Procurement choices, supplied contracts and incentives
Domain 10 covers make-or-buy analysis, the three contract families and their risk allocation, the source-selection process, and contract control. Calculation items on incentive-fee contracts appear regularly, as do scenario items on which contract type suits an unclear scope.
Planning procurement
- Make-or-buy analysis compares internal cost and capability against external supply.
- Fixed-price family: firm-fixed-price (FFP) suits a well-defined scope and puts maximum cost risk on the seller; fixed-price incentive fee (FPIF) shares overruns against a ceiling; fixed-price with economic price adjustment (FP-EPA) protects long-term contracts against inflation.
- Cost-reimbursable family: cost plus fixed fee (CPFF), cost plus incentive fee (CPIF), cost plus award fee (CPAF). The buyer bears most cost risk and must audit the seller's costs.
- Time and materials (T&M) is used for small, urgent, or poorly defined work and should carry a ceiling.
- Procurement documents: RFI, RFP (solution and price), RFQ (price), IFB (bid).
Conduct and control
- Conduct procurement: bidder conferences, independent cost estimates, proposal evaluation, negotiation, award.
- Control procurement: contract change control, performance review, inspection and audit, seller payment, claims administration, and procurement audit. Use the actual contract’s authorized change procedure and applicable law. A written approval trail supports control, but no blanket statement about every possible oral agreement is inferred here.
Worked example
FPIF: target cost 100万元, target fee 10万元, target price 110万元, ceiling price 130万元, sharing 70% buyer / 30% seller. Actual cost is 120万元, an overrun of 20万元; the seller bears 6万元, so fee = 10 − 6 = 4万元 and price = 124万元, below the ceiling. If actual cost were 140万元, the computed price would be 138万元, but the ceiling caps the seller at 130万元, so the seller absorbs a 10万元 loss.
Traps that cost marks
- Choosing cost-reimbursable contracts for a stable, well-defined scope.
- Forgetting that CPFF requires the buyer to audit seller costs.
- Ignoring the ceiling when computing FPIF settlements.
- Accepting an oral contract change.
- Confusing a procurement audit with a financial statement audit.