What is a Firm Fixed Price Contract? | Contract Types | FFP | PMP Exam

A Firm Fixed Price Contract or FFP is the simplest form of the Fixed Price Contract in which the payment made by the buyer to the seller is fixed. It is independent of the seller's cost. The risk of cost variation is 100% owned by the seller with the buyer bearing no risk.
👉 This is a simple-to-understand guide that explains the FFP Contract.
- What is a Firm Fixed Price Contract?
- What is the advantage of a Firm Fixed Price contract?
- What is an example of a Firm Fixed Price contract?
- How is the risk shared between seller and buyer in a Firm Fixed Price contract?
- What are the formulas for the Firm Fixed Price contract?
Contracts are covered under Procurement Management in the PMBOK guide. We can expect multiple questions on contracts in the PMP exam.
#FixedPrice
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All the best with your #PMP exam!!
#SunnySensei

[@sunny.sensei]

Which of the following is not true for a Firm Fixed Price Contract? A. Seller should implement a robust change management system B. Firm Fixed Price Contract is more suitable for long term projects than short term projects C. Cost overrun will have no impact on the buyer D. The seller should strictly control the costs to ensure profitability © #SunnySensei #fixedprice #ffp #firmfixedprice

[@KRao26]

Ans: A In Firm Fixed Price Contract, Price of contract does not change. so seller/contractor cannot implement a robust change management system. So, "A" is the correct answer. Correct me if my I am wrong..Mr.Sunny.

[@sunny.sensei]

Sorry, but A is not the correct choice. Let me explain. In FFP contract, 100% of the cost overrun risk is borne by the seller. Buyer bears no risk. This means the seller has to carefully manage the project-cost. Seller cannot allow scope creep - addition to scope without formal approvals. Extra scope will cost more and hit the seller’s profitability. Robust “change management system” is necessary to manage the project scope. All changes to the scope are tracked using this system. Additional scope is formally agreed upon by the seller and the buyer. The buyer also pays the seller an extra fee for this additional scope. In summary, A is TRUE for Firm Fixed Price Contract. This question is looking for the statement that is NOT TRUE. Please have another look at the question. All the best with your PMP exam! #SunnySensei

[@javaidiqbal8567]

B is not true. My thinking process is based, firstly, on elimination as I believe A, C, and D are all true to FFP contracts. Secondly, long term projects are prone to more changes, the longer a project runs the higher the chance of variability in scope, quality, time, resources, etc. and therefore the actual costs can be unpredictable compared to costs in a short term project. So, B stands out to be untrue.

[@sunny.sensei]

Excellent, you are absolutely correct. Thank you for sharing the detailed explanation too.