PMP Practice Questions #105
Your organization is about to embark on a new project where the scope is not fully defined and is expected to evolve. The project involves specialized work that requires varied expertise at different stages. You are considering contract types for hiring external consultants. Given these circumstances, why might a Time and Material (T&M) contract be appropriate, and what is a key risk associated with this type of contract?
A. A T&M contract is appropriate because it offers flexibility in managing changing requirements, but the key risk is potential scope creep leading to budget overruns.
B. A T&M contract is appropriate for well-defined scopes, reducing the risk of incomplete work, but may lead to higher costs due to the fixed nature of payments.
C. A T&M contract should be used to transfer all risks to the vendor, eliminating the risk of cost overruns for the project.
D. A T&M contract is ideal for short-term projects with limited budgets, but the main risk is the vendor may under-deliver due to the lack of a fixed price incentive.
Analysis:
This scenario involves selecting an appropriate contract type for a project with an evolving scope and specialized work requiring varied expertise at different stages. The focus is on understanding the suitability and risks associated with a Time and Material (T&M) contract in such a context.
Analysis of Options:
Option A: A T&M contract is appropriate because it offers flexibility in managing changing requirements, but the key risk is potential scope creep leading to budget overruns. This option accurately captures the essence of T&M contracts. They are ideal in situations where scope is fluid, allowing for adaptability. However, the primary risk is that without strict control, the project’s scope can expand uncontrollably, causing budgetary issues.
Option B: A T&M contract is appropriate for well-defined scopes, reducing the risk of incomplete work, but may lead to higher costs due to the fixed nature of payments. This option misrepresents T&M contracts, which are actually more suited to projects with undefined scopes rather than well-defined ones. Additionally, T&M contracts don’t have fixed payments, contradicting the essence of this contract type.
Option C: . A T&M contract should be used to transfer all risks to the vendor, eliminating the risk of cost overruns for the project. This option incorrectly suggests that T&M contracts transfer all risks to the vendor. In reality, the risk of cost overruns largely remains with the buyer, as payments are based on the time spent and materials used.
Option D: A T&M contract is ideal for short-term projects with limited budgets, but the main risk is the vendor may under-deliver due to the lack of a fixed price incentive. This option inaccurately implies that T&M contracts are primarily for short-term projects and suggests a risk that is not inherent to this contract type. The effectiveness of a T&M contract does not inherently depend on project duration or budget size.
Conclusion: Based on the provided scenario, Option A is the most suitable choice. Under a Time and Material (T&M) contract, flexibility is key, especially when project scope is undefined and expected to evolve. This contract type allows for adjustments as the project progresses, accommodating changes in requirements and the need for varied expertise at different stages. The primary risk with T&M contracts is scope creep, where the lack of a fixed scope can lead to project expansion and potential budget overruns. Effective project management is crucial to monitor progress and control costs under this contract format.
PMP Exam Content Outline Mapping
| Domain | Task |
|---|---|
| Process | Task 11: Plan and manage procurement |
Topics Covered
- Contract Types
