Project Risk Management Contract & Procurement Risk 1 — Questions and Answers
Question 1: Which contract type transfers the most financial risk to the seller?
- Fixed-price contract (Correct answer)
- Cost-plus-fixed-fee contract
- Time and material contract
- Cost-plus-incentive-fee contract
Correct answer: Fixed-price contract
In a fixed-price contract, the seller must complete the work at the agreed price regardless of actual costs, bearing the full financial risk.
Question 2: What is the primary purpose of a make-or-buy analysis in project risk management?
- To determine whether to hire internal or external staff
- To assess the risks and costs of producing internally versus outsourcing (Correct answer)
- To evaluate the quality of vendor proposals
- To establish contract payment terms
Correct answer: To assess the risks and costs of producing internally versus outsourcing
A make-or-buy analysis evaluates the risks, costs, and benefits of producing a product or service internally versus outsourcing to an external vendor.
Question 3: In a Cost-Plus-Incentive-Fee (CPIF) contract, how is seller performance risk managed?
- The buyer absorbs all cost overruns with no seller accountability
- The seller receives incentive fees for meeting defined performance targets (Correct answer)
- Costs are fixed regardless of actual expenditures
- The seller guarantees delivery at a set price
Correct answer: The seller receives incentive fees for meeting defined performance targets
CPIF contracts include incentive fees tied to performance metrics, motivating sellers to control costs while sharing financial risk with the buyer.
Question 4: Which procurement document is used to solicit bids when the scope of work is clearly and completely defined?
- Request for Information (RFI)
- Request for Proposal (RFP)
- Invitation for Bid (IFB) (Correct answer)
- Request for Quotation (RFQ)
Correct answer: Invitation for Bid (IFB)
An Invitation for Bid (IFB) is used when scope is fully defined and vendor selection is based primarily on price.
Question 5: What does a warranty clause in a procurement contract primarily protect against?
- Schedule delays caused by the buyer
- Defects or failures in delivered goods and services after acceptance (Correct answer)
- Cost overruns during project execution
- Scope creep introduced by the seller
Correct answer: Defects or failures in delivered goods and services after acceptance
A warranty clause requires the seller to repair or replace defective goods or services for a specified period after delivery and acceptance, protecting the buyer.
Question 6: Which risk response strategy is employed when a project team outsources project work to an external vendor through a contract?
- Avoid
- Mitigate
- Transfer (Correct answer)
- Accept
Correct answer: Transfer
Outsourcing work to a vendor through a contract transfers the financial and performance risk to the third party.
Question 7: What is a key risk associated with sole-source procurement?
- Increased competition driving up costs
- Vendor dependency and lack of competitive pricing leverage (Correct answer)
- Difficulty in evaluating multiple vendor proposals simultaneously
- Longer procurement lead times due to evaluation complexity
Correct answer: Vendor dependency and lack of competitive pricing leverage
Sole-source procurement creates vendor dependency and eliminates competitive pricing, increasing the risk of cost overruns and reducing the buyer's negotiating leverage.
Project Risk Management Contract & Procurement Risk 1
Which contract type transfers the most financial risk to the seller?