Plan Procurement and Select Contract Types

Introduction

This lesson covers the first half of task 5 of the Process domain in the July 2026 PMP Examination Content Outline (Process carries 41% of the exam): plan procurement, determine the delivery solution, select preferred contract types, and prepare the procurement management plan. The second lesson of this chapter covers negotiation, executing the plan, evaluating vendors, and verifying that the objectives of the agreement are met.

Procurement questions test judgment about risk allocation. Who bears the risk of cost overruns, how clear is the scope, and how much control does the buyer want? After this lesson you will be able to run a make-or-buy analysis, write a procurement strategy, compare fixed-price, cost-reimbursable and time-and-material contracts with calculations, and choose contracting approaches that suit agile or hybrid work.

Learning objectives

• Explain what the procurement management plan and the procurement strategy contain.
• Perform a make-or-buy analysis, including a break-even calculation.
• Describe the main procurement documents (RFI, RFQ, RFP, SOW) and when each is used.
• Compare contract types and calculate seller and buyer outcomes under each.
• Choose a contract type from scope clarity, risk and relationship in a scenario.
• Describe agile-friendly contracting and tailoring for hybrid projects.
• Identify legal, ethical and sustainability aspects to build into agreements.

1. Why procurement planning matters

Most projects buy something: software licences, contractors, equipment, cloud services, specialist consultancy. Buying shifts some work and some risk to a seller, but it also adds dependency, coordination and legal exposure. A project manager is rarely the contracting authority; the organization's procurement or legal department often signs the agreement. The project manager still defines requirements, participates in selection, and manages delivery against the agreement.

Procurement planning answers four questions:

1. What do we need from outside the project, and why?
2. Should we make it ourselves or buy it?
3. How will we find and select the seller, and under what type of agreement?
4. How will we manage the relationship and verify delivery?

The answers form the procurement management plan and the procurement strategy.

2. Make-or-buy analysis

A make-or-buy analysis compares producing something internally against acquiring it, and includes cost, capacity, capability, control, intellectual property, schedule and risk. Cost is not the only factor: a company may make a core, differentiating capability itself even when it costs more, and buy a commodity service even if it could build it.

Factors to consider:

Example: break-even

A project needs a reporting tool. Building it costs EUR 90,000 in fixed development plus EUR 2,000 per month of internal maintenance. Buying a subscription costs EUR 5,000 per month with no up-front cost. Break-even month: 90,000 + 2,000 x m = 5,000 x m, so 90,000 = 3,000 x m, giving m = 30 months. If the tool will be used for 24 months, buying is cheaper (cost of buying 120,000 versus making 138,000). If it will be used for 48 months, making is cheaper (make 186,000 versus buy 240,000). The decision depends on the useful life, and then on non-financial factors such as data sensitivity.

3. Procurement strategy and management plan

The procurement strategy states how the work will be delivered and bought: the delivery model (design-build, build-operate-transfer, framework agreement, single or multiple sellers), the contract types, the phases of procurement, and the risk allocation. The procurement management plan describes how the procurement processes will be managed from planning to closure.

Typical contents of the plan:

• Types of contract to use and when.
• Authority of the project team, the procurement department and legal.
• Standard documents and templates.
• Selection criteria and evaluation method.
• Integration with scope, schedule, cost and risk (for example, lead times on the schedule).
• Constraints and assumptions (jurisdiction, currency, regulatory rules, local content).
• How sellers will be managed, measured and paid (milestones, service levels).
• Insurance, bonds and guarantees.
• Sustainability and ethics requirements (environmental standards, labour practices, anti-corruption rules).
• Reporting and meeting cadence with the seller.
• Closure and transition requirements.

Procurement documents

Evaluation criteria should be defined before proposals arrive and should include technical capability, price, past performance, financial stability, references, and compliance with security or sustainability requirements. A weighted scoring model keeps the decision objective.

4. Contract types

The central concept is risk allocation. In a fixed-price contract the seller carries most of the cost risk. In a cost-reimbursable contract the buyer carries it. In time and materials, both share it in a way that depends on caps and rates.

Fixed-price contracts

• Firm fixed price (FFP): a set price regardless of the seller's costs. Best when scope is clear and stable. Low buyer cost risk, but changes cost money and sellers may cut corners if they underestimated.
• Fixed price with economic price adjustment (FPEPA): the fixed price is adjusted for defined factors such as inflation or exchange rates, suited to long contracts.
• Fixed price incentive fee (FPIF): a fixed price with an incentive for meeting targets, a target cost, a target profit, a price ceiling and a sharing ratio.

