International Project Management Association (IPMA) Practice Exam

What is the most critical factor in deciding between a fixed-price and a cost-reimbursable contract?

1. How well defined the scope is

2. The expected duration of the project

3. The expected value of the contract

4. Relevant environmental regulations

The correct answer is: How well defined the scope is

The most critical factor in deciding between a fixed-price and a cost-reimbursable contract is how well defined the scope is. A clearly defined scope allows for the creation of a fixed-price contract, where the costs are predetermined and the contractor agrees to complete the project for that price. This type of contract is ideal when the project requirements are stable and well understood, as it transfers the risk of cost overruns to the contractor. In contrast, if the project scope is not well defined, a cost-reimbursable contract may be more appropriate. This type of contract provides flexibility to adapt to changes in project requirements and compensates the contractor for their costs, which can help in situations where uncertainty is high and project specifications may evolve. The relevance of the expected duration of the project, expected value of the contract, and relevant environmental regulations are important considerations but do not fundamentally determine the choice between fixed-price and cost-reimbursable contracts as much as the clarity of project scope does. A well-defined scope leads to a better understanding of the tasks involved, enabling the negotiation of terms that reflect the true nature of the deliverables and risks associated with the project.