PK0-005 Project Life Cycle Practice Question

Which contract type places the most cost risk on the seller?

Answer choices

Why each option matters

Answer the question above first, then reveal the full breakdown to understand why each option is right or wrong.

Correct answer & explanation

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Fixed-price

A fixed-price contract puts cost risk on the seller because the price is fixed regardless of actual costs.

Answer analysis

For each option: why learners choose it and why it is or isn't the right answer here.

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Fixed-price
Why this is correct
A fixed-price contract locks the seller into an agreed sum regardless of actual costs, so any overrun is absorbed by the seller. This places maximum cost risk on the seller, unlike cost-reimbursable or time-and-materials arrangements.
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Cost-reimbursable
Why it's wrong here
Cost-reimbursable contracts repay the seller's allowable incurred costs plus a fee, so overruns fall on the buyer. It is tempting because the seller must document costs, but a firm-fixed-price contract places the greatest cost risk on the seller.
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Time and materials
Why it's wrong here
Time and materials pays the seller for actual hours plus materials, so cost overruns are borne by the buyer, not the seller. It is tempting as variable pricing, but the seller's risk is low because effort is reimbursed regardless of overrun.
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Cost plus incentive fee
Why it's wrong here
A cost plus incentive fee contract reimburses all allowable seller costs and adds a fee, so cost overruns fall on the buyer, not the seller. It is tempting because the incentive fee rewards beating cost or schedule targets, making it the right choice when the buyer wants to motivate performance on a cost-reimbursable arrangement.

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