Practice Quiz

Risk Management Professional Exam Prep

Category - Risk Management

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What is a potential downside to a Fixed Price contract with a vendor if you are buying services? Select all that apply.
  1. The vendor might cut corners on the quality of materials.
  2. The vendor will not control material costs.
  3. he vendor does not have any incentives to finish the project on time.
  4. The vendor may price in a margin of safety.
  5. None of the above.
Explanation
Answer: A, D. With a fixed price contract, the vendor performing the services has the cost risk and has an incentive to keep the prices of the materials used down. Additionally, they may price in an initial margin of safety so they can be absolutely sure they will make money on the project.
B, is the opposite of A and is not true as controlling material costs will be in the vendor’s best interest in this case. C is not true as finishing the project on time is a key criteria for project success and the vendor’s reputation. Also, if the project goes too long, this will impact the project’s financial success for them.

Key Takeaway: With a fixed price project, it’s important the project manager ensure that the vendor delivers quality services using the right resources and materials. Ideally, these would be stipulated clearly in the contract.
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