Cost-reimbursable contracts

• Cost plus fixed fee (CPFF): the buyer reimburses the seller's allowable costs plus a fixed fee set at the start as a fraction of estimated cost.
• Cost plus incentive fee (CPIF): costs plus a fee that depends on meeting objectives, with a sharing ratio of savings or overruns.
• Cost plus award fee (CPAF): costs plus a fee, part of which is awarded at the buyer's discretion according to performance criteria.

Cost-reimbursable contracts suit uncertain or evolving scope, such as research and development. The buyer needs strong cost control and audit rights.

Time and material (T&M)

The buyer pays hourly or daily rates plus materials at cost. It starts quickly, suits staff augmentation and small, ill-defined work, and is risky if left open-ended, so add a cap (not-to-exceed value) or a time limit.

Worked example: FPIF with a sharing ratio

Statement. A buyer signs an FPIF contract: target cost EUR 400,000, target fee EUR 40,000 (target price EUR 440,000), price ceiling EUR 480,000, sharing ratio 80/20 (buyer/seller). The seller's final actual cost is EUR 350,000. What do the buyer and the seller pay and earn?

Reasoning.

1. Cost saving = 400,000 - 350,000 = 50,000.
2. Sharing: buyer's share 80% = 40,000, seller's share 20% = 10,000.
3. Seller's fee = target fee + seller's share of savings = 40,000 + 10,000 = 50,000.
4. Final price = actual cost + fee = 350,000 + 50,000 = 400,000.
5. Check: the buyer pays 400,000, which is 40,000 less than the target price of 440,000, which equals the buyer's 80% share of the saving.

Solution. The buyer pays EUR 400,000 and the seller's profit is EUR 50,000.

Overrun variant. If actual cost is EUR 460,000: overrun 60,000; the seller bears 20% = 12,000, so fee = 40,000 - 12,000 = 28,000, price = 460,000 + 28,000 = 488,000, which exceeds the ceiling of 480,000. The price is capped at 480,000, so the seller keeps 480,000 - 460,000 = EUR 20,000 of profit. Above the point of total assumption the seller absorbs all further overruns.

Why other readings are wrong. Reading the seller's fee as unchanged ignores the incentive. Reading the price as 440,000 ignores the cost saving. Ignoring the ceiling leaves out the seller's real exposure.

Example: choosing a contract type

A hospital needs a patient portal. Requirements are well understood from a previous project, the technology is standard, and a fixed go-live date is set by regulation. An FFP contract with milestone payments fits: low cost risk for the buyer, clear scope. For a different engagement, an AI-assisted diagnostic prototype where the outcome is uncertain, a CPIF or T&M with a cap and short phases fits better, since scope will evolve and the buyer wants to steer.

5. Agile-friendly and hybrid contracting

Traditional fixed scope, fixed price contracts conflict with agile change. Options that fit adaptive work:

• Time-and-material with a not-to-exceed cap and the right to stop after each iteration.
• Fixed price per iteration or per release, with scope within the iteration flexible by priority.
• Capped capacity (team-as-a-service): the buyer pays for a stable team over a period, and the backlog is controlled by the product owner.
• Phased contracts: a discovery phase (small, T&M), then a build phase priced on the discovered scope.
• Variable scope with a fixed price: a fixed price, an agreed backlog ordered by value, and a rule that items can be swapped at equal size.
• Shared-risk and gain-share models: the seller's fee relates to delivered business outcomes.
• Early termination rights: the buyer can end the contract with notice when value no longer justifies the spend.

Governance still matters: define roles (who is the product owner), acceptance criteria and the definition of done in the contract, and set transparent reporting (burn-up, demos).

6. Legal, ethical and sustainability aspects

Agreements bind legally. Include clauses for scope and deliverables, price and payment, change management, intellectual property, confidentiality and data protection, warranty and liability limits, acceptance and inspection, termination, dispute resolution, force majeure and subcontracting. For security-related purchases, include audit rights and incident reporting obligations. The project manager should involve legal counsel, and should not give legal commitments personally.

Ethics matters on the exam. Do not accept gifts from bidders, share one bidder's proposal with another, or steer a tender towards a friend's company. Declare conflicts of interest. Equal information to all bidders (bidder conference, shared Q&A) is a standard fairness practice. Where relevant, include sustainability criteria (energy use, supplier labour practices, recyclability) in the selection and in the contract.

7. Common pitfalls and exam tips

Pitfalls

• Choosing a fixed-price contract for work with unclear scope and then fighting about change.
• Choosing cost-plus without cost controls or audit rights.
• Leaving T&M open-ended.
• Putting the lowest price as the only selection criterion.
• Starting procurement late and forgetting lead times on the schedule.
• Signing a contract without acceptance criteria.
• Making commitments to a vendor before procurement or legal approval.
• Ignoring non-cost factors in make-or-buy.

Exam tips

• Scope clear and stable: fixed price. Scope uncertain: cost-reimbursable or T&M with controls.
• The party that carries more cost risk has the higher incentive to control costs. Buyers prefer fixed price for low risk; sellers prefer cost-plus.
• An RFI is for exploring the market, an RFQ for price of a defined item, an RFP for a solution.
• Make-or-buy is more than a cost comparison; check capacity, IP and strategy.
• In agile contexts, the right answer usually adds flexibility (iteration-based pricing, caps, exit rights) rather than a rigid fixed scope.
• The project manager works with procurement and legal and does not sign contracts alone unless authorized.

8. Mini case study

Situation. A manufacturer needs an IoT platform to monitor 300 machines. The technology is new to the company, and the exact analytics are unknown. Management wants the first value in six months and wants to avoid cost overruns. Three vendors have shown interest. The procurement department proposes a firm fixed price contract for the whole platform based on a 10-page requirement document. Data confidentiality is critical because machine data reveals production methods.

Questions. What should the project manager recommend?

Commented solution.

1. Run a short RFI to understand vendors' approaches, since the solution is not well defined.
2. Challenge the firm fixed price: scope is vague, so the vendor will either add heavy risk premiums or dispute every change.
3. Recommend a phased approach: a small discovery phase (T&M with a cap of, for example, EUR 60,000 and 8 weeks) to define analytics and architecture; then a build contract (FPIF or iteration-based fixed price) on defined scope with a price ceiling.
4. Use an RFP with weighted criteria (technical approach 40%, price 25%, security and data protection 20%, references 15%), and apply the same information to all vendors.
5. Put into the contract: IP ownership of analytics models, data confidentiality and location, audit rights, acceptance criteria, exit rights after the discovery phase, and service levels for support.
6. Put lead times and the vendor selection milestones on the schedule and in the risk register.

Why not fixed price for everything? It misallocates risk for uncertain scope. Why not pure T&M without a cap? It exposes the buyer to unlimited cost. Why not choose the cheapest bid? Security and capability carry more weight than price here.

Key terms

• Procurement management plan: how procurement will be planned, executed, controlled and closed.
• Make-or-buy analysis: comparing internal production with purchase.
• RFI, RFQ, RFP, IFB: information, quotation, proposal and bid requests.
• SOW: statement of work describing deliverables and acceptance.
• FFP, FPIF, CPFF, CPIF, CPAF: fixed-price and cost-reimbursable contract families.
• T&M: time and material contract; use a cap.
• Price ceiling and point of total assumption: maximum price and the cost above which the seller bears all overruns.
• Sharing ratio: split of cost savings or overruns between buyer and seller.
• Source selection criteria: weighted criteria used to evaluate offers.
• Not-to-exceed clause: cap on total payment in T&M.

Summary checklist

• I can run a make-or-buy analysis with break-even and non-cost factors.
• I can describe the procurement strategy and management plan.
• I know when to use SOW, RFI, RFQ, RFP and IFB.
• I can choose and compare FFP, FPIF, CPFF, CPIF, CPAF and T&M by risk allocation.
• I can calculate FPIF outcomes including the ceiling.
• I can propose agile-friendly contracting (iterations, caps, exit rights).
• I include legal, ethical and sustainability requirements in agreements and involve legal and procurement.

Official sources

• PMI, PMP Examination Content Outline (July 2026): https://www.pmi.org/-/media/pmi/documents/public/pdf/certifications/new-pmp-examination-content-outline-2026.pdf (opens in a new tab)
• PMI, PMP certification: https://www.pmi.org/certifications/project-management-pmp (opens in a new tab)
• PMI, PMP exam change: https://www.pmi.org/blog/pmp-exam-change (opens in a new tab)