Why would a project manager be worried about cost-plus fixed fee contracts?

Cost-plus fixed fee contracts pose a unique risk for project managers because they can lead to cost overruns. In these types of contracts, the seller is reimbursed for all allowable costs incurred during the project, in addition to receiving a fixed fee as profit. This reimbursement model can sometimes create a lack of incentive for the seller to control costs effectively, as they know that all expenditures will be covered by the buyer.

The potential for unlimited costs means that the project manager must closely monitor expenses and ensure that they stay within budget. The risk of cost overruns increases because there is less pressure on the seller to minimize costs; the financial obligation primarily falls on the project manager or the organization funding the project. If costs escalate considerably beyond what was initially estimated, the project manager may face challenges in managing the project’s budget and overall financial health.

This type of contract structure is particularly concerning in environments where cost control is critical, as it can lead to increased expenditures without necessarily enhancing project outcomes. Thus, project managers must be vigilant when working with cost-plus fixed fee contracts to manage the associated risks effectively.