. All allowable costs are reimbursed